Vivos Therapeutics, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 10-K. 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 Part I. “Item 1A. Risk Factors’’ and elsewhere in this Annual Report on Form 10-K. Overview We are a revenue stage medical technology company focused on the development and commercialization of innovative treatment alternatives for patients with dentofacial abnormalities and/or patients diagnosed with mild to moderate obstructive sleep apnea (OSA) and snoring in adults. We believe our technologies and protocols represent a significant improvement in the treatment of mild to moderate OSA versus other treatments such as continuous positive airway pressure (or CPAP) or palliative oral appliance therapies. We call our alternative treatment protocol The Vivos Method . The Vivos Method is an advanced therapeutic protocol, which often combines the use of customized oral appliance specifications and proprietary clinical protocols developed by our company and prescribed by specially trained dentists in cooperation with their medical colleagues. Published studies have shown that using our customized appliances and clinical protocols led to significantly lower Apnea Hypopnea Index scores and improve other conditions associated with OSA. Our patented oral appliances have proven effective (within the scope of the U.S. Food and Drug Administration (or FDA) cleared uses) in approximately 25,000 patients treated worldwide by more than 1,450 trained dentists. Our business model is focused around dentists, and our program to train independent dentists and offer them other value-added services in connection with their ordering and use of The Vivos Method for patients is called the Vivos Integrated Practice (“VIP”) program. On December 11, 2020, we completed our initial public offering by issuing 4,025,000 shares of our common stock, at a public offering price of $6.00 per share, for net proceeds of approximately $21.6 million after deducting underwriting discounts and commissions and offering expenses payable by us. On May 11, 2021, we completed a follow-on underwritten public offering of 4,600,000 shares of our common stock at a price of $6.00 per share, for net proceeds of approximately $25.4 million after deducting underwriting discounts and commissions and offering expenses payable by us. Impact of COVID-19 In December 2019, a novel strain of coronavirus known as COVID-19 was reported to have surfaced in China, and by March 2020 the spread of the virus resulted in a world-wide pandemic. By March 2020, the U.S. economy had been largely shut down by mass quarantines and government mandated stay-in-place orders (the “Orders”) to halt the spread of the virus. Many of these Orders have been relaxed or lifted in jurisdictions where large portions of the population have been vaccinated, but there is considerable uncertainty about whether the Orders will need to be reinstated due to the ongoing spread of new variants of COVID-19. A significant portion of the worldwide population remains unvaccinated, and uncertainty also exists about whether existing vaccines will be effective as new variants of COVID-19 emerge. Accordingly, the overall impact of COVID-19 continues to have an adverse impact on global business activities. - 60 - Many of our VIPs and potential VIPs closed their offices during 2020 as a result of COVID-19, although some remained open to specifically provide patients our products as our appliances and VIPs were deemed an essential business for health considerations in many jurisdictions. In the face of the pandemic and the results potential for revenue reduction, we worked diligently to reduce expenses and maintain revenues during 2020. While revenue growth flattened in March and April 2020, expenses were reduced and we aggressively expanded our network of healthcare providers familiar with our products by offering online continuing education courses which introduced many in the medical and dental communities to our product line. As businesses continued to reopen through 2021, the impact of COVID-19 on our company began to diminish, although we continue to closely monitor the potential impact of COVID-19 variants on our business. Of note, during the second half of 2021, many of our Canadian VIPs have not traveled to the U.S. for training in light of travel restrictions. As of August 9, 2021, the Government of Canada imposed further restrictions on unvaccinated travelers, which has caused delays with some of our Canadian VIPs receiving required training and commencing Vivos Method cases. In addition, our fourth quarter 2021 revenue growth was impacted by lower VIP enrollments due largely to the COVID-19 Omicron variant resurgence. We achieved sales growth despite seeing significant headwinds throughout our core customer base, mostly driven by COVID-19 Delta and Omicron variant resurgences in the middle and latter part of the year. In December 2021, the American Dental Association reported that just 60% of dental practices were open and operating with business as usual. Another industry source reported 92% of dental practices were struggling to hire or replace hygienists, and 77% reported difficulty hiring front desk positions. These challenges across the dental community have impacted both VIP enrollments and patient case starts, as replacement dental personnel must be trained in the proper use of The Vivos Method. The world-wide response to the pandemic resulted in a significant downturn in economic activity, which we believe has continued to some degree into 2022 as a new variant (called B.A.2) has emerged. There is no assurance that government stimulus programs will successfully restore the economy to the levels that existed before the pandemic and there is a risk that new variant outbreaks will cause additional disruptions and slowdowns in the economy. In addition, worldwide supply chain constraints and inflation, as well as Russia’s invasion of Ukraine in February 2022, have emerged as new barriers to long-term economic recovery. If an economic recession or depression commences and is sustained, it could have a material adverse effect on our business as demand for our products could decrease. As such, the long-term financial impact on our business of COVID-19 as well as these other matters cannot reasonably be fully estimated at this time. Recent Developments In January 2022, we announced the filing of a U.S. patent application related to certain new and enhanced clinical methods and proprietary protocols developed within The Vivos Method treatment for dentofacial abnormalities and/or OSA. This new patent application was based on early field data which revealed an additional 58% average improvement in AHI score reductions in OSA patients who had received treatment with The Vivos Method where the revised clinical protocols were implemented. In December 2021, we announced that we received acceptance from a Centers for Medicare & Medicaid Services Pricing, Data Analysis and Coding (or PDAC) contractor for our mmRNA device for treating mild to moderate OSA and snoring in adults. This acceptance places the mmRNA device on the PDAC list of oral appliances covered by and billable to Medicare. This development makes benefits of the mmRNA device available to millions of Medicare beneficiaries who seek effective treatment for mild to moderate OSA. Also in December 2021 , we announced our official registration with Health Canada, the Ministry of Health department responsible for helping Canadians maintain and improve their health through services and resources. The official registration of our products will aim to provide patients with a comprehensive, end-to-end solution for OSA patients, which incorporates clinical screening, medical diagnosis and therapy using Vivos products. At the core of this development, we will offer our comprehensive line of highly effective oral appliances and proprietary clinical protocols to approximately 25,000 dentists across Canada who have millions of patients in search of an alternative treatment for dentofacial abnormalities and/or mild to moderate OSA and snoring. - 61 - Material Items and Trends Impacting Our Business We believe that the following items and trends may be useful in better understanding our results of operations. New VIP Enrollments (Service Revenue). Enrolling denta1 practices as VIPs is the first step in our ability to generate new revenue. As part of the VIP enrollment fee, we enter into a service contract with VIPs under which they receive training on the use of the Vivos treatment protocol. VIPs have the ability to start generating revenue for us and themselves after this training. To entice dentists to enroll as VIPs, we have worked with different marketing programs (which we generally call a “discovery track”) with respect to the payment of VIPs enrollment fee, including discounts and payment plans. Once VIPs execute their VIP enrollment agreement, the discovery track allows the VIP 45 to 60 days to obtain financing and pay the enrollment fee. In general, however, we recognize 50% of the service revenue associated with enrollment fees in the second month of enrollment and the remaining 50% pro rata throughout the following eleven months of the enrollment service contract. Ongoing support and additional training is provided throughout the year under the services contract, which includes access to our proprietary Airway Intelligence Services, which provides the VIP with resources to help simplify the sleep apnea diagnostic and Vivos treatment planning process. In addition to enrollment service revenue, we offer additional services, such as our Billing Intelligence Services offering, and MyoCorrect orofacial myofunctional therapy services, which was introduced in April 2021. Revenue for these services is recognized monthly during the month the services are rendered. We are also engaging in strategic collaborations to market the benefits of the Vivos treatment protocol and VIP enrollment to dentists, including our August 2021 cooperative relationship with Empower Sleep to provide diagnostic and medical consultation services to people across North America who suffer from OSA and our October 2021 cross marketing collaboration with Candid Care, the maker of the CandidPro clear aligner for straightening teeth. As the VIP program has matured, we have noted that approximately forty percent (40%) of dentists on average during 2021 (almost exclusively on a VIP discovery track) who enroll as VIPs later decide to cancel participation in the VIP program (although the percentage has varied from quarter to quarter). In order to properly reflect this occurrence in the discussion of our results of operations below, for the period ended December 31, 2021 we have shown new VIP enrollments for the period on a “net of cancellations” basis. New VIP Case Starts (Product Revenue). Enrolling new VIPs is key to our ability to generate revenue, but equally as important is the number of Vivos treatment case starts that our VIPs commence, as these lead to appliance orders and related revenue. Once a VIP is fully trained, we encourage them to start cases. However, our experience has been that VIPs typically start slowly as they introduce The Vivos Method into their practices. While we work with VIPs to screen their patients for OSA with our SleepImage home sleep apnea ring test (which we expect will encourage Vivos Method case starts), not all VIPs incorporate our The Vivos Method into their practices at the same rate. We utilize Practice Advisors to help VIPs with onboarding and starting and increasing case starts over time. We believe VIPs can recoup their investment in VIP enrollment with approximately eight Vivos Method case starts, but as noted above, many VIPs start and also maintain their case starts at a significantly slower rate. We presently have a concentration of active VIPs who regularly start new Vivos Method treatment cases, with approximately thirty percent (30%) of VIPs accounting for all new case starts during the quarter ended December 31, 2021. We are working not only to increase the number of VIPs overall, but the number of active VIPs in terms of case starts. More active VIPs are also more likely to take advantage of our other service revenue generating offerings such as MyoCorrect orofacial myofunctional therapy and medical Billing Intelligence Services. Marketing to DSOs . During the second half of 2021, we increased our efforts to market The Vivos Method and related products and services to larger dental service organizations (“DSOs”). Marketing to DSOs creates an opportunity to enroll and onboard multiple dental practices as VIPs under one common ownership structure. This would allow us to leverage training and support across multiple VIP practices and gain economies of scale with the goal of faster growth, both in VIP enrollments and in Vivos case starts. Our other dentist enrollment program, which we refer to as the Airway Alliance Program (“AAP”), was also established in the fourth quarter of 2021 and launched in the first quarter of 2022. This program is designed to attract the vast majority of the estimated 200,000 U.S. and Canadian dentists who are being strongly encouraged by the American Dental Association to screen their patients for sleep apnea. The AAP gives these dentists the simple yet profitable way to screen their patients for mild to moderate OSA using the SleepImage HST. Patients with mild to moderate OSA can be referred to a fully trained local VIP dentist for treatment. - 62 - Inflation . We believe the U.S. has entered a period of inflation which has increased (and may continue to increase) our, and our suppliers’ costs as well as the end cost of our products to consumers. To date, we have been able to manage inflation risk without a material adverse impact on our business or results of operations. However, we anticipate that inflationary pressures will make it necessary for us to adjust our standard pricing for our appliance products effective second quarter of 2022. The full impact of such price adjustments on sales or demand for our products is not fully known at this time and may require us to adjust other aspects of our business as we seek to grow revenue and, ultimately, achieve profitability and positive cash flow from operations. Supply Chain. From time to time, we may experience supply chain challenges due to forces beyond our control. For example, the Suez Canal blockage earlier in 2021 caused some delay in shipments of SleepImage rings from China. Overall, however, as our appliances are made in the U.S., we have not experienced significant supply chain issues as a result of COVID-19 or otherwise, although this may change in future periods. Seasonality . We believe that the patient volumes of our VIPs will be sensitive to seasonal fluctuations in urgent care and primary care activity. Typically, winter months see a higher occurrence of influenza, bronchitis, pneumonia and similar illnesses; however, the timing and severity of these outbreaks vary dramatically. Additionally, as consumers shift toward high deductible insurance plans, they are responsible for a greater percentage of their bill, particularly in the early months of the year before other healthcare spending has occurred, which may lead to lower than expected patient volume or an increase in bad debt expense during that period. Our quarterly operating results may fluctuate significantly in the future depending on these and other factors. Cybersecurity . We have established procedures to escalate enterprise level issues, including cybersecurity matters, to the appropriate management levels within our organization and our board of directors, or members or committees thereof, as appropriate. Under our framework, cybersecurity issues, including those involving vulnerabilities introduced by our use of third-party software, are analyzed by subject matter experts for potential financial, operational, and reputational risks, based on, among other factors, the nature of the matter and breadth of impact. Matters determined to present potential material impacts to our financial results, operations, and/or reputation are immediately reported by management to the board of directors, or individual members of committees thereof, as appropriate, in accordance with our escalation framework. In addition, we have established procedures to ensure that members of management responsible for overseeing the effectiveness of disclosure controls are informed in a timely manner of known cybersecurity risks and incidents that may materially impact our operations and that timely public disclosure is made, as appropriate. Key Components of Consolidated Statements of Operations Net revenue. We recognize revenue when we satisfy our performance obligations over time as our customer receive the benefit of training and/or we transfer control of the promised products to our customers, which generally occurs over a very short period of time. Performance obligations are typically satisfied by shipping or delivering products to customers, or customers receiving training, which is also the point when title transfers and/or training occurs. Revenue consists of the gross sales price, net of estimated allowances, discounts, and personal rebates that are accounted for as a reduction from the gross sale price. Cost of sales. Cost of goods sold primarily consists of direct costs attributable to the purchase from third party suppliers and related products. It also includes freight costs, fulfillment, distribution, and warehousing costs related to products sold. Sales and marketing. Sales and marketing costs primarily consist of personnel costs for employees engaged in sales and marketing activities, commissions, advertising and marketing costs, website enhancements, and conferences for our sales and marketing staff. General and administrative expenses. General and administrative (“G&A”) expenses consist primarily of personnel costs for our administrative, human resources, finance and accounting employees, and executives. General and administrative expenses also include contract labor and consulting costs, travel - related expenses, legal, auditing and other professional fees, rent and facilities costs, repairs and maintenance, and general corporate expenses. Depreciation and amortization expense. Depreciation and amortization expense is comprised of depreciation expense related to property and equipment, amortization expense related to leasehold improvements, and amortization expense related to identifiable intangible assets. Interest expense. Interest expense is incurred under our loan under the U.S. Small Business Administration’s Payroll Protection Program (PPP). The components of interest expense include the amount of interest payable in cash at the stated interest rate, and accretion and amortization of debt discounts and issuance costs. - 63 - Interest income. Interest income relates to temporary cash investments and a note receivable from a related party arising from the sale of our former company-owned dental clinic in Orem, Utah in 2019. The components of interest income from the note receivable include interest at the stated rate and accretion of the debt discount. Due to the impairment of the note receivable, no interest will be accrued starting January 1, 2022. Results of Operations Comparison of Years ended December 31, 2021 and 2020 Our consolidated statements of operations for the years ended December 31, 2021 and 2020 are presented below (dollars in thousands): 2021 2020 Change Revenue Product revenue $ 6,520 $ 4,890 $ 1,630 Service revenue 10,365 8,176 2,189 Total revenue 16,885 13,066 3,819 Cost of sales (exclusive of depreciation and amortization shown separately below) 4,281 2,653 1,628 Gross profit 12,604 10,413 2,191 Gross profit % 75 % 80 % Operating expenses General and administrative 25,791 16,090 9,701 Sales and marketing 5,551 2,314 3,237 Litigation settlement - 3,331 (3,331 ) Impairment loss 911 - 911 Depreciation and amortization 733 718 15 Operating loss (20,382 ) (12,040 ) (8,342 ) Non-operating income (expense) Interest expense (14 ) (96 ) 82 Other expense (9 ) - (9 ) Interest income 117 79 38 Net loss $ (20,288 ) $ (12,057 ) $ (8,231 ) Revenue Revenue increased by $3.8 million, or 29%, to $16.9 million for the year ended December 31, 2021 compared to $13.1 million for the year ended December 31, 2020. This increase consists of (i) approximately $1.5 million attributable to higher appliance sales to VIPs to volume increases, (ii) an increase of approximately $1.0 million in VIP revenue, (iii) an increase of approximately $1.1 million in center revenue, initial management service revenue including our MID program, and from the introduction of our orofacial myofunctional therapy services, and (iv) an increase of approximately $0.3 million in BIS revenue. R evenue growth was impacted by the COVID-19 Delta and Omicron variant resurgences. We achieved sales growth despite seeing significant headwinds throughout our core customer base, mostly driven by COVID-19 Delta and Omicron variant resurgences in the middle and latter part of the year. In December 2021, the American Dental Association reported that just 60% of dental practices were open and operating with business as usual. Another industry source reported 92% of dental practices were struggling to hire or replace hygienists, and 77% reported difficulty hiring front desk positions. These challenges across the dental community have impacted both doctor enrollments and patient case starts, as replacement dental personnel must be trained in The Vivos Method. - 64 - During the year ended December 31, 2021, we enrolled 197 VIPs net of cancellations and recognized VIP revenue of approximately $8.5 million, an increase of 2% compared to the year ended December 31, 2020, when we enrolled 194 VIPs net of cancellations for a total of approximately $7.5 million. The 13% increase in total revenue was primarily driven by (i) higher enrollments that took place in June, August, and September of which 50% of the enrollment fees were recognized during the year ended December 31, 2021, (ii) revenue recognized from higher prior year enrollments, and (iii) a higher price per VIP enrollment 2021 of $40,000 per contract, when compared to $32,000 per VIP contract in 2020. VIP enrollment revenue is recognized 50% in the second month of enrollment and the remaining 50% pro rata throughout the following eleven months of the service contract. For the year ended December 31, 2021, we sold 11,355 oral appliance arches for a total of approximately $6.0 million, a 33% increase from the year ended December 31, 2020 when we sold 8,135 total oral appliance arches for a total of approximately $4.5 million. Additionally, for the year ended December 31, 2021 we had approximately $0.9 million in BIS revenue, a 46% increase from the year ended December 31, 2020 with approximately $0.6 million in revenue. Lastly, for the year ended December 31, 2021 we had approximately $0.8 million in center revenue and management service revenue including our MID program, compared to approximately $0.4 million for the year ended December 31, 2020, and approximately $0.4 million in our orofacial myofunctional therapy revenue, compared to none for the year ended December 31, 2020 due to the introduction of these services in 2021, and approximately $0.3 million for SleepImage subscriptions, sponsorships, and seminar revenue for the year ended December 31, 2021, compared to $0.2 million for the year ended December 31, 2020. Cost of Sales and Gross Profit Cost of sales increased by approximately $1.6 million to approximately $4.3 million for the year ended December 31, 2021 compared to approximately $2.7 million for the year ended December 31, 2020. This increase was primarily due to product and services costs associated with higher sales volume of our appliances, additional costs associated with VIP enrollments, and billing and myofunctional therapy revenue. Cost of sales includes approximately $0.8 million increase related to the deployment of SleepImage rings as part of the VIP enrollment package, and approximately $0.1 million increase related to the leasing of SleepImage rings in 2021. Additionally, we had an increase of approximately $0.5 million related to costs associated with appliances and approximately $0.1 million related to costs associated with our orofacial myofunctional therapy revenue. For the year ended December 31, 2021, gross profit increased by approximately $2.2 million to $12.6 million. This increase was attributable to an increase in total revenue of $3.8 million as discussed above, partially offset by an increase in cost of sales of $1.6 million. Gross margin decreased to 75% for the year ended December 31, 2021 compared to 80% for the year ended December 31, 2020, primarily driven by the higher costs associated with VIP enrollments. General and Administrative Expenses General and administrative expenses increased approximately $9.7 million, or approximately 60%, to approximately $25.7 million for the year ended December 31, 2021, as compared to $16.1 million for the year ended December 31, 2020. The primary driver of this increase was an increase in personnel and related compensation of approximately $4.6 million, including salaries, bonuses, paid time off, stock-based compensation, and other employee-related expenses. The increase in payroll related costs were mainly a result of increased headcount (from 93 employees at December 31, 2020 to 158 employees at December 31, 2021). Other drivers of the increase in general and administrative expenses included an increase of approximately $1.2 million to general corporate costs such as director and officer insurance premiums and professional fees, an increase of approximately $0.9 million for information and technology supplies and equipment, approximately $1.2 million increase of bad debt expense driven by the increase in sales, and approximately $0.8 million in other corporate expenses such as filing fees, subscriptions, and office expenses, and an increase of approximately $0.1 million for office rent and utilities. These increases were due to the growth of the company combined with higher headcount and expenses associated with being a public company. - 65 - Sales and Marketing Sales and marketing expense increased by $3.2 million to $5.6 million for the year ended December 31, 2021, compared to $2.3 million for the year ended December 31, 2020. This increase was primarily due to an increase of approximately $1.2 million in new marketing campaigns, updating marketing materials for investors and consumers, improving the Vivos website and promotion of conferences and events taking place in 2021, such as the Vivos Institute. Marketing expenses increased approximately $0.7 million due to various marketing initiatives as well as the deployment of SleepImage HST rings as demos to be used at different marketing events and marketing campaigns. Additionally, we had an increase of approximately $1.3 million in conference expenses as a result of conferences hosted in throughout the country and our August 2021 grand opening of The Vivos Institute in Denver, Colorado. Settlement Expense Settlement expense in 2020 resulted from the settlement of a shareholder demand in the fourth quarter of 2020. As a result of the settlement, we issued 300,000 shares of common stock with a fair value of $1.8 million and 325,000 warrants to purchase common shares with a fair value of $1.5 million. The aggregate settlement expense of $3.3 million was recognized for the year ended December 31, 2020 and we did not have a similar expense for the year ended December 31, 2021. Impairment Loss Impairment loss in 2021 resulted from the uncertainty of collection on a related party note receivable arising out of the sale of our company-owned dental facility in Orem, Utah in 2019. As a result, we impaired approximately $0.9 million as of December 31, 2021, and we did not have a similar expense for the year ended December 31, 2020. Depreciation and Amortization Depreciation and amortization expense was approximately $0.7 million for year ended December 31, 2021 and 2020. The impact of depreciation expense related to new assets placed into service was offset by lower depreciation expense related to legacy assets that were retired during the year. Our fixed assets placed in service increased by approximately $1.9 million in the year-over-year comparison primarily attributable to the buildout of our Vivos Institute facility in Denver, Colorado. These assets were placed into services at the beginning of August 2021. Accordingly, we expect to recognize higher depreciation and amortization expense in future periods. Interest Expense Interest expense decreased by approximately $0.1 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020 as a result of convertible notes converted to Common Stock upon completion of our IPO in December 2020. Interest Income Interest income was unchanged at approximately $0.1 million for the year ended December 31, 2021 and 2020. Despite higher cash balances for the year ended December 31, 2021, the current low interest rate environment did not result in material earnings from temporary cash investments. Liquidity and Capital Resources As of December 31, 2021, we had cash and cash equivalents of $24.0 million compared to cash and cash equivalents of $18.2 million as of December 31, 2020. This increase was primarily driven by the net proceeds from our May 2021 underwritten follow-on offering, partially offset by spending during the year ended December 31, 2021. During the first quarter of 2021, we began tenant improvements to The Vivos Institute facility in Denver, Colorado, which we lease. The Vivos Institute facility opened in early August 2021 and provides onsite training courses and post-graduate education to our VIPs and other healthcare professionals. While we have incurred losses and negative operating cash flows since inception, we believe that our existing cash resources following our May 2021 follow-on offering will be sufficient to meet our capital requirements and fund our planned operations for at least the next 18 months, although this estimation assumes we do not face unexpected events, costs, or contingencies, any of which could affect our liquidity and cash requirements. Available resources may be consumed more rapidly than anticipated, resulting in the need for additional funding if we do not generate positive cash flows from operations. If and when required, we anticipate funding our liquidity requirements from cash generated from operations and potentially from: ● proceeds from public and private financings (including equity (such as our “at the market offering” program through Roth Capital Partners), debt or equity-linked financings or commercial debt facilities); - 66 - ● proceeds from the exercise of outstanding options or warrants; and ● strategic commercial transactions with third parties. There is a risk that none of these plans will be implemented if and when necessary or on commercially reasonable terms, if at all, which could leave us without required cash resources and could adversely impact our results of operations and impair the viability of our company. We do not have any off-balance sheet arrangements, as defined by applicable regulations of the SEC, that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources. Cash Flows The following table presents a summary of our cash flow for the years ended December 31, 2021 and 2020 (in thousands): 2021 2020 Net cash provided by (used in): Operating activities $ (15,735 ) $ (5,680 ) Investing activities (2,608 ) (120 ) Financing activities 24,167 23,537 Net cash used in operating activities of approximately $15.7 million for the year ended December 31, 2021 is an increase of more than $10.0 million compared to net cash used in operating activities of approximately $5.7 million for the year ended December 31, 2020. This increase is due primarily to the increase in our net loss of approximately $8.2 million, an increase of approximately $0.5 million related to a tenant improvement allowance due to the company in 2022, $0.3 million in accounts receivable related to an increase in VIP enrollments during the two quarters of the year, an increase of approximately $0.6 million in accrued expenses due to increase in consulting fees, legal fees, and franchise tax, an increase of approximately $0.9 million in impairment for a related party note receivable arising from the 2019 sale of our company-owned dental clinic in Orem, Utah, an increase of approximately $0.8 million in prepaid expenses and current assets primarily driven by prepaid inventory for our SleepImage HST rings, deposits for future events including conferences and exhibits, and other prepaid services. Additionally, there was approximately a $0.5 million increase in contract liability due to the increase in VIP enrollments during the year ended December 31, 2021, compared to the year ended December 31, 2020. For the year ended December 31, 2021, net cash used in investing activities consisted of (i) capital expenditures for property and equipment of $2.4 million, and cash payments for a business acquisition of $0.2 million, for a total of $2.6 million. Capital expenditures for property and equipment were primarily attributable to leasehold improvements for The Vivos Institute that opened in August 2021. For the year ended December 31, 2020, net cash used in investing activities amounted to $0.1 million for the purchase of equipment. Net cash provided by financing activities of $24.2 million for the year ended December 31, 2021 was primarily attributable to proceeds of $25.4 million from the issuance of Common Stock in our follow-on public offering in May 2021 and proceeds from the exercise of stock options of $0.3 million. Total financing cash inflows amounted to $27.9 million gross and were partially offset by cash payments of $1.5 million for the redemption of all remaining shares of Series A Preferred Stock, and $2.2 million for professional fees and other offering costs related to our follow-on public offering, and principal payments under debt agreements of $0.1 million. - 67 - For the year ended December 31, 2020, net cash provided by financing activities of $23.5 million was primarily attributable to $22.3 million in cash proceeds from our initial public offering, $2.5 million in proceeds from the sale of Series B Preferred Stock, and $1.3 million in proceeds from the PPP loan. Total financing cash inflows amounted to $26 million and were partially offset by cash payments of $2.2 million for the redemption of shares of Series A Preferred Stock, $0.2 million for professional fees and other offering costs related to our initial public offering, and principal payments under debt agreements of $0.1 million. Critical Accounting Policies Involving Management Estimates and Assumptions Basis of Presentation and Consolidation Our consolidated financial statements included as part of this Annual Report on Form 10-K, which include the accounts of our company and our wholly owned subsidiaries (BMS, First Vivos, Vivos Therapeutics (Canada) Inc., Vivos Management and Development, LLC and Vivos Del Mar Management, LLC), are prepared in conformity with U.S. GAAP and the rules and regulations of the SEC related to annual and quarterly reports. All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations. The consolidated balance sheet as of December 31, 2020 included in this report has been derived from our audited consolidated financial statements. Use of Estimates To prepare financial statements in conformity with U.S. GAAP, management must make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Concentration of Credit Risk and Significant Customers Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivable. We limit our exposure to credit loss by placing our cash with high credit quality financial institutions. Additionally, we have a diverse customer base and no single customer represented greater than ten percent of sales or accounts receivable for the years ended December 31, 2021 and 2020. Accounts Receivable, Net The accounts receivable in the accompanying consolidated financial statements are stated at the amounts management expects to collect. We reduce accounts receivable by estimating an allowance that may become uncollectible in the future. Management determines the estimated allowance for uncollectible amounts based on its judgements in evaluating the aging of the receivables and the financial condition of our clients. Allowance for uncollectible receivables was $0.2 million as of December 31, 2021 and $0.5 million as of December 31, 2020. Intangible Assets, Net Intangible assets consist of assets acquired from First Vivos and costs paid to MyoCorrect and Lyon Dental for work related to our patents, intellectual property and customer contracts. The identifiable intangible assets acquired from First Vivos and Lyon Dental for customer contracts are amortized using the straight-line method over the estimated life of the assets, which approximates 5 years (See Note 5). The costs paid to MyoCorrect and Lyon Dental for patents and intellectual property are amortized using the straight-line method over the life of the underlying patents, which approximates 15 years. Goodwill Goodwill is the excess of acquisition cost of an acquired entity over the fair value of the identifiable net assets acquired. Goodwill is not amortized but tested for impairment annually or whenever indicators of impairment exist. These indicators may include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business or other factors. We test for impairment annually after the close of the year. There was no impairment of goodwill recognized at December 31, 2021 or 2020. - 68 - Long-lived Asset Policy We review and evaluate the recoverability of long-lived assets whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable. Such circumstances could include, but are not limited to, (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an adverse action or assessment by a regulator. We measure the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires us to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. Our evaluation of long-lived assets completed for the years ended December 31, 2021 and 2020 resulted in no impairment loss. Notes Receivable, Net The note receivable in the accompanying financial statements were stated at the amount management expected to collect. As of December 31, 2021, due to uncertainty of collections, we impaired the note receivable. To the extent cash is collected in the future we will recognize income in the period collected. The note receivable arose from the 2019 sales of our company-owned dental clinic in Oren, Utah. Revenue Recognition We generate revenue from the sale of products and services. Revenue is recognized when control of the products or services is transferred to our customers in a way that reflects the consideration we expect to be entitled to in exchange for those products and services. We determine revenue recognition through the following five-step model, which entails: 1) identification of the promised goods or services in the contract; 2) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; 3) measurement of the transaction price, including the constraint on variable consideration; 4) allocation of the transaction price to the performance obligations; and 5) recognition of revenue when, or as we satisfy each performance obligation. Service revenue We review our VIP contracts using the 5-step method outlined above. Once it is determined that a contract exists, service revenue is recognized when the underlying training or other services are performed. Unearned revenue reported on the balance sheet as contract liability represents the portion of fees paid by customers for services that have not yet been performed as of the reporting date and are recorded as the service is rendered. We recognize this revenue over the twelve-month life of the contract. Provisions for discounts are provided in the same period that the related revenue from the products and/or services is recorded. - 69 - We enter into programs that may provide for multiple element deliverables. Commencing in 2018, we began enrolling medical and dental professionals in a one-year program which included training in a highly personalized, deep immersion workshop format which provided the dentist access to an onboarding team who is dedicated to creating a successful integrated practice. The key topics covered in training included case selection, clinical diagnosis, appliance design, adjunctive therapies, instructions on ordering our products, guidance on pricing, instruction on insurance reimbursement protocols and interacting with our proprietary software system and the many features on our website. The initial training and educational workshop is typically provided in the first month that a VIP enrolls. Since VIPs are able to begin generating revenue after the first training workshop, we recognize 50% of the service revenue in the second month of enrollment and the remaining 50% pro-rata throughout the following eleven months of the service contract. Ongoing support and additional training are provided throughout the year and include access to our proprietary Airway Intelligence Service (or AIS) which provides VIPs with resources to help simplify the diagnostic and treatment planning process. AIS is provided as part of the price of each appliance and is not a separate revenue stream. Following the year of training and support, a VIP may pay for seminars and training courses that meet the VIP’s needs on a subscription or a course by course basis. In addition to enrollment service revenue, in 2020 we launched an additional service on a monthly subscription basis: Billing Intelligence Service (or BIS). Revenue for this service is recognized monthly during the month the service is rendered. Included in BIS is a monthly AirO2 license. In April 2021, we launched our MyoCorrect orofacial myofunctional therapy services. We identify all goods and services that are delivered separately under a sales arrangement and allocate revenue to each deliverable based on relative fair values. Fair values are generally established based on the relevant service period which approximates the prices for relevant training that would be charged if those services were sold separately. In general, revenues are separated between durable medical equipment (product revenue) and education and training services (service revenue). The allocated revenue for each deliverable is then recognized ratably based on relative fair values of the components of the sale. Revenue from training is recognized over the relevant service period (i.e., as we satisfy our performance obligations and creates value for the VIP). We also evaluate the impact of undelivered items on the functionality of delivered items for each sales transaction and, where appropriate, defer revenue on delivered items when that functionality has been affected. Functionality is determined to be met if the delivered products or services represent a separate earnings process. From time to time, we offer various discounts to our customers. These include the following: 1) Discount for cash paid in full 2) Conference and trade show incentives 3) Negotiated concessions on annual enrollment fee The amount of the discount is determined up front prior to the sale. Accordingly, measurement is determined before the sale occurs and revenue is recognized based on the terms agreed upon between us and the VIP over the performance period. In rare circumstances, a discount has been given after the sale during a conference which is offering a discount to full price. In this situation revenue is measured and the change in transaction price is allocated over the remaining performance obligation. The amount of consideration can vary by customer due to promotions and discounts authorized to incentivize a sale. Prior to the sale, the customer and us agree upon the amount of consideration that the customer will pay in exchange for the services we provide. The net consideration that the customer has agreed to pay is the expected value that is recognized as revenue over the service period. Any overpayments are refunded during the reporting period so that no refund liability is recognized. At the end of each reporting period, we update the transaction price to represent the circumstances present at the end of the reporting period and any changes in circumstances during the reporting period. Product revenue In addition to revenue from services, we also generate revenue from the sale of our patented oral devices (such as mmRNA and DNA appliances) and the Vivos Guides. Revenue from appliance sales is recognized when control of product is transferred to the VIP (our customer) in an amount that reflects the consideration we expect to be entitled to in exchange for those products. The VIP in turn charges the VIP’s patient and/or patient’s insurance a fee for the appliance and for his or her professional services in measuring, fitting, installing the appliance and educating the patient as to its use. We are contracted with the VIP for the sale of the appliance and are not involved in the sale of the products and services from the VIP to the VIP’s patient. - 70 - Our appliances are visually similar to a retainer that is worn after braces are removed. Each appliance is specifically fitted to each patient. We utilize our network of certified VIPs throughout the country to sell the appliances to their customers as well as in two centers that we operate. We utilize third party contract manufacturers or labs to manufacture/fabricate each appliance and preformed Guide. The manufacturer designated by us (of which there are several) produces the appliance in strict adherence to our patents, design history files, protocols, processes and procedures and under the direction and specific instruction of us. The manufacturer then ships the appliance to the VIP who ordered the appliance through us. All of our contract manufacturers are required to follow our master design files in production of appliances, or the lab will be in violation of the FDA’s rules and regulations. We performed an analysis under ASC Topic 606-10-55-36 through 55-40 and concluded it is the principal in the transaction and is reporting revenue gross. We bill the VIP provider the contracted price for the appliance which is recorded as product revenue. Product revenue is recognized once the appliance ships to the VIP provider under our direction. Within each center, we utilize a team of medical professionals to measure, order and fit each appliance. Upon scheduling the patient (which is our customer in this case), the center takes a deposit and reviews the patient’s insurance coverage. Revenue is recognized differently for our owned centers than for our VIPs. We recognize revenue in the centers after the appliance is received from the manufacturer and once the appliance is fitted and provided to the patient. We offer our clinical advisors (who help our VIPs with the technical aspects of our products) discounts from our standard VIP pricing. In addition, from time to time, we offer buy one, get one offers and other credits to our VIPs to use our products and increase volume within their practices. Stock-Based Compensation Our board of directors (or the compensation committee thereof) grants share-based payments to employees under our equity incentive plans described below. We measure the cost of employee and director services received in exchange for all equity awards granted, including stock options, based on the fair market value of the award as of the grant date. We compute the fair value of stock options using the Black-Scholes-Merton (“BSM”) option pricing model, and we estimate the expected term using the simplified method which is the average of the vesting term and the contractual term of the respective options. We then recognize the cost of the equity awards over the period that services are provided to earn the award, usually the vesting period. For awards granted which contain a graded vesting schedule, and the only condition for vesting is a service condition, compensation cost is recognized as an expense on a straight-line basis over the requisite service period as if the award were, in substance, a single award. We recognize the impact of forfeitures in the period that the forfeiture occurs, rather than estimating the number of awards that are not expected to vest in accounting for stock-based compensation. Prior to the commencement of public trading of our common stock in December 2020, we estimated fair value of our common stock based on the most recent sales to third parties. The assumptions used in our option pricing model represent management’s best estimates. If factors change and different assumptions are used, our equity-based compensation expense could be materially different in the future. The key assumptions included in the model are as follows: ● Share Price – We use the closing price of our common stock on the grant date. ● Expected volatility — We determine the expected price volatility based on the historical volatilities of our peer group as we do not have a sufficient trading history for our common stock. Industry peers consist of several public companies in the bio-tech industry similar to us in size, stage of life cycle and financial leverage. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own stock price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation. ● Risk-free interest rate — The risk-free rate was determined based on yields of U.S. Treasury Bonds of comparable terms. The volatility is based on analyzing the stock price and implied volatility of guideline companies. - 71 - ● Expected dividend yield — We have not previously issued dividends and do not anticipate paying dividends in the foreseeable future. Therefore, we used a dividend rate of zero based on our expectation of additional dividends. ● Expected term — We estimate the expected term using the simplified method which is the average of the vesting term and the contractual term of the options. In 2017, our board of directors and shareholders approved the adoption of a stock and option award plan (the “2017 Plan”), under which shares were reserved for future issuance for options, restricted stock awards and other equity awards. The 2017 Plan permits grants of equity awards to employees, directors, consultants and other independent contractors. Our board of directors and shareholders approved a total reserve of 1,333,333 shares for issuance under the 2017 Plan. In 2019, our board of directors and shareholders approved the adoption of a stock and option award plan (the “2019 Plan”), under which shares were reserved for future issuance for options, restricted stock awards and other equity awards. The 2019 Plan permits grants of equity awards to employees, directors, consultants and other independent contractors. Our board of directors and shareholders have approved a total reserve of 333,334 shares for issuance under the 2019 Plan. On June 18, 2020, our shareholders approved an amendment and restatement of the 2019 Plan to increase the number shares or our common stock available for issuance thereunder by 833,333 share of common stock such that, after amendment and restatement of the 2019 Plan, and prior to any grants, 1,166,667 shares of common stock were available under the 2019 Plan. On July 28, 2021, our stockholders approved an amendment and restatement of the 2019 Plan to increase the number of shares of common stock available for issuance thereunder by 1,200,000 shares of common stock such that, after amendment and restatement of the 2019 Plan, and prior to any grants, 2,366,667 shares of common stock were available under the 2019 Plan. Basic and Diluted Net Loss Per Share Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed using the weighted average number of common shares outstanding and the weighted average dilutive potential common shares outstanding using the treasury stock method. However, for the years ended December 31, 2021 and 2020, diluted net loss per share is the same as basic net loss per share as the inclusion of weighted average shares of common stock issuable upon the exercise of outstanding warrants and stock options would be anti-dilutive. The numerator in the basic and diluted net loss per share calculation is the net loss attributable to common stockholders, which is the net loss for the year increased by the current year preferred stock dividends accrued. The holder of our formerly outstanding Series A Preferred Stock (Dr. G. Dave Singh, our founder and former Chief Medical Officer) was entitled to participate in common stock dividends, if and when declared, on a one-to-one per-share basis. Accordingly, in periods in which we have net income, earnings per share will be computed using the two-class method whereby the pro rata dividends distributable to the holder of our Series A Preferred Stock will be deducted from earnings applicable to common stockholders, regardless of whether a dividend is declared for such undistributed earnings. For the years ended December 31, 2021 and 2020, we incurred a net loss and, accordingly, there were no undistributed earnings to allocate under the two-class method. Recent Accounting Pronouncements From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed in Note 1 to our consolidated financial statements included in Item 8 of this Report, we believe that the impact of recently issued standards that are not yet effective could have a material impact on our financial position or results of operations upon adoption. For additional information on recently issued accounting standards and our plans for adoption of those standards, please refer to the section titled Recent Accounting Pronouncements under Note 1 to our consolidated financial statements included in Item 8 of this Report. - 72 -