Vivos Therapeutics, Inc. - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the transition period from to

Commission File Number: 001-39796

Vivos Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (866) 908-4867

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 15, 2021, the registrant had 23,012,119 shares of common stock, $0.0001 par value per share, outstanding.

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” (as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) that reflect our current expectations and views of future events. The forward-looking statements are contained principally in the section of this report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Readers are cautioned that significant known and unknown risks, uncertainties and other important factors (including those over which we may have no control and others listed in this Quarterly Report on Form 10-Q and in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020 (which is available at https://vivoslife.com/investor-relations/sec-filings/) (the “2020 Form 10-K”)) may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:

These forward-looking statements involve numerous risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results of operations or the results of other matters that we anticipate herein could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in the “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” section contain in this report and in the “Business,” “Regulation,” “Risk Factors” and other sections of the 2020 Form 10-K. You should thoroughly read this Quarterly Report on Form 10-Q and the documents that we refer to with the understanding that our actual future results may be materially different from, and worse than, what we expect. We qualify all of our forward-looking statements by these cautionary statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events or information as of the date on which the statements are made in this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this Quarterly Report on Form 10-Q and the documents that we refer to in this Quarterly Report on Form 10-Q and have filed as exhibits to this Quarterly Report on Form 10-Q, completely and with the understanding that our actual future results may be materially different from what we expect.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

VIVOS THERAPEUTICS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

See notes to unaudited condensed consolidated financial statements.

VIVOS THERAPEUTICS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

See notes to unaudited condensed consolidated financial statements.

VIVOS THERAPEUTICS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

See notes to unaudited condensed consolidated financial statements.

VIVOS THERAPEUTICS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

See notes to unaudited condensed consolidated financial statements.

VIVOS THERAPEUTICS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1 - ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Organizational Transactions

BioModeling Solutions, Inc. (“BioModeling” or “BMS”) was organized on March 20, 2007 as an Oregon limited liability company, and subsequently incorporated in 2013. On August 16, 2016, BioModeling entered into a share exchange agreement (the “SEA”) with First Vivos, Inc. (“First Vivos”), and Vivos Therapeutics, Inc. (“Vivos”), a then Wyoming corporation established on July 7, 2016 to facilitate this merger. Vivos was formerly named Corrective BioTechnologies, Inc. until its name changed on September 6, 2016 to Vivos Biotechnologies and on March 2, 2018 to Vivos Therapeutics, Inc. and had no substantial pre-combination business activities. First Vivos was incorporated in Texas on November 10, 2015. Pursuant to the SEA, all the outstanding shares of common stock and warrants of BioModeling and all of the shares of common stock of First Vivos were exchanged for newly issued shares of common stock, par value $0.0001 per share (the “Common Stock”) and warrants to purchase Common Stock of Vivos, the legal acquirer, which is collectively referred to herein as the “Company”. On August 12, 2020, the Company reincorporated as a domestic Delaware corporation under Delaware General Corporate Law from Wyoming.

The merger transaction was accounted for as a reverse acquisition and recapitalization, with BioModeling as the acquirer for financial reporting and accounting purposes. Upon the consummation of the merger, the historical financial statements of BioModeling became the Company’s historical financial statements and continued to be recorded at their historical carrying amounts.

Description of Business

The Company is a medical technology company focused on the development and commercialization to dental practices of a patented oral appliance technology and related protocols called the Vivos System. The Company believes the Vivos System represents the first non-surgical, non-invasive and cost-effective treatment for people with sleep disordered breathing, including mild-to-moderate obstructive sleep apnea. The Company’s business model is focused around dentists, and the Company’s program to train dentists and offer them other value-added services in connection with their ordering and use of the Vivos System for patients is called the Vivos Integrated Practice (“VIP”) program.

COVID-19

The early 2020 outbreak of COVID-19, and its development into a pandemic in March 2020, has resulted in significant economic disruption globally. Actions taken by various governmental authorities, individuals and companies around the world to prevent the spread of COVID-19 through social distancing have restricted travel, many business operations, public gatherings and the overall level of individual movement and in-person interaction across the globe. This has significantly reduced global economic activity and resulted in a decline in demand across many industries.

Many of the Company’s VIPs and potential VIPs closed their offices during periods of 2020 as a result of COVID-19, although some remained open to specifically provide patients with Company products as Company 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, Company management worked diligently to reduce expenses and maintain revenues during 2020. While revenue growth flattened in March and April 2020, expenses were reduced and the Company aggressively expanded its network of healthcare providers familiar with its products by offering online continuing education courses which introduced many in the medical and dental communities to the Company’s product line. As businesses have continued to reopen into 2021, the impact of COVID-19 on the Company has begun to diminish, although the Company is closely monitoring the potential impact of COVID-19 variants on its business. Of note, during the three months ended September 30, 2021, many of the Company’s Canadian VIPs have not traveled to the US 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 the Company’s Canadian VIPs receiving required training and commencing Vivos System cases. However, overall, for the quarter ended September 30, 2021, the Company does not believe that COVID-19 as had a material impact on its results of operations.

Basis of Presentation and Consolidation

The accompanying unaudited interim condensed consolidated financial statements, which include the accounts of the Company and its consolidated subsidiaries (which, consist, as of the date of this report, of BMS, First Vivos, Vivos Therapeutics (Canada) Inc., and Vivos Management and Development, LLC (“VMD”) (all of which are wholly-owned subsidiaries of the Company) and Vivos Del Mar Management, LLC, which is wholly owned by VMD), have been prepared in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules and regulations of the SEC related to a quarterly report. 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 condensed consolidated balance sheet as of December 31, 2020 included in this report has been derived from the Company’s audited consolidated financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements and, in the opinion of management, reflect all material adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the unaudited interim condensed consolidated financial statements. The information presented throughout this report, as of and for the periods ended September 30, 2021 and 2020, is unaudited.

These interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. The results of operations for the three months and nine months ended September 30, 2021 are not necessarily indicative of results to be expected for the full year.

On July 30, 2020, the Company effected a reverse stock split in which each common shareholder received one share of Common Stock for every three shares outstanding. All share and per share amounts in this report have been adjusted to reflect the effect of such reverse stock split.

Emerging Growth Company

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.

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.

December 2020 Initial Public Offering

On December 11, 2020, the Company completed its initial public offering (“IPO”) by offering 4,025,000 shares of Company Common Stock at a 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 the Company. In connection with the IPO, the Company’s then outstanding units of Series B preferred stock were automatically converted into an aggregate of 1,199,195 shares of Company Common Stock and warrants to purchase an aggregate of 1,199,195 shares of Company Common Stock (see Note 9).

May 2021 Follow-On Offering

On May 11, 2021, the Company completed a follow-on underwritten public offering of 4,600,000 shares of Company 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 the Company. Issuing costs associated with this stock issuance were approximately $2.2 million (see Note 9).

Payroll Protection Program Loan

On May 8, 2020, the Company received approximately $1,265,000 in funding through the U.S. Small Business Administration’s Payroll Protection Program (“PPP”) that was part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act signed into law in March 2020. The interest rate on the loan is 1.00% per year and matures on May 5, 2022 and may be forgiven to the extent proceeds of the loan are used for eligible expenditures such as payroll and other expenses described in the CARES Act. The note is payable in monthly installments of principal and interest over 12 months, beginning 12 months from the date of the note (deferral period). The note can be repaid at any time with no payment penalty.

The Company used these funds to assist with payroll, rent and utilities. The Company has spent the funding in a manner in which it believes the entire balance of the outstanding promissory note will be eligible for forgiveness through the terms of the PPP. An application to forgive the entire amount was submitted with the lender in January 2021; however, there can be no assurance given that all or any portion of the PPP loan will be forgiven. Any request for forgiveness is subject to review and approval by the lender and the SBA, including review of qualifying expenditures, staffing and salary levels.

Currently, there is no guidance in U.S. GAAP that specifically addresses the accounting by an entity that obtains a forgivable loan from a government entity. In the absence of specific guidance, the Company believes that is acceptable to account for the PPP loan as a debt instrument under ASC 470, Debt and apply the interest method in ASC 835-30, Imputation of Interest, which considers the interest accrued during the payment deferral period allowed for the loan. The Company recognized the entire loan amount as a financial liability (current and noncurrent per ASC 470-10-45, Other Presentation), with interest accrued and expensed over the term of the loan (see Note 7). Additionally, any amount forgiven when the Company is legally released as the primary obligor under the loan, will be recognized in the statement of operations as a gain from extinguishment of the loan.

Cash and Cash Equivalents

The Company considers currency on hand, demand deposits and all highly liquid investments with an original or remaining maturity of three months or less to be cash and cash equivalents. As of September 30, 2021, and December 31, 2020, the Company had no cash equivalents and all cash amounts consisted of cash on deposit. During the nine months ended September 30, 2021 and the year ended December 31, 2020, the Company, at times, maintained balances in excess of federally insured limits.

Concentration of Credit Risk and Significant Customers

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivable. The Company limits its exposure to credit loss by placing its cash with high credit quality financial institutions. Additionally, the Company has a diverse customer base and no single customer represented greater than ten percent of sales or accounts receivable for the three months and nine months ended September 30, 2021 and the year ended December 31, 2020.

Accounts Receivable, Net

The accounts receivable in the accompanying financial statements are stated at the amounts management expects to collect. The Company performs credit evaluations of its customers’ financial condition and may require a prepayment for a portion of the services to be performed. The Company reduces 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 the Company’s customers (namely, the Company’s VIP dentists). Allowance for uncollectible receivables was $592,747 and $507,347 as of September 30, 2021 and December 31, 2020, respectively.

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. The Company does not begin depreciating assets until they are placed in service.

Intangible Assets, Net

Intangible assets consist of assets acquired from First Vivos, BMS and Dr. G. Dave Singh (the Company’s founder, Chief Medical Officer and former director), and costs paid to third parties for work related to the Company’s patents. The identified intangible assets that were acquired are amortized using the straight-line method over the estimated life of the assets, which ranges from 5-15 years (See Note 5). The costs paid to third parties for the Company’s assets are amortized using the straight-line method over the life of the underlying patents, which approximates 15 years. The Company initially determined the fair value of the intangible assets using a discounted cash flow approach.

On March 29, 2021, the Company acquired certain assets from, and entered into related agreements with, MyoCorrect, LLC and its affiliates (“MyoCorrect”), which affiliates include an existing VIP dentist to administer the MyoCorrect program whereby dentists enrolled in the VIP program will have access to trained therapists who provide orofacial myofunctional therapy (“OMT”) via telemedicine technology. The Company issued to the OMT therapist warrants to purchase 200,000 shares of the Company’s Common Stock with an exercise price of $7.50 per share. 25,000 of these warrants vested initially upon issuance, but the remainder only vest and become exercisable upon the achievement of pre-determined performance metrics related to the utilization of MyoCorrect. The fair value of the warrants is consideration for intangibles assets, valued using the Black-Scholes pricing model at $136,326 and will amortized over 15 years.

Goodwill

Goodwill is the excess of acquisition costs of an acquired entity over the fair value of the identifiable net assets acquired (See Note 5). 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. The Company tests for impairment annually at year end. There was no impairment of goodwill recognized at December 31, 2020. There were no indicators of impairment that occurred for the three months and nine months ended September 30, 2021 and accordingly, no impairment was required.

Long-lived Assets

The Company reviews and evaluates 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. The Company measures 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 the Company 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. There was no impairment of long-lived assets as of December 31, 2020. No triggering events indicating potential impairment were identified for the three months and nine months ended September 30, 2021.

Notes Receivable, net

The notes receivable in the accompanying financial statements are stated at the amount management expects to collect. The current portion is what the Company expects to collect in the next twelve months and the long-term portion consists of the portion the Company expects to collect beyond twelve months. The Company reduced notes receivable by estimating a discount based on market rates. The discount on notes receivable was $46,580 and $68,101 as of September 30, 2021 and December 31, 2020, respectively. Accretion on the discount and interest on the note is recorded in interest income.

Fair Value Measurements

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

The Company believes that the fair value of cash, accounts receivable, accounts payable and accrued liabilities approximates their carrying values at September 30, 2021, and December 31, 2020, due to their short maturities. The Company also believes that the current and long-term portion of notes receivable and debt approximates their carrying value at September 30, 2021, and December 31, 2020, as its terms are commensurate with terms the Company can obtain from third parties.

Share-Based Compensation

The Company accounts for share-based payments to employees by recognizing compensation expense based upon the estimated fair value of the awards on the date of grant. Prior to December 2020 (when the Company consummated its IPO), the Company used the price paid for such stock in the then most recent sales to third parties as the stock price input into the Company’s valuation model as of the date of grant. Following the IPO, the Company uses the price of its publicly-traded Common Stock on the date of grant. The Company then determines the estimated grant fair value using the Black-Scholes option pricing model and recognizes compensation costs ratably over the requisite service period which approximates the vesting period using the straight-line method. For options issued to consultants, the Company recognizes the estimated fair value of options issued using the Black-Scholes option pricing model at the time the services are rendered.

The Black-Scholes model requires the input of certain subjective assumptions and the application of judgment in determining the fair value of the awards. The most significant assumptions and judgments include the expected volatility, risk-free interest rate, the expected dividend yield, and the expected term of the awards. The Company accounts for forfeitures as they occur.

The assumptions used in the Company’s option pricing model represent management’s best estimates. If factors change and different assumptions are used, the Company’s equity-based compensation expense could be materially different in the future. The key assumptions included in the model are as follows:

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 immaterial for the three months and nine months ended September 30, 2021 and 2020, respectively.

Income Taxes

The Company uses the asset and liability method to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities.

Deferred tax assets and liabilities are determined using the effective tax rates for the years in which the tax assets and liabilities are expected to be realized. A valuation allowance is established when it is more likely than not that the future realization of all or some of the deferred tax assets will not be achieved.

Basic and Diluted Net Loss Per Share

Basic net loss per share is computed using the weighted average number of shares of Common Stock outstanding during the period. Diluted net loss per common share is computed using the weighted average number of shares of Common Stock outstanding and the weighted average dilutive potential shares of Common Stock outstanding using the treasury stock method. However, for the nine months ended September 30, 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 the holders of Common Stock, which is the net loss for the year increased by the current year preferred stock dividends accrued (at September 30, 2021, the Company had no shares of preferred stock outstanding; see Notes 8 and 9).

For both the three months and nine months ended September 30, 2021 and 2020, the Company incurred a net loss and, accordingly, there were no undistributed earnings to allocate.

The following table summarizes outstanding Common Stock securities not included in the computation of diluted net loss per common share as their inclusion would be anti-dilutive:

SCHEDULE OF OUTSTANDING COMMON STOCK SECURITIES NOT INCLUDED IN THE COMPUTATION OF DILUTED NET LOSS PER SHARE 

Recent Accounting Pronouncements

The Company is an emerging growth company (“EGC”) as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), whereby the Company is not required to comply with new or revised financial accounting standards until the dates when private companies are required to comply with such standards. The JOBS Act provides that a company can elect to opt out of the extended transition periods and comply with the requirements that apply to non-EGC public companies but any such election to opt out is irrevocable. Presented below is a discussion of new accounting standards including deadlines for adoption assuming that the Company retains its designation as an EGC.

Standards Required to be Adopted in Future Years. The following accounting standards are not yet effective, and a decision has not been reached about whether the Company will elect to early adopt any of the standards:

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). This ASU requires the Company to recognize lease assets and lease liabilities on the balance sheet and also disclose key information about leasing arrangements. In July 2018, the FASB issued ASU No. 2018-11 Targeted Improvements, which provides lessees the option to adopt either (i) retrospectively to each prior reporting period presented upon initial adoption, or (ii) apply the new leasing standard to all open leases as of the adoption date by recognizing a cumulative-effect adjustment to accumulated deficit in the period of adoption without restating prior periods. The Company is still evaluating which transition approach will be implemented upon adoption of ASU No. 2016-02. ASU 2016-02 is effective for the Company beginning in the first quarter of 2022 and early adoption is permitted.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends the guidance on the impairment of financial instruments. This guidance requires use of an impairment model (known as the “current expected credit losses”, or CECL model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes, as an allowance, its estimate of expected credit losses. ASU 2016-13 is effective for the Company beginning in the first quarter of 2023. The Company is still evaluating the impact the adoption of ASU 2016-13 will have on its results of operations or financial position.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for the Company beginning in the first quarter of 2022. Early adoption is permitted, including adoption in an interim period. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity). ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock, which results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Additionally, ASU 2020-06 affects the diluted earnings per share calculation for instruments that may be settled in cash or shares and for convertible instruments and requires enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. Effective January 1, 2021, the Company elected to adopt ASU 2020-06 using the modified retrospective transition method which did not result in any changes to the Company’s financial statements upon adoption.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not currently expected to have a material impact on the Company’s financial statements upon adoption.

2 – REVENUE RECOGNITION

In May 2014, the FASB issued ASU No. 2014-09 (Topic 606) titled, “Revenue from Contracts with Customers.” Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605), and requires entities to recognize revenues when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company’s customers currently consist primarily of its VIPs.

Revenue Recognition

The Company generates revenue from the sale of products and services. Revenue is recognized when control of the products or services is transferred to its customers in a way that reflects the consideration the Company expects to be entitled to in exchange for those products and services.

The Company determines revenue recognition through the following five-step model, which entails:

Service revenue

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. The Company recognizes 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.

The Company enters into programs that may provide for multiple element deliverables. Commencing in 2018, the Company began enrolling medical and dental professionals in a one-year program (which has evolved into the VIP program) which includes training in a highly personalized, deep immersion workshop format which provides the dentist access to a global 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 Company products, guidance on pricing, instruction on insurance reimbursement protocols and interacting with its proprietary software system and the many features on the Company’s website. The initial training and educational workshop is typically provided in the first month that a dental practice enrolls in the VIP program. Since VIPs are able to begin generating revenue after the first training workshop, the Company recognizes 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 is 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 Vivos System appliance and is not a separate revenue stream. Following the year of training and support, the 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, the Company offers and expects to offer additional services, such as its Billing Intelligence Services offering, and orofacial myofunctional therapy services, which was introduced in April 2021. Revenue for these services is recognized monthly during the month the services are rendered.

The Company identifies all goods and services that are delivered separately under a sales arrangement and allocates 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 the Company satisfies its performance obligations and creates value for the VIP). The Company also evaluates the impact of undelivered items on the functionality of delivered items for each sales transaction and, where appropriate, defers 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, the Company offers various discounts to its customers. These include the following:

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 the Company agree upon the amount of consideration that the customer will pay in exchange for the services the Company provides. 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, the Company updates the transaction price to represent the circumstances present at the end of the reporting period and any changes in circumstances during the reporting period.

In early 2021, the Company entered into its first agreement through its Medical Integration Division (“MID”). The purpose of the MID is to assist VIP practices in establishing clinical collaboration ties (called Pneusomnia Centers) with local healthcare professionals who routinely see or treat patients with sleep and breathing disorders. MID generates revenue through a one-time development fee and recurring management fees. The development service fee is for the sum of $60,000. Fifty percent (50%) or $30,000 of the development fee is paid upon the funding of the clinic and is deemed earned at the time the clinic opens. The remaining balance of $30,000 is payable in six (6) equal monthly installments of $5,000 commencing the month following the opening of the clinic and is recognized monthly during the month the service is rendered. The management service fee is equal to six percent (6%) of the clinic’s “monthly net revenues” with a monthly minimum of $5,000 and is recognized monthly during the month the service is rendered. During the nine months ended September 30, 2021, MID generated approximately $0.1 million of revenue.

Product revenue

In addition to revenue from services, the Company also generates revenue from the sale of the Vivos System, appliances and preformed guides to its customers, the VIPs. 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. The Company is contracted with the VIP 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 Vivos System appliance is similar to a retainer that is worn after braces are removed. Each appliance is unique and is fitted to the patient. The Company utilizes its network of VIPs (currently mainly in the United States but also in Canada) to sell the appliances to their patients as well as in two centers that the Company operates. The Company utilizes third party contract manufacturers or labs to produce its appliances and preformed guides. The manufacturer designated by the Company produces the appliance in strict adherence to the Company’s 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 the Company. All of the Company’s contract manufacturers are required to follow the Company’s master design files in production of appliances or the lab will be in violation of the FDA’s rules and regulations. The Company 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. The Company bills the 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 the direction of the Company.

The Company operates two dental centers of its own in Colorado and manages one in Utah through a management service agreement. Within each center, the Company utilizes a team of medical professionals to measure, order and fit each appliance. Upon scheduling the patient (which is the Company’s customer in this case), the center takes a deposit and reviews the patient’s insurance coverage. Revenue is recognized differently for our Company owned centers than for its VIPs. The Company recognizes revenue in the centers after the appliance is received from the manufacturer and once the appliance is fitted and provided to the patient. Owning and operating dental centers was the Company’s business model prior to 2018, when the VIP program was established and evolved into the Company’s primary business model.

The Company offers its Clinical Advisors (i.e., dentists, who help the VIPs with technical aspects of Company products) discounts from standard VIP pricing. This is done to help encourage the Clinical Advisors to purchase Company products for their own practices. In addition, from time to time, the Company offers “buy one get one” offers and other credits to incentivize VIPs to embrace Company products and increase volume within their practices.

The Company’s revenue from contracts with customers is shown in the table below:

SCHEDULE OF REVENUE FROM CONTRACT WITH CUSTOMERS 

Costs of obtaining the contract

The Company does pay commission-like bonuses to certain employees and others to incentivize sales growth. The Company recognizes these incremental costs of obtaining a VIP contract as an expense when incurred since the amortization period of the asset that the Company would have otherwise recognized would be amortized over a period of less than one year.

Contract Balances

When timing of the Company’s delivery of product is different from the timing of the payments made by customers, the Company recognizes either a contract asset (performance precedes customer payment) or a contract liability (customer payment precedes performance). Contracts are often paid in arrears and are recognized as receivables after the Company considers whether a significant financing component exists.

Payment on product revenues is typically paid by credit card upfront. Payment on service revenues in 2021 and 2020 was sought up front and for training to be received, a minimum deposit is required. In some cases, the Company allowed installment plans to entice additional dentists to become VIPs.

The opening and closing balances of the Company’s contract liability for the three months and nine months ended September 30, 2021 and 2020, respectively, are as follows:

SCHEDULE OF CONTRACT LIABILITY 

3 - NOTES RECEIVABLE

Effective October 1, 2019, the Company sold its dental center in Utah to an entity controlled by the spouse of an employee for total consideration of $1,225,000. Consideration included cash of $250,000 and a promissory note of $975,000. The note has a stated interest rate of 6%, based on market rates. Payments to the Company under the promissory note commenced November 1, 2019 and continue on the first day of each month thereafter for sixty months. On October 1, 2024 the entire amount of the remaining principal and interest on the note shall be payable by the purchaser to the Company. Company recorded a discount on the note receivable of approximately $100,000 that is being amortized monthly over a five-year period.

4 - PROPERTY AND EQUIPMENT, NET

Property and equipment consist of the following:

SCHEDULE OF PROPERTY AND EQUIPMENT 

Leasehold improvements relate to the Company’s two dental centers and the Vivos Institute in Colorado. Total depreciation and amortization expense was $130,576 and $162,180 for the three months ended September 30, 2021 and 2020, respectively, and $283,907 and $314,272 for the nine months ended September 30, 2021 and 2020, respectively.

5 – IDENTIFIABLE INTANGIBLE ASSETS AND GOODWILL

The Company amortizes identifiable intangible assets on a straight-line basis over their estimated lives, which range from 5-15 years. As of September 30, 2021 and December 31, 2020, identifiable intangibles were as follows:

SCHEDULE OF IDENTIFIABLE INTANGIBLES 

Amortization expense of identifiable intangible assets was $61,928 and $104,758 for the three months ended September 30, 2021 and 2020, respectively, and $280,863 and $314,272 for the nine months ended September 30, 2021 and 2020, respectively. The estimated future amortization of identifiable intangible assets is as follows:

SCHEDULE OF ESTIMATED FUTURE AMORTIZATION OF IDENTIFIABLE INTANGIBLE ASSETS

Goodwill of $2,671,434 at December 31, 2020 was tested for impairment on December 31, 2020 and impairment was not required. There were no triggering events that occurred for the three months and nine months ended September 30, 2021 and accordingly, no impairment was required.

6 – ACCRUED EXPENSES

Accrued expenses consist of the following:

SCHEDULE OF ACCRUED EXPENSES 

7 - DEBT

On May 8, 2020, the Company received approximately $1,265,000 in funding through the PPP that was part of the CARES Act signed into law in March 2020. The interest rate on the loan is 1.00% per year and matures on May 5, 2022. The Company used these funds to assist with payroll, rent and utilities. The Company has spent the funding in a manner in which it believes the entire balance of the outstanding promissory note will be eligible for forgiveness through the terms of the PPP. An application to forgive the entire amount was submitted with the lender in January 2021, however, there can be no assurance given that all or any portion of the PPP loan will be forgiven. Any request for forgiveness is subject to review and approval by the lender and the SBA, including review of qualifying expenditures, staffing and salary levels.

Outstanding debt was as follows:

SCHEDULE OF OUTSTANDING DEBT 

Expected future principal payments for outstanding debt are as follows:

SCHEDULE OF FUTURE PRINCIPAL PAYMENTS FOR OUTSTANDING DEBT 

8 –CONVERTIBLE REDEEMABLE PREFERRED STOCK

In May 2017, the Company entered into a Definitive Purchase Agreement (the “DPA”) to acquire all of the licensed intellectual property, consisting primarily of patents, from Dr. G. Dave Singh, the Company’s largest and former majority stockholder of BioModeling. Dr. Singh is a past director and is currently the Company’s Chief Medical Officer (refer to Note 12 for discussion of Dr. Singh’s current sabbatical from the Company). The Company’s Board of Directors previously authorized the issuance of 1 million shares of Series A convertible preferred stock (“Series A Preferred Stock”) with a stated value of $5 per share. Each share was convertible at any time into one share of Common Stock and each share of Series A Preferred Stock was also entitled to one vote. The Series A Preferred Stock was redeemable at the Company’s option at any time for the stated value and at the option of the holder at 20% each year, commencing twelve months from the closing date with a limitation of $1 million in any twelve-month period unless authorized by the Board of Directors to be more in any twelve-month period.

In accordance with ASC 480, the Company accounted for the Series A Preferred Stock as temporary equity. As such, the carrying value of the shares was accreted over time such that the carrying value of the shares was at least equal to the redemption value of the shares. The accretion was recorded as a debit to Additional Paid-In Capital and a credit to preferred stock. With proceeds from the IPO, the Company redeemed all remaining Series A Preferred Stock in December 2020 representing 700,000 shares and $3,500,000. During the three months ended September 30, 2020, the Company recognized $250,000 of accretion, and for the nine months ended September 30, 2020, the Company recognized $750,000 of accretion. During the three months ended September 30, 2020, the Company redeemed zero shares of the Series A Preferred Stock, and for the nine months ended September 30, 2020, the Company redeemed 30,000 shares of the Series A Preferred Stock for $150,000.

9 - STOCKHOLDERS’ EQUITY

Common Stock

The Company is authorized to issue 200,000,000 shares of Common Stock, par value of $0.0001 per share and 50,000,000 of preferred stock, par value of $0.0001 per share. Holders of the Common Stock are entitled to one vote for each share held. The Company’s Board of Directors may grant dividends to holders of the preferred stock and the Common Stock. The Company’s Board of Directors may, from time to time, authorize the issuance of preferred stock from the 50,000,000 shares approved for issuance. Each issuance of preferred stock may have different voting, dividend, conversion, redemption, and liquidation preferences.

For the three months ended September 30, 2021, no shares of Common Stock were issued to consultants for services. For the nine months ended September 30, 2021, the Company issued 2,667 shares of Common Stock to consultants for services for net proceeds of $20,000.

For the three months ended September 30, 2021, the Company issued 200,000 shares of Common Stock related to stock issuances from exercise of options for net proceeds of $330,000. For the nine months ended September 30, 2021, the Company issued 4,800,000 shares of Common Stock, out of which 4,600,000 shares of Common Stock are associated with the follow-on offering. There were approximately $2.2 million of offering costs associated with this stock issuance as part of the follow-on offering completed on May 11, 2021, for net proceeds of approximately $25.4 million.

For the three months ended September 30, 2020, the Company issued 2,000 shares of Common Stock related to stock issuances for consulting services and conversion of convertible debt for net proceeds of $15,000, and for the nine months ended September 30, 2020, the Company issued 166,648 shares of Common Stock related to stock issuances for consulting services and conversion of convertible debt for net proceeds of $1,248,569. Included in these amounts were 25,000 shares of Common Stock issued through the termination of an agreement with Maxim Group LLC, a FINRA member broker dealer, for no net proceeds. Of those shares issued, no shares of Common Stock were issued for the three months ended September 30, 2020 and 106,314 shares of Common Stock were issued for the nine months ended September 30, 2020 through the conversion of convertible debt and interest totaling $796,069 with a conversion price of $7.50. Offering costs associated with these stock issuances were immaterial.

Preferred Stock – Generally

As of September 30, 2021, no shares of preferred stock were issued or outstanding.

Preferred Stock – Series B

On January 9, 2020, the Company’s Board of Directors designated 1,200,000 shares of Series B Preferred. The terms of the Series B Preferred had a par value of $0.0001 per share and provided for an issuance price of $15.00 per share. The shares of Series B Preferred did not provide the holders with rights to demand redemption, dividends, or to vote as a class with the Company’s holders of Common Stock. Upon liquidation, the shares of Series B Preferred had priority over the holders of shares of Common Stock. The terms of the Series B Preferred provided for mandatory conversion to shares of Common Stock upon a sale of the Company or upon completion of a qualified financing for aggregate gross cash proceeds of at least $15.0 million. Upon a mandatory conversion event, the shares of Series B Preferred will convert to shares of Common Stock based on a conversion price equal to 75% of the price paid by investors in a sale of the Company or a qualified financing.

The Company commenced a private placement of detached units (the “Series B Units”) consisting of (i) one share of Series B Preferred, and (ii) one warrant to be issued for the number of shares of Common Stock into which to the Series B Preferred was convertible upon a mandatory conversion event (the “Contingent Warrants”). The Contingent Warrants have an exercise price equal to 125% of the price of the Company’s shares of Common Stock on the date of a mandatory conversion event. The Company reported no beneficial conversion on the Contingent Warrant as the warrant has a contingent beneficial conversion feature that is not calculated as a separate derivative until the contingent event has occurred. The private placement provided for the sale of units at an issuance price of $15.00 per unit for gross proceeds up to $15,000,000. Based on the terms of the Series B Preferred, the Company classified it within permanent equity in the consolidated balance sheet throughout 2020. As of December 31, 2020, all of the Series B stock was converted into 1,199,195 shares of Common Stock as the IPO triggered the mandatory conversion and Contingent Warrants to purchase 1,199,195 shares of Common Stock were issued to the former Series B Unit holders.

Stock Options

In 2017, the Company’s stockholders 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. The Company’s stockholders have approved a total reserve of 1,333,333 shares for issuance under the 2017 Plan. In April 2019, the Company’s stockholders 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. The Company’s stockholders approved a total reserve of 333,334 shares for issuance under the 2019 Plan. On June 18, 2020, the Company’s stockholders approved an amendment and restatement of the 2019 Plan to increase the number of shares of Common Stock available for issuance thereunder by 833,333 shares 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, the Company’s 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.

During the nine months ended September 30, 2021 and 2020, the Company issued stock options to purchase 969,000 and 332,333 shares at a weighted average exercise price of $5.23 and $7.50, respectively per share of the Company’s Common Stock to certain members of the Board of Directors and certain employees. The stock options allow the holders to purchase shares of the Company’s Common Stock at prices between $2.72 and $7.50 per share. The following table summarizes all stock options as of September 30, 2021 and 2020:

SCHEDULE OF STOCK OPTIONS 

The Company accounts for share based payments by recognizing compensation expense based upon the estimated fair value of the awards on the date of grant. The Company determines the estimated grant fair value using the Black-Scholes option pricing model and recognizes compensation expense ratably over the requisite service period which approximates the vesting period using the straight-line method.

The weighted average assumptions used in the fair value calculations are as follows:

SCHEDULE OF WEIGHTED AVERAGE ASSUMPTIONS USED IN THE FAIR VALUE 

During the three months ended September 30, 2021 and 2020, the Company recognized $1,112,365 and $428,663, respectively, and for the nine months ended September 30, 2021 and 2020, the Company recognized $2,194,709 and $1,345,931, respectively, of share-based compensation expense relating to the vesting of stock options. The options were valued using the Black-Scholes valuation method at the date of the grant and compensation expense is recognized over the requisite service period. Unrecognized expense relating to these awards as of September 30, 2021 was approximately $5,623,852, which will be recognized over the weighted average remaining term of 3.26 years at September 30, 2021.

Warrants

In March 2021, the Company issued warrants related to certain consulting agreements and an asset purchase agreement. Warrants to purchase 95,000 shares of Common Stock were issued to consultants for services rendered. These warrants have a three-year term. In addition, warrants to purchase up to 200,000 shares of Common Stock were issued in connection with the acquisition of certain assets from MyoCorrect, LLC (“MyoCorrect”). On March 29, 2021, warrants to purchase 25,000 shares of Common Stock vested. These warrants have a three-year term. The remainder vest and become exercisable upon the achievement of pre-determined performance metrics related to the utilization of MyoCorrect, with a five-year term.

On April 14, 2021, the Company issued a warrant to purchase 25,000 shares of our Common Stock at a price of $8.90 per share for three years in connection with Lyon Management and Consulting, LLC. The vesting of the warrant is as follows: 5,000 shares vested immediately upon issuance of the warrant, 10,000 shares vest and become exercisable on April 14, 2022 and 10,000 shares vest and become exercisable on April 14, 2023.

On May 11, 2021 and in connection with its registered underwritten follow-on offering, the Company issued warrants to the underwriter that provide for the purchase of 276,000 shares of Common Stock at an exercise price of $7.50 per share with a fair value of $1,486,451. These warrants are exercisable beginning on November 7, 2021, and expire on May 11, 2026.

Pursuant to the terms of the Series B Preferred, and as a result of the consummation of the IPO (which qualified as a mandatory conversion event for purposes of the Series B Preferred), 1,199,195 Contingent Warrants were provided for an exercise price equal to 125% of the price of the Company’s shares of Common Stock issued in the IPO, or $7.50 per share based on the IPO price of $6.00.

On October 22, 2020, two minority stockholders initiated a derivative demand which resulted in a settlement and release agreement that was entered into on November 6, 2020 (See Note 10). Pursuant to the settlement, the Company issued warrants to purchase an aggregate of 325,000 shares of Common Stock (the “Settlement Warrants”). The Settlement Warrants are exercisable on a cash only basis at an exercise price of $7.50 per share, are exercisable beginning on June 15, 2021, and expire on May 6, 2024.

The following table summarizes all warrants as of September 30, 2021:

SCHEDULE OF WARRANT OUTSTANDING 

The weighted average assumptions used in the fair value calculations are as follows:

SCHEDULE OF WEIGHTED AVERAGE ASSUMPTIONS USED IN THE FAIR VALUE 

10 - RELATED PARTY TRANSACTIONS

During the three months ended March 31, 2020, one of the Company’s former directors who held $200,000 in 2019 convertible notes issued by the Company in 2019 exchanged her outstanding notes for Series B Units, which converted at the time of the IPO into 45,252 shares of Common Stock and Contingent Warrants to purchase 45,252 shares of Common Stock.

During the three months ended March 31, 2020, Dr. G. Dave Singh, the Company’s founder, Chief Medical Officer, and a former director of the Company as well as the former holder of the Company’s Series A Preferred Stock, exercised his right to redeem 10,000 shares of the Series A preferred stock for $15.00 per share for a total of $150,000. In January 2021, $1,500,000 in cash was paid to Dr. Singh to fully redeem the remaining Series A Preferred Stock he held and had redeemed in December 2020. Such $1,500,000 was recorded in accounts payable at December 31, 2020.

For the three months ended September 30, 2021 and 2020, options for the purchase of 539,000 and 309,000 shares, respectively, of Common Stock were granted to the Company’s directors, officers, employees and consultants. For the nine months ended September 30, 2021 and 2020, options for the purchase of 969,000 and 332,333 shares, respectively, of Common Stock were granted to the Company’s directors, officers, employees and consultants.

11 - INCOME TAXES

Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period. The provision for income taxes for the three months and nine months ended September 30, 2021 and 2020 differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 21% to pre-tax income primarily due to permanent differences, state taxes and change in valuation allowance. A full valuation allowance was in effect, which resulted in the Company’s zero tax expense.

On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act contains numerous income tax provisions, including:

Because the Company records a full valuation allowance, the Company does not anticipate the CARES Act will have a material impact on its income tax provision in the financial statements.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred since inception. Such objective evidence limits the ability to consider other subjective evidence such as the Company’s projections for future growth. On the basis of this evaluation, a full valuation allowance has been recorded at September 30, 2021 and December 31, 2020 to record the deferred tax asset that is not likely to be realized.

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgement including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known or as the tax environment changes.

12 – COMMITMENTS AND CONTINGENCIES

Leases

The Company leases office properties under various lease terms. Rent expense, including real estate taxes and related costs, for the three months ended September 30, 2021 and 2020 aggregated approximately $69,377 and $124,599, respectively, and nine months ended September 30, 2021 and 2020 aggregated approximately $521,788 and $349,584, respectively. In connection with some of the Company’s leases, lease incentives were granted. Deferred lease incentives are being amortized on a straight-line basis over the term of the lease.

Future rental payments over the term of the Company’s leases are as follows:

SCHEDULE OF FUTURE RENTAL PAYMENTS OF LEASES 

12 – COMMITMENTS AND CONTINGENCIES

Employment Agreements

During 2020, the Company entered into new employment agreements with its chief executive officer, chief medical officer and chief financial officer. The agreements include incentive compensation in the form of cash bonuses and stock options. The employment agreements require the continuation of salary and benefits for up to two years in the event the employee is terminated without cause.

On September 22, 2021, the Company entered into a Sabbatical Agreement (the “Sabbatical Agreement”) with Dr. G. Dave Singh, the Company’s founder, Chief Medical Officer and former director. The Sabbatical Agreement serves as an amendment to that certain Amended and Restated Employment Agreement, dated October 9, 2020, between the Company and Dr. Singh. Effective September 1, 2021, Dr. Singh accepted a role as an Adjunct Professor at Stanford University, where he will be teaching and conducting research into various aspects of craniofacial sleep medicine.

Pursuant to the Sabbatical Agreement, Dr. Singh’s sabbatical will be for a period of twelve (12) months from September 1, 2021, during which time Dr. Singh’s benefits and compensation shall remain the same. Dr. Singh will retain his title as Chief Medical Officer during his sabbatical. Pursuant to the Sabbatical Agreement, he has Dr, Singh resigned as a member of the Company’s Board of Directors, effective September 22, 2021.

Dr. Singh’s duties and responsibilities while on sabbatical, which are reduced from Dr. Singh’s duties and responsibilities as set forth in his Amended and Restated Employment Agreement, include: (i) advising Company regulatory personnel and consultants concerning clinical studies, on an as-needed basis (ii) collaborating with Company personnel on new device development, and (iii) attending and/or making presentations at national, regional, local, and international assemblies and conferences as a Company representative. Dr. Singh shall be eligible for earning incentive compensation on achievement of certain milestone and performance objectives pursuant to his Amended and Restated Employment Agreement.

The Sabbatical Agreement provides that thirty (30) days prior to the expiration of the Sabbatical Agreement, the Company’s Board of Directors will, following a request from Dr. Singh, determine whether to fully reinstate, or modify, Dr. Singh’s regularly assigned job duties and responsibilities as provided for under his Amended and Restated Employment Agreement. A determination not to reinstate such regularly assigned job duties shall constitute an event of “Good Reason” under Section 4(d)(i) of the Amended and Restated Employment Agreement. The Sabbatical Agreement also provides for an option to extend the sabbatical, at the Company’s discretion, upon a request from Dr. Singh.

The nominating and governance committee of the Company’s Board of Directors will, at their discretion, consider a subsequent appointment to fill Dr. Singh’s position on the Board of Directors at a future date; provided that, in the event of the reinstatement of Dr. Singh’s regularly assigned job duties and responsibilities, he will become eligible for nomination to the Company’s Board of Directors, such nomination not to be unreasonably withheld.

Item 2. 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 Quarterly Report on Form 10-Q. 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. See “Cautionary Note Regarding Forward-Looking Statements.”

Overview

We are a medical technology company focused on the development and commercialization of a highly differentiated technology offering a clinically effective non-surgical, non-invasive, non-pharmaceutical, and low-cost solution for patients with sleep disordered breathing (“SDB”), including mild-to-moderate obstructive sleep apnea (“OSA”). We offer novel and proprietary alternatives for treating mild-to-moderate OSA as well as certain craniofacial and anatomical anomalies known to be associated with OSA. We believe our products and technology represent a significant improvement in the treatment of mild-to-moderate OSA versus other treatments such as CPAP.

Our treatment for mild-to-moderate OSA involves specially designed and customized oral appliances and treatment protocols that we refer to as the Vivos System. We believe the Vivos System technology represents the first non-surgical, non-invasive and cost-effective solution that normally does not require lifetime use of intervention for the hundreds of millions of people globally who suffer from mild-to-moderate OSA. We intend to more rapidly expand the use of the Vivos System by actively recruiting dentists and training them about OSA and the use and application of our products and technology to treat mild-to-moderate OSA. Our oral appliances have proven effective (within the scope of the U.S. Food and Drug Administration (“FDA”) cleared uses as described below) in over 22,000 patients treated worldwide by more than 1,350 trained dentists.

Our business model is focused around dentists, and our program to train dentists and offer them other value-added services in connection with their ordering and use of the Vivos System 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

The early 2020 outbreak of COVID-19 and its development into a pandemic in March 2020 resulted in significant economic disruption globally, including in our current principal markets in the United States and Canada. Actions taken by various governmental authorities, individuals and companies around the world to prevent the spread of COVID-19 significantly reduced global economic activity during 2020 and 2021 and resulted in a decline in demand across many industries.

Many of our VIPs and potential VIPs closed their dental offices for periods of time during 2020 as a result of COVID-19, although some remained open to specifically provide patients with our appliances and VIPs were deemed an essential business for health considerations in many jurisdictions. In the face of the pandemic and a resulting reduction in revenue potential, 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 have continued to reopen into 2021, the impact of COVID-19 on our business has begun to diminish. As a result, we determined no triggering events indicating potential impairment were identified as of September 30, 2021. However, we still continued to see some impact of the Delta variant of COVID-19 as of September 30, 2021. During the three months ended September 30, 2021, many of our Canadian VIPs have not traveled to the US for training in light of travel restrictions. As of August 9, 2021, the Government of Canada imposed further restrictions on unvaccinated travelers, which caused delays with some of our Canadian VIPs receiving required training and commencing Vivos System cases and potential VIP prospects. In addition, even as COVID-19 vaccinations become more prevalent in the United States during 2021 and government or other restrictions are being modified or lifted in certain areas, since the situation with COVID-19 remains highly uncertain (particularly with the emergence of COVID-19 variants and the rapidly evolving ways in which society is facing these variants), the overall situation remains fluid and we thus cannot predict with certainty the impact of COVID-19 or local outbreaks thereof will have on our near- and longer-term results of operations.

Other 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 and are able to begin 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. 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 and expect to 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 critical diagnostic and medical consultation services to people across North America who suffer from OSA and our recently announced 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 four percent (4%) of dentists per quarter 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 September 30, 2021 we have shown new VIP enrollments for the period on a “net of cancellations” basis. Readers should note that VIP enrollment numbers shown in the year-over-year comparative periods below are not shown “net of cancellation”, so any shown decrease in year-over-year VIP enrollments should take this into consideration. Readers should also note that cancellations may not occur in material amounts in future periods as we refine our marketing and promotional programs.

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 sleep apnea treatment into their practices. While we work with VIPs to screen their patients for OSA with our VivoScore home sleep apnea ring test (which we hope will encourage Vivos treatment case starts), not all VIPs incorporate our Vivos treatment protocol 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 System 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 treatment cases, with approximately thirty percent (30%) of VIPs accounting for all new case starts during the quarter ended September 30, 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 three months ended September 30, 2021, we increased our efforts to market our Vivos System 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 System case starts.

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 January 2022.  The full impact of such price adjustments on sales or demand for our products cannot be 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 VivoScore 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.

Results of Operations

Three Months and Nine Months Ended September 30, 2021 Compared to Three Months and Nine Months Ended September 30, 2020

Comparison of the Three Months Ended September 30, 2021 and 2020

Revenue

Revenue increased over $1.2 million, or approximately 38%, to $4.5 million for the three months ended September 30, 2021 compared to approximately $3.3 million for the three months ended September 30, 2020. The increase is attributable to approximately $0.6 million increase in VIP enrollments, $0.3 million increase in appliance sales due to volume increases, approximately $0.3 million increase in center revenue, initial management service revenue from our new MID program, revenue from the introduction of our orofacial myofunctional therapy services, and an approximately $0.1 million increase in Billing Intelligence Services (“BIS”) revenue. Revenue growth in 2021 when compared to 2020 is partially attributable to the negative impact of the Delta variant of COVID-19 on our revenue during the third quarter of 2020.

During the three months ended September 30, 2021, we enrolled 56 VIPs net of cancellations and recognized VIP revenue of approximately $2.3 million, compared to the three months ended September 30, 2020, when we enrolled 64 VIPs net of cancellations and recognized VIP revenue of approximately $1.7 million. The 34% increase in revenue was primarily driven by higher enrollments that took place in June and August, of which 50% of the enrollment fees were recognized within the three months ended September 30, 2021, combined with revenue recognized from higher prior year enrollments. 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. During the three months ended September 30, 2021 we sold 2,996 total oral appliance arches for a total of approximately $1.6 million, a 24% increase from the three months ended September 30, 2020 where we sold 2,245 total oral appliance arches for a total of approximately $1.3 million. Additionally, during the three months ended September 30, 2021 we had approximately $0.3 million in BIS revenue, a 43% increase from the three months ended September 30, 2020 with approximately a $0.2 million in revenue. Lastly, for the three months ended September 30, 2021 we had approximately $0.2 million in center revenue and management service revenue including our new MID program, compared to $0.1 million for the three months ended September 30, 2020, and approximately $0.1 million in our orofacial myofunctional therapy revenue, compared to none for the three months ended September 30, 2020 due to the introduction of these services in 2021.

Cost of Goods Sold and Gross Profit

Cost of goods increased by approximately $0.7 million to approximately $1.4 million for the three months ended September 30, 2021, compared to approximately $0.7 million for the three months ended September 30, 2020. The 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.

Gross profit increased by approximately $0.6 million to $3.2 million on higher revenues of approximately $4.5 million for three months ended September 30, 2021 compared to gross profit of approximately $2.6 million for the three months ended September 30, 2020. Gross margin percentage decreased to 70% for the three months ended September 30, 2021, compared to 78% for the three months ended September 30, 2020 primarily driven by higher costs associated with VIP enrollments, which includes approximately $0.3 million increase related to the deployment of VivoScore home sleep apnea test rings “(VivoScore”) as part of the VIP enrollment package, and approximately $0.1 million increase related to the sale of VivoScore rings in 2021.

General and Administrative Expenses

General and administrative expenses increased approximately $2.7 million, or approximately 72%, to approximately $6.5 million for the three months ended September 30, 2021 as compared to approximately $3.8 million for the three months ended September 30, 2020. The primary driver of this increase was an increase of approximately $1.7 million in compensation, including salaries, bonuses, paid time off, stock-based compensation, and other employee-related expenses, mainly as a result of increased headcount (from approximately 92 employees at September 30, 2020 to approximately 147 employees at September 30, 2021). Other drivers of the increase in general and administrative expenses included an increase of approximately $0.3 million to general corporate costs such as insurance, specifically directors and officers insurance, and professional fees, an increase of approximately $0.1 million for office rent and utilities, an increase of approximately $0.2 million increase of bad debt expense driven by the increase in sales, approximately $0.3 million increase in travel expense as COVID-19 restrictions began to lift and approximately $0.1 million in other corporate expenses such as filing fees, subscriptions, and office expenses. These increases were due to the growth of our company combined with higher headcount and expenses associated with being a public company.

Sales and Marketing

Sales and marketing expense increased by approximately $1.5 million to approximately $2.0 million for the three months ended September 30, 2021, compared to approximately $0.4 million for the three months ended September 30, 2020. The increase was primarily due to approximately $0.6 million increase in marketing expenses due to the deployment of VivoScore home sleep apnea test rings as demos to be used at different marketing events and marketing campaigns, approximately $0.5 million increase 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. Additionally, we had approximately $0.3 million increase in conference expenses as a result of a conference hosted in Dallas and our grand opening of the Vivos Institute in Denver, Colorado. Lastly, there was approximately $0.1 million increase in sales commissions driven by the increase in sales.

Depreciation and Amortization

Depreciation and amortization expense was approximately $0.2 million for the three months ended September 30, 2021 and 2020, it remained constant during the quarter, as some assets were placed into service while others were fully depreciated at the beginning of the quarter, resulting in an immaterial net impact during the quarter. Our fixed assets placed in service increased by approximately $1.8 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, allocated between furniture and equipment and leasehold improvements.