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 cranial and/or dentofacial abnormalities and/or patients diagnosed with mild to moderate obstructive sleep apnea (“OSA”) and snoring in adults. We believe our technologies and conventions represent a significant improvement in the treatment of mild to moderate OSA versus other treatments such as continuous positive airway pressure (“CPAP”) or palliative oral appliance therapies. Our alternative treatments are part of The Vivos Method . The Vivos Method is an advanced therapeutic protocol, which often combines the use of customized oral appliance specifications and proprietary clinical treatments 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 treatments 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 FDA cleared uses) in over 33,000 patients treated worldwide by more than 1,700 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. 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, now widely acknowledged to have been generally ineffective, and in many ways, harmful. As a result, nearly all of these Orders have been relaxed or lifted, but there is considerable uncertainty about whether the Orders will be reinstated should a new COVID-19 variant or entirely new virus emerge. - 62 - Our business was materially impacted by COVID-19 in 2020 and to some extent in 2021due to the actions of governmental bodies that mandated quarantines and lockdowns that resulted in many of our VIPs and potential VIPs having to close their offices. The impact of COVID-19 on our business diminished somewhat as 2022 progressed. However, it appears that the latest COVID-19 subvariants evoke generally milder symptoms and do not pose the same health or economic threat as previous strains. However, the residual effects of the pandemic on dental workforce availability as well as patient precautionary measures continued to negatively impact our VIP dental practices and our revenue across the U.S. and Canada during 2022. We believe new enrollments during the fourth quarter of 2022 were negatively impacted by the ongoing overall workforce uncertainties in the dental market. 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. Material Items, Trends and Risks 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 modalities. 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. 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 as the Company’s performance obligations are satisfied in accordance with ASC 606. We are also engaging in strategic collaborations to market the benefits of the Vivos treatment modalities and VIP enrollment to dentists, including our cooperative relationships with various medical providers to deliver diagnostic and medical consultation services to people across North America who suffer from OSA. We recognize revenue on VIP enrollments once the contract is executed, payment is received, and as the Company’s performance obligations are satisfied in accordance with ASC 606. 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 forty-eight percent (48%) of VIPs accounting for all new case starts during the year ended December 31, 2022. 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. - 63 - 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 support 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. As of the end of 2022, we believe we have made important progress in penetrating this market, but as we cautioned previously, DSOs tend to move slowly when adopting new technologies or programs. 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 ® home sleep test. Patients with mild to moderate OSA can be referred to a fully trained local VIP dentist for treatment. The AAP program did not contribute meaningfully to revenue during 2022. 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, inflationary pressures (including increases in the price of raw material components of our appliances) made it necessary for us to adjust our standard pricing for our appliance products effective May 1, 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. In the fourth quarter of 2022, we rolled back a portion of the pricing increase of May in order to stimulate demand. An additional inflation-related risk is the Federal Reserve’s response, which up to this point has been to raise interest rates. Such actions have, in times past, created unintended consequences in terms of the impact on housing starts, overall manufacturing, capital markets, and banking. If such disruptions become systemic, as occurred in the 2008 Great Recession, then the impact on our Revenue, Earnings and access to Capital Markets of both inflation and inflation-fighting responses would be impossible to know or calculate. 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, the fourth quarter tends to be one where we see higher enrollment levels for new VIP dentists, however, as previously mentioned, in Q4 of 2022 we did not see that same pattern emerge. The first quarter of each year tends to be our weakest quarter of the year for new enrollments, and to a certain extent, appliance sales as well. 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 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. - 64 - War in Ukraine. In addition, worldwide supply chain constraints and economic and capital markets uncertainty arising out of 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. Capital markets uncertainty, with public stock price decreases and volatility, could make it more difficult for us to raise needed capital at the appropriate time. Key Components of Consolidated Statements of Operations Net revenue. We recognize revenue when we satisfy our performance obligations over time as our customers receive the benefit of the promised goods and services, which generally occurs over a short period of time. Performance obligations with respect to appliance sales are typically satisfied by shipping or delivering products to our VIPs or, in the case of enrollment or service revenue, upon our satisfaction of performance obligations associated with VIP enrollments. 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. Other income. Other income relates to the PPP loan forgiven in January 2022 by the SBA. Restatement of March 30, 2022 Financial Statements As described in the Explanatory Note and Note 2, “Restatement of Consolidated Financial Statement,” in Item 1 of Part 1 of Amendment No. 1 to our Quarterly Report on Form 10-Q for the three months ended March 31, 2022, originally filed with the SEC on May 16, 2022 and such Amendment No. 1 being filed on November 25, 2022 (the “10-Q/A”), we determined it was necessary to restate our financial statements for the three months ended March 31, 2022. The restatement of the previously filed financial statements was due to our management (with the concurrent of the Audit Committee of our Board of Directors) determining that our existing revenue recognition policy was not consistent with the guidance in ASC 606. After analyzing our contracts using the five-step process in ASC 606, we have determined that for VIP enrollment contracts, it is necessary for us to separately identify the performance obligations and recognize the revenue as the performance obligations are satisfied or over the customer life as applicable. We identified a material weakness related to the operating effectiveness of our review controls in that we did not put the appropriate resources in place to be able to identify technical accounting issues and perform review functions appropriately for the revenue recognition issue described above and for those items which we had previously identified in Part II, Item 9A of our Form 10-K for the fiscal year ended December 31, 2021. - 65 - Results of Operations Comparison of Years ended December 31, 2022 and 2021 Our consolidated statements of operations for the years ended December 31, 2022 and 2021 are presented below (dollars in thousands): 2022 2021 Change Revenue Product revenue $ 8,381 $ 6,520 $ 1,861 Service revenue 7,643 10,365 (2,722 ) Total revenue 16,024 16,885 (861 ) Cost of sales (exclusive of depreciation and amortization shown separately below) 6,005 4,281 1,724 Gross profit 10,019 12,604 (2,585 ) Gross profit % 63 % 75 % Operating expenses General and administrative 29,041 25,791 3,250 Sales and marketing 5,340 5,551 (211 ) Impairment loss - 911 (911 ) Depreciation and amortization 669 733 (64 ) Operating loss (25,031 ) (20,382 ) (4,649 ) Non-operating income (expense) Interest expense - (14 ) 14 Other expense (190 ) (9 ) (181 ) PPP loan forgiveness 1,287 - 1,287 Other income 89 117 (28 ) Net loss $ (23,845 ) $ (20,288 ) $ (3,557 ) Revenue Revenue decreased approximately $0.8 million, or 5%, to approximately $16 million for the year ended December 31, 2022 compared to $16.9 million for year ended December 31, 2021. Revenue during 2022 decreased due to a decrease of approximately $3.7 million in VIP enrollment revenue, as well as an adjustment to our revenue recognition methodology which resulted in a cumulative decrease of approximately $0.4 million in VIP revenue related to prior years. This was offset by an increase of 29% or approximately $1.8 million attributable to higher appliance sales to VIPs, (ii) an increase of approximately $0.1 million in revenue from our two company-owned dental centers, (iii) an increase of approximately $0.3 million in BIS revenue, (iv) a $0.6 million increase in myofunctional therapy service revenue, (iv) and increase of approximately $0.4 million in sleep testing services. During the year ended December 31, 2022, we enrolled 196 VIPs and recognized VIP revenue of approximately $4.8 million, a decrease of 43% in enrollment revenue, compared to the year ended December 31, 2021, when we enrolled 197 VIPs for a total of approximately $8.5 million. Revenue growth was impacted by a change in our revenue methodology adopted during 2022, which affected the contract life and allocation of performance obligations to different categories. 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. For the year ended December 31, 2022, we sold 12,281 oral appliance arches for a total of approximately $7.8 million, a 29% increase from the year ended December 31, 2021 when we sold 11,355 oral appliance arches for a total of approximately $6.0 million. Lastly, for the year ended December 31, 2022 we had approximately $0.6 million in center revenue, compared to approximately $0.5 million for the year ended December 31, 2021, and approximately $1.0 million in our orofacial myofunctional therapy revenue, compared to $0.3 million for the year ended December 31, 2021 due to the introduction of the service in 2021 and increased demand for these services. - 66 - Cost of Sales and Gross Profit Cost of sales increased by approximately $1.7 million to approximately $6.0 million for the year ended December 31, 2022 compared to approximately $4.3 million for the year ended December 31, 2021. 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 related to costs associated with appliances, an increase of approximately $0.8 million related to costs associated with VIP enrollment and training, and approximately $0.7 million increase related to our new program (started in 2022) related to the sale and leasing of SleepImage rings. For the year ended December 31, 2022, gross profit decreased by approximately $2.6 million to $10 million. This decrease was attributable to an increase in cost of sales of $1.7 million explained above, coupled with a decrease in revenue of approximately $0.8 million. Gross margin decreased to 63% for the year ended December 31, 2022 compared to 75% for the year ended December 31, 2021, primarily driven by the higher costs associated with appliances due to increase in cost of raw materials and VIP enrollments and new incentives deployed to increase VIP enrollments. General and Administrative Expenses General and administrative expenses increased approximately $3.3 million, or approximately 13%, to approximately $29 million for the year ended December 31, 2022, as compared to $25.8 million for the year ended December 31, 2021. The primary driver of this increase was an increase in personnel and related compensation of approximately $2.4 million, including salaries and benefits, paid time off, stock-based compensation, and other employee-related expenses. The increase in payroll related costs were mainly a result of increased headcount in 2022 (from 137 average headcount at December 31, 2021 to 167 average headcount at December 31, 2022). Other drivers of the increase in general and administrative expenses included an increase of approximately $1.4 million to general corporate costs such as consulting and professional fees, an increase of approximately $1.0 million related to travel expenses, and an increase of approximately $0.6 million for information and technology supplies, equipment, rent, research as well as corporate expenses such as filing fees, subscriptions, and office expenses, offset by a decrease of approximately $0.9 million in bad debt expense and approximately $0.3 million in bank and merchant fees. These increases were due to the growth of the company combined with higher headcount and expenses associated with being a public company. Sales and Marketing Sales and marketing expense decreased by $0.2 million to $5.3 million for the year ended December 31, 2022, compared to $5.5 million for the year ended December 31, 2021. This decrease relates to approximately $1.6 million reduction in marketing campaigns, materials and product samples, which was offset by an increase of approximately $0.6 million on redesigning and improving the Vivos website, and approximately $0.2 million on print media and marketing supplies. Depreciation and Amortization Depreciation and amortization expense was approximately $0.7 million for the years ended December 31, 2022 and 2021. The change in depreciation expense is related to new assets placed into service which was offset by lower depreciation expense related to legacy assets that were retired during the year. PPP Loan Forgiveness PPP loan forgiveness was approximately $1.3 million for the year ended December 31, 2022 when compared to none for the year ended December 31, 2021. The increase is due to the PPP loan forgiven by the SBA in its entirety. - 67 - Liquidity and Capital Resources The financial statements have been prepared in conformity with generally accepted accounting principles in the United States, which contemplate continuation of our company as a going concern. We have incurred losses since inception, including $20.3 million for the year ended December 31, 2021, resulting in an accumulated deficit of $55.6 million as of December 31, 2021. As of December 31, 2022, we had an accumulated deficit of $79.5 million, and approximately $3.5 million in cash, which will not be sufficient to fund our operations and strategic objectives over the next twelve months from the date of issuance of these financial statements. Without additional financing, these factors raise substantial doubt regarding our ability to continue as a going concern. We will be required to obtain additional financing and expect to satisfy our cash needs primarily from the issuance of equity securities or indebtedness in order to sustain operations until we can achieve profitability and positive cash flows, if ever. There can be no assurances, however, that adequate additional funding will be available on favorable terms, or at all. If such funds are not available in the future, we may be required to delay, significantly modify or terminate our operations, all of which could have a material adverse effect on 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, 2022 and 2021 (in thousands): 2022 2021 Net cash provided by (used in): Operating activities $ (19,587 ) $ (15,735 ) Investing activities (924 ) (2,608 ) Financing activities - 24,167 Net cash used in operating activities of approximately 19.6 million for the year ended December 31, 2022 is an increase of approximately $3.9 million compared to net cash used in operating activities of approximately $15.7 million for the year ended December 31, 2021. This increase is due primarily to the increase in our net loss of approximately $3.6 million, a decrease of approximately $0.9 million in accrued expenses due to increase in consulting fees, legal fees, third party lab fees associated with the production of our appliances, offset by an increase of approximately $0.7 million in accounts receivable related to the MID clinics and VIP enrollments under payment plans, an increase of approximately $0.5 million in accounts payable, an increase of approximately $0.1 million in prepaid expenses and current assets primarily driven by annual renewals of subscriptions and other services, and an increase of approximately $0.5 million due to the collection of a tenant improvement allowance related to the build-out of the Vivos Institute in Denver, Colorado. For the year ended December 31, 2022, net cash used in investing activities consisted of capital expenditures for software of $0.9 million related to the development of software for internal use, which is expected to be placed in service in mid-2023. This compares to net cash used in investing activities for the year ended December 31, 2021 of $2.6 million due to capital expenditures for leasehold improvements and equipment related to The Vivos Institute. For the year ended December 31, 2022, there was no cash used in financing activities. For the year ended December 31, 2021, net cash provided by financing activities of $24.2 million 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. - 68 - Critical Accounting Policies Involving Management Estimates and Assumptions Basis of Presentation and Consolidation The accompanying consolidated financial statements, which include the accounts of the Company and its wholly owned subsidiaries (BioModeling, First Vivos, Vivos Therapeutics (Canada) Inc., Vivos Management and Development, LLC, Vivos Del Mar Management, LLC, Vivos Modesto Management, LLC, Vivos Therapeutics DSO LLC, a Colorado limited liability company, and Vivos Airway Alliances, LLC, a Colorado limited liability company), are prepared in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”). All significant intercompany balances and transactions have been eliminated in consolidation. Emerging Growth Company Status The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company currently expects to retain its status as an emerging growth company until the year ending December 31, 2026, but this status could end sooner under certain circumstances. Revenue Recognition The Company generates revenue from the sale of products and services. A significant majority of the Company’s revenues are generated from enrolling dentists in the VIP program and sales of products and services to VIPs. Revenue is recognized when control of the products or services is transferred to customers (i.e., VIP dentists ordering such products or services for their patients) in a way that reflects the consideration the Company expects to be entitled to in exchange for those products and services. Following the guidance of ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) and the applicable provisions of ASC Topic 842, Leases (“ASC 842”), the Company determines 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 the Company satisfies each performance obligation. Service Revenue VIP Enrollment Revenue The Company reviews its VIP enrollment contracts from a revenue recognition perspective using the 5-step method outlined above. Once it is determined that a contract exists (a VIP enrollment agreement is executed and payment is received), service revenue related to VIP enrollments is recognized when the underlying services are performed. The price of the standard VIP enrollment that the VIP pays upon execution of the contract is significant, running at approximately $31,500, with different entry levels from $2,500 to $50,000. Unearned revenue reported on the balance sheet as contract liability represents the portion of fees paid by VIP customers for services that have not yet been performed as of the reporting date and are recorded as the service is rendered. The Company recognizes this revenue as performance obligations are met. Accordingly, the contract liability for unearned revenue is a significant liability for the Company. Provisions for discounts are provided in the same period that the related revenue from the products and/or services is recorded. - 69 - The Company enters into programs that may provide for multiple performance obligations. Commencing in 2018, the Company began enrolling medical and dental professionals in a one-year program (later known as the VIP Program) which includes training in a highly personalized, deep immersion workshop format which provides the VIP dentist access to a team who is dedicated to creating a successful integrated practice. The key topics covered in training include case selection, clinical diagnosis, appliance design, adjunctive therapies, instructions on ordering the Company’s products, guidance on pricing, instruction on insurance reimbursement protocols and interacting with our proprietary software system and the many features on the Company’s website. The initial training and educational workshop are typically provided within the first 30 to 45 days that a VIP enrolls. Ongoing support and additional training are provided throughout the year and includes access to the Company’s proprietary Airway Intelligence Service (“AIS”) which provides the VIP 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 Provider’s needs on a subscription or a course-by-course basis. VIP enrollment fees include multiple performance obligations which vary on a contract by contract basis. The performance obligations included with enrollments may include sleep apnea rings, a six or twelve months BIS subscription, a marketing package, lab credits and the right to sell our appliances. We allocate the transaction price of a VIP enrollment contract to each performance obligation under such contract using the relative standalone selling price method. The relative standalone price method is based on the proportion of the standalone selling price of each performance obligation to the sum of the total standalone selling prices of all the performance obligations in the contract. The right to sell is similar to a license of intellectual property because without it the VIP cannot purchase appliances from us. The right to sell performance obligation includes the Vivos training and enrollment materials which prepare dentists for treating their patients using The Vivos Method. Because the right to sell is never sold outside of VIP contracts, and VIP contracts are sold for varying prices, we believes it is appropriate to estimate the standalone selling price of this performance obligation using the residual method. As such, the observable prices of other performance obligations under a VIP contract will be deducted from the contract price, with the residual being allocated to the right to sell performance obligation. Our management uses significant judgements in revenue recognition including an estimation of customer life over which it recognizes the right to sell. Our management has determined that VIPs who do not complete sessions 1 and 2 of training rarely complete training at all and fail to participate in the VIP program long term. Since the beginning of the VIP program, just under one-third of new VIP members fall into this category, and the revenue allocated to the right to sell for those VIPs is accelerated at the time in which it becomes remote that a VIP will continue in the program. Revenue is recognized in accordance with each individual performance obligation unless it becomes remote the VIP would continue, at which time the remainder of review is accelerated and recognized in the following month. Those VIPs who complete training typically remain active for a much longer period, and revenue from the right to sell for those VIPs is recognized over the estimated period of which those VIPs will remain active. Because of various factors occurring year to year, our management has estimated customer life for each year a contract is initiated. The estimated customer lives are calculated separately for each year and have been estimated at 15 months for 2020, 14 months for 2021 and 18 months for 2022. The right to sell is recognized on a sum of the years’ digits method over the estimated customer life for each year as this approximates the rate of decline in VIPs purchasing behaviors we have observed. Other Service Revenue In addition to VIP enrollment service revenue, in 2020 we launched BIS, an additional service on a monthly subscription basis, which includes our AireO2 medical billing and practice management software. Revenue for these services is recognized monthly during the month the services are rendered. - 70 - Also, we offer our VIPs the ability to provide MyoCorrect to the VIP’s patients as part of treatment with The Vivos Method. The program includes packages of treatment sessions that are sold to the VIPs, and resold to their patients. Revenue for MyoCorrect services is recognized over the 12-month performance period as therapy sessions occur. Allocation of Revenue to Performance Obligations We identify all goods and services that are delivered separately under a sales arrangement and allocates revenue to each performance obligation based on relative fair values. These fair values approximate the prices for the relevant performance obligation that would be charged if those services were sold separately, and are recognized over the relevant service period of each performance obligation. After allocation to the performance obligations, any remainder is allocated to the right to sell under the residual method and is recognized over the estimated customer life. In general, revenues are separated between durable medical equipment (product revenue) and education and training services (service revenue). Treatment of Discounts and Promotions From time to time, we offer various discounts to its customers. These include the following: 1) Discount for cash paid in full 2) Conference or trade show incentives, such as subscription enrollment into the SleepImage ® home sleep test program, or free trial period for the SleepImage ® lease program 3) Negotiated concessions on annual enrollment fee 4) Credits/rebates to be used towards future product orders such as lab rebates 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 the Company and the customer 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 we 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. 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 its patented oral devices and preformed guides (known as appliances or systems) to its customers, the VIP dentists. Revenue from the appliance sale is recognized when control of product is transferred to the VIP in an amount that reflects the consideration it expects 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 contract with VIPs for the sale of the appliance and is not involved in the sale of the products and services from the VIP to the VIP’s patient. The appliance is similar to a retainer that is worn after braces are removed. Each appliance is unique and is fitted to the patient. We utilize our network of certified VIPs throughout the United States and in some non-U.S. jurisdictions to sell the appliances to their customers as well as in two dental centers that we operate. We utilize third party contract manufacturers or labs to produce its customized, patented appliances and preformed guides. The manufacturer designated by us produces the appliance in strict adherence to our patents, design files, protocols, processes and procedures and under the direction and specific instruction of the Company, ships the appliance to the VIP who ordered the appliance from 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 606-10-55-36 through 55-40 and concluded that we are the principal in the transaction and are reporting revenue on a gross basis. We bill the applicable VIP the contracted price for the appliance which is recorded as product revenue. Product revenue is recognized once the appliance ships to the VIP under our direction. - 71 - Within each of the two centers that we own, 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 revenue we recognize form VIPs. We recognize revenue from our centers after the appliance is received from the manufacturer and once the appliance is fitted and provided to the patient. We offer certain dentists (known as Clinical Advisors) discounts from standard VIP pricing. This is done to help encourage Clinical Advisors, who help the VIPs with technical aspects of our products and to purchase our products for their own practices. In addition, from time to time, we offer credits to incentivize VIPs to adopt our products and increase Vivos Method case volume within their practices. These performance obligations are recorded as revenue in future periods over the life of the credit. Use of Estimates The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. Our management bases its estimates and assumptions on existing facts, historical experience, and various other factors that it believes are reasonable under the circumstances, to determine the carrying values of assets and liabilities that are not readily apparent from other sources. Our significant accounting estimates include, but are not necessarily limited to, assessing collectability on accounts receivable, the determination of customer life and breakage related to recognizing revenue for VIP contracts, notes receivable, impairment of goodwill and long-lived assets; valuation assumptions for assets acquired in business combinations; valuation assumptions for stock options, warrants and equity instruments issued for goods or services; deferred income taxes and the related valuation allowances; and the evaluation and measurement of contingencies. Additionally, the full impact of COVID-19 and its variants is unknown and cannot be reasonably estimated. However, we have made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent there are material differences between our estimates and the actual results, our future consolidated results of operations will be affected. Cash and Cash Equivalents All highly liquid investments purchased with an original maturity of three months or less that are freely available for the Company’s immediate and general business use are classified as cash and cash equivalents. Accounts Receivable, Net The accounts receivable in the accompanying financial statements are stated at the amounts management expects to collect. Our management performs credit evaluations of its customers’ financial condition and may require a prepayment for a portion of the services to be performed. 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. Property and Equipment, Net Property and equipment are stated at historical cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which ranges from 4 to 5 years. Amortization of leasehold improvements is recognized using the straight-line method over the shorter of the life of the improvement or the term of the respective leases which range between 5 and 7 years. We do not begin depreciating assets until they are placed in service. - 72 - Intangible Assets, Net Intangible assets consist of assets acquired from First Vivos and costs paid to (i) MyoCorrect, LLC (“MyoCorrect LLC”), from whom we acquired certain assets related to our OMT service in March 2021 and (ii) Lyon Management and Consulting, LLC and its affiliates (“Lyon Dental”), from whom we acquired certain medical billing and practice management software, licenses and contracts in April 2021 (including the software underlying AireO2) for work related to our acquired 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 6). The costs paid to MyoCorrect LLC and Lyon Dental for patents and intellectual property are amortized 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 as of December 31. There was no impairment of goodwill recognized at December 31, 2021. There were no quantitative or qualitative indicators of impairment that occurred for the year ended December 31, 2022 and accordingly, no impairment was required. Impairment of Long-lived Assets 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 resulted in no impairment loss. There were no quantitative or qualitative indicators of impairment that occurred for the year ended December 31, 2022 and accordingly, no impairment was required. Equity Offering Costs Commissions, legal fees and other costs that are directly associated with equity offerings are capitalized as deferred offering costs, pending a determination of the success of the offering. Deferred offering costs related to successful offerings are charged to additional paid-in capital in the period it is determined that the offering was successful. Deferred offering costs related to unsuccessful equity offerings are recorded as expense in the period when it is determined that an offering is unsuccessful. Accounting for Payroll Protection Program Loan We accounted for our U.S. Small Business Administration’s (“SBA”) Payroll Protection Program (“PPP”) loan as a debt instrument under ASC 470, Debt . We recognized the original principal balance as a financial liability with interest accrued at the contractual rate over the term of the loan. On January 21, 2022, our PPP loan received of May 8, 2020 was forgiven by the SBA in its entirety, which includes approximately $1.3 million in principal. As a result, we recorded a gain on the forgiveness of the loan in the quarter ended March 31, 2022 under non-operating income (expense). - 73 - Loss and Gain Contingencies We are subject to the possibility of various loss contingencies arising in the ordinary course of business. An estimated loss contingency is accrued when it is probable that an asset has been impaired, or a liability has been incurred, and the amount of loss can be reasonably estimated. If some amount within a range of loss appears to be a better estimate than any other amount within the range, we accrue that amount. Alternatively, when no amount within a range of loss appears to be a better estimate than any other amount, we accrue the lowest amount in the range. If we determine that a loss is reasonably possible and the range of the loss is estimable, then we disclose the range of the possible loss. If we cannot estimate the range of loss, we will disclose the reason why we cannot estimate the range of loss. Our management regularly evaluates current information available to it to determine whether an accrual is required, an accrual should be adjusted and if a range of possible loss should be disclosed. Legal fees related to contingencies are charged to general and administrative expense as incurred. Contingencies that may result in gains are not recognized until realization is assured, which typically requires collection in cash. Share-Based Compensation 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. 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 determine the expected price volatility based on the historical volatilities of shares 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. We 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 and cancellations in the period that the forfeiture or cancellations occurs, rather than estimating the number of awards that are not expected to vest in accounting for stock-based compensation. Research and Development Costs related to research and development are expensed as incurred and include costs associated with research and development of new products and enhancements to existing products. Research and development costs incurred were approximately $0.2 million and less than $0.1 million for the years ended December 31, 2022 and 2021, respectively. Leases Operating leases are included in operating lease right-of-use (“ROU”) asset, accrued expenses, and operating lease liability – current and non-current portion in our balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, we use our incremental borrowing rate based on the information available at the lease commencement date as the rate implicit in the lease is not readily determinable. The determination of our incremental borrowing rate requires management judgment based on information available at lease commencement. The operating lease ROU assets also include adjustments for prepayments, accrued lease payments and exclude lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. Operating lease cost is recognized on a straight-line basis over the expected lease term. Lease agreements entered into after the adoption of ASC 842 that include lease and non-lease components are accounted for as a single lease component. Lease agreements with a noncancelable term of less than 12 months are not recorded on our balance sheets. - 74 - Income Taxes We account for income taxes in accordance with Accounting Standards Codification (“ASC”) 740, Income Taxes, under which deferred income taxes are recognized based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results, or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. A valuation allowance is recorded when it is more likely than not that a deferred tax asset will not be realized. The recorded valuation allowance is based on significant estimates and judgments and if the facts and circumstances change, the valuation allowance could materially change. In accounting for uncertainty in income taxes, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. We recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. Basic and Diluted Net Loss Per Share Basic net loss per common share is computed by dividing the net loss applicable to common stockholders by the weighted average number of common shares outstanding for each period presented. Diluted net loss per common share is computed by giving effect to all potential shares of Common Stock, including stock options, convertible debt, preferred stock (if any), and warrants, to the extent dilutive. 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 the accompanying consolidated financial statements included in 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 the accompanying consolidated financial statements included in this Report.