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 revenue stage medical technology company focused on the development and commercialization of innovative treatment alternatives for patients with dentofacial abnormalities and/or patients diagnosed with mild to moderate obstructive sleep apnea (OSA) and snoring in adults. We believe our technologies and conventions represent a significant improvement in the treatment of mild to moderate OSA versus other treatments such as continuous positive airway pressure (or CPAP) or palliative oral appliance therapies. 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 protocols led to significantly lower Apnea Hypopnea Index scores and improve other conditions associated with OSA. Our patented oral appliances have proven effective (within the scope of the U.S. Food and Drug Administration (or FDA) cleared uses) in approximately 28,000 patients treated worldwide by more than 1,600 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. Many of these Orders have been relaxed or lifted in jurisdictions where large portions of the population have been vaccinated, but there is considerable uncertainty about whether the Orders will need to be reinstated due to the ongoing spread of new variants of COVID-19. A significant portion of the worldwide population remains unvaccinated, and uncertainty also exists about whether existing vaccines will be effective as new variants of COVID-19 emerge. Accordingly, the overall impact of COVID-19 continues to have an adverse impact on global business activities.

Many of our VIPs and potential VIPs closed their offices during 2020 as a result of COVID-19, although some remained open to specifically provide patients our products as our appliances and VIPs were deemed an essential business for health considerations in many jurisdictions. In the face of the pandemic and the results potential for revenue reduction, we worked diligently to reduce expenses and maintain revenues during 2020. While revenue growth flattened in March and April 2020, expenses were reduced and we aggressively expanded our network of healthcare providers familiar with our products by offering online continuing education courses which introduced many in the medical and dental communities to our product line. As businesses continued to reopen through 2021, the impact of COVID-19 on our company began to diminish, although we continue to closely monitor the potential impact of COVID-19 variants on our business. Of note, during the second half of 2021, many of our Canadian VIPs have not traveled to the U.S. for training in light of travel restrictions. As of August 9, 2021, the Government of Canada imposed further restrictions on unvaccinated travelers, which has caused delays with some of our Canadian VIPs receiving required training and commencing Vivos Method cases.





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In addition, our fourth quarter 2021 revenue growth was impacted by lower VIP enrollments due largely to the COVID-19 Omicron variant resurgence. We achieved sales growth despite seeing significant headwinds throughout our core customer base, mostly driven by COVID-19 Delta and Omicron variant resurgences in the middle and latter part of the year. In December 2021, the American Dental Association reported that just 60% of dental practices were open and operating with business as usual. Another industry source reported 92% of dental practices were struggling to hire or replace hygienists, and 77% reported difficulty hiring front desk positions. These challenges across the dental community have impacted both VIP enrollments and patient case starts, as replacement dental personnel must be trained in the proper use of The Vivos Method. The world-wide response to the pandemic resulted in a significant downturn in economic activity, which continued into 2022 as new variants of COVID-19 have emerged, and there remains a risk that new variant outbreaks will cause additional disruptions and slowdowns in the economy.

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 protocol. VIPs have the ability to start generating revenue for us and themselves after this training. To entice dentists to enroll as VIPs, we have worked with different marketing programs (which we generally call a "discovery track") with respect to the payment of VIPs enrollment fee, including discounts and payment plans. Once VIPs execute their VIP enrollment agreement, the discovery track allows the VIP 45 to 60 days to obtain financing and pay the enrollment fee. Ongoing support and additional training is provided throughout the year under the services contract, which includes access to our proprietary Airway Intelligence Services, which provides the VIP with resources to help simplify the sleep apnea diagnostic and Vivos treatment planning process.

In addition to enrollment service revenue, we offer additional services, such as our Billing Intelligence Services offering, and MyoCorrect orofacial myofunctional therapy services, which was introduced in April 2021. Revenue for these services is recognized monthly during the month the services are rendered.

We are also engaging in strategic collaborations to market the benefits of the Vivos treatment protocol and VIP enrollment to dentists, including our cooperative relationships with various medical providers to deliver diagnostic and medical consultation services to people across North America who suffer from OSA and our October 2021 cross marketing collaboration with Candid Care, the maker of the CandidPro clear aligner for straightening teeth.

Historically, we commenced the recognition of VIP enrollment revenue once the contract was signed. Due to some dentists not fulfilling their obligation, we are now recognizing revenue on VIP enrollments once the contract is executed and payment is received in full.

New VIP Case Starts (Product Revenue). Enrolling new VIPs is key to our ability to generate revenue, but equally as important is the number of Vivos treatment case starts that our VIPs commence, as these lead to appliance orders and related revenue. Once a VIP is fully trained, we encourage them to start cases. However, our experience has been that VIPs typically start slowly as they introduce The Vivos Method into their practices. While we work with VIPs to screen their patients for OSA with our SleepImage home sleep apnea ring test (which we expect will encourage Vivos Method case starts), not all VIPs incorporate our The Vivos Method into their practices at the same rate. We utilize Practice Advisors to help VIPs with onboarding and starting and increasing case starts over time. We believe VIPs can recoup their investment in VIP enrollment with approximately eight Vivos Method case starts, but as noted above, many VIPs start and also maintain their case starts at a significantly slower rate. We presently have a concentration of active VIPs who regularly start new Vivos Method treatment cases, with approximately thirty-six percent (36%) of VIPs accounting for all new case starts during the quarter ended March 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.





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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. 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.

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.

Supply Chain. From time to time, we may experience supply chain challenges due to forces beyond our control. For example, the Suez Canal blockage earlier in 2021 caused some delay in shipments of SleepImage rings from China. Overall, however, as our appliances are made in the U.S., we have not experienced significant supply chain issues as a result of COVID-19 or otherwise, although this may change in future periods.

Seasonality. We believe that the patient volumes of our VIPs will be sensitive to seasonal fluctuations in urgent care and primary care activity. Typically, winter months see a higher occurrence of influenza, bronchitis, pneumonia and similar illnesses; however, the timing and severity of these outbreaks vary dramatically. Additionally, as consumers shift toward high deductible insurance plans, they are responsible for a greater percentage of their bill, particularly in the early months of the year before other healthcare spending has occurred, which may lead to lower than expected patient volume or an increase in bad debt expense during that period. Our quarterly operating results may fluctuate significantly in the future depending on these and other factors.

Cybersecurity. We have established procedures to escalate enterprise level issues, including cybersecurity matters, to the appropriate management levels within our organization and our board of directors, or members or committees thereof, as appropriate. Under our framework, cybersecurity issues, including those involving vulnerabilities introduced by our use of third-party software, are analyzed by subject matter experts for potential financial, operational, and reputational risks, based on, among other factors, the nature of the matter and breadth of impact. Matters determined to present potential material impacts to our financial results, operations, and/or reputation are immediately reported by management to the board of directors, or individual members of committees thereof, as appropriate, in accordance with our escalation framework. In addition, we have established procedures to ensure that members of management responsible for overseeing the effectiveness of disclosure controls are informed in a timely manner of known cybersecurity risks and incidents that may materially impact our operations and that timely public disclosure is made, as appropriate.

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.





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Key Components of Consolidated Statements of Operations

Net revenue. We recognize revenue when we satisfy our performance obligations over time as our customer receive the benefit of training and/or we transfer control of the promised products to our customers, which generally occurs over a very short period of time. Performance obligations are typically satisfied by shipping or delivering products to customers, or customers receiving training, which is also the point when title transfers and/or training occurs. Revenue consists of the gross sales price, net of estimated allowances, discounts, and personal rebates that are accounted for as a reduction from the gross sale price.

Cost of sales. Cost of goods sold primarily consists of direct costs attributable to the purchase from third party suppliers and related products. It also includes freight costs, fulfillment, distribution, and warehousing costs related to products sold.

Sales and marketing. Sales and marketing costs primarily consist of personnel costs for employees engaged in sales and marketing activities, commissions, advertising and marketing costs, website enhancements, and conferences for our sales and marketing staff.

General and administrative expenses. General and administrative ("G&A") expenses consist primarily of personnel costs for our administrative, human resources, finance and accounting employees, and executives. General and administrative expenses also include contract labor and consulting costs, travel-related expenses, legal, auditing and other professional fees, rent and facilities costs, repairs and maintenance, and general corporate expenses.

Depreciation and amortization expense. Depreciation and amortization expense is comprised of depreciation expense related to property and equipment, amortization expense related to leasehold improvements, and amortization expense related to identifiable intangible assets.

Other income. Other income relates to the PPP loan forgiven in January 2022 by the SBA.





Results of Operations

Comparison of the three months ended March 31, 2022 and 2021

Our restated unaudited consolidated statements of operations for the three months ended March 31, 2022 and 2021 are presented below (dollars in thousands):





                                           2022              2021             Change

Revenue
Product revenue                        $       2,049     $       1,387     $         662
Service revenue                                1,595             2,061              (466 )
Total revenue                                  3,644             3,448               196
Cost of sales (exclusive of
depreciation and amortization shown
separately below)                              1,093               758               335
Gross profit                                   2,551             2,690              (139 )
Gross profit %                                    70 %              78 %

Operating expenses
General and administrative                     8,275             5,059             3,215
Sales and marketing                              753               860              (107 )
Depreciation and amortization                    162               177               (15 )

Operating loss                                (6,639 )          (3,406 )          (3,233 )

Non-operating income (expense)
Other expense                                    (38 )              (1 )             (37 )
PPP loan forgiveness                           1,287                 -             1,287
Other income                                      59                 8                51

Net loss                               $      (5,331 )   $      (3,399 )   $      (1,932 )




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Revenue

Revenue increased by $0.2 million, to $3.6 million for the three months ended March 31, 2022 compared to $3.4 million for the three months ended March 31, 2021. Revenue during the first quarter of the year was impacted by a cumulative adjustment from year ended 2019, 2020 and 2021 as disclosed in Note 2, "Restatement of Consolidated Financial Statements" to the accompanying financial statements, this includes a decrease of approximately $0.4 million to VIP revenue and an increase of approximately $0.1 million to BIS. Additionally, revenue was impacted due to an increase of approximately $0.6 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) and an increase of approximately $0.3 million in BIS revenue and myofunctional therapy service revenue, offset by a decrease of approximately $.5 million in VIP enrollment revenue.

During the three months ended March 31, 2022, we enrolled 32 VIPs and recognized VIP revenue of approximately $1.3 million, a decrease of 29% compared to the three months ended March 31, 2021, when we enrolled 53 VIPs for a total of approximately $1.7 million. Revenue growth was impacted by the COVID-19 Delta and Omicron variant resurgences towards the end of 2021 and through the first quarter of 2022. 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 three months ended March 31, 2022, we sold 2,965 oral appliance arches for a total of approximately $1.8 million, a 43% increase from the three months ended March 31, 2021 when we sold 2,570 total oral appliance arches for a total of approximately $1.3 million. Lastly, for the three months ended March 31, 2022 we had approximately $0.2 million in center revenue, compared to approximately $0.1 million for the three months ended March 31, 2021, and approximately $0.2 million in our orofacial myofunctional therapy revenue, compared to almost none for the three months ended March 31, 2021 due to the introduction of these services late in the first quarter of 2021.

Cost of Sales and Gross Profit

Cost of sales increased by approximately $0.3 million to approximately $1.1 million for the three months ended March 31, 2022 compared to approximately $0.8 million for the three months ended March 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 $0.2 million related to costs associated with appliances and approximately $0.1 million increase related to our new program (started in 2022) related to the sale and leasing of SleepImage rings.

For the three months ended March 31, 2022, gross profit decreased by approximately $0.1 million to $2.6 million. This decrease was attributable to an increase in cost of sales of $0.3 million. Gross margin decreased to 70% for the three months ended March 31, 2022 compared to 78% for the three months ended March 31, 2021, primarily driven by a cumulative adjustment from year ended 2019, 2020 and 2021 as disclosed in Note 2, "Restatement of Consolidated Financial Statements" to the accompanying financial statements, coupled with the higher costs associated with appliances due to increase in cost of raw materials and VIP enrollments due to new incentives deployed to increase VIP enrollments.





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General and Administrative Expenses

General and administrative expenses increased approximately $3.2 million, or approximately 64%, to approximately $8.3 million for the three months ended March 31, 2022, as compared to $5.1 million for the three months ended March 31, 2021. The primary driver of this increase was an increase in personnel and related compensation of approximately $1.3 million, including salaries, bonuses, paid time off, stock-based compensation, and other employee-related expenses. The increase in payroll related costs were mainly a result of increased headcount (from 110 employees at March 31, 2021 to 165 employees at March 31, 2022). Other drivers of the increase in general and administrative expenses included an increase of approximately $0.8 million to general corporate costs such as director and officer insurance premiums and professional fees, an increase of approximately $0.5 million for information and technology supplies and equipment, as well as corporate expenses such as filing fees, subscriptions, and office expenses. 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 $0.1 million to $0.8 million for the three months ended March 31, 2022, compared to $0.9 million for the three months ended March 31, 2021. This decrease was primarily due to a decrease in sales commissions of approximately $0.3 million, offset by an increase of approximately $0.2 million in new marketing campaigns, updating marketing materials for investors and consumers, improving the Vivos website. The main driver to the decrease in commissions is due to the decrease in VIP enrollments.

Depreciation and Amortization

Depreciation and amortization expense was approximately $0.2 million for the three months ended March 31, 2022 and 2021. The insignificant 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 is approximately $1.3 million for the three months ended March 31, 2022 when compared to none for the three months ended March 31, 2021. The increase is due to the PPP loan being forgiven by the SBA in its entirety.

Liquidity and Capital Resources

The financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. The Company has 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 March 31, 2022, we had an accumulated deficit of approximately $61 million. We had approximately $17.8 million of cash and cash equivalents compared to cash and cash equivalents of $14.1 million as of March 31, 2021, which may not be sufficient to fund the operations and strategic objectives of the Company over the next twelve months from the date of issuance of these financial statements. Without additional financing, these factors raise substantial doubt regarding the Company's ability to continue as a going concern.

The Company will be required to obtain additional financing and expects to satisfy its cash needs primarily from the issuance of equity securities or indebtedness in order to sustain operations until it 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, the Company may be required to delay, significantly modify or terminate its operations, all of which could have a material adverse effect on the 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.





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Cash Flows

The following table presents a summary of our cash flow for the three months ended March 31, 2022 and 2021 (in thousands):





                                    2022         2021

Net cash provided by (used in):
Operating activities              $ (6,082 )   $ (3,861 )
Investing activities                  (120 )       (262 )
Financing activities                     -          (25 )

Net cash used in operating activities of approximately $6.1 million for the three months ended March 31, 2022 is an increase of more than $2.2 million compared to net cash used in operating activities of approximately $3.9 million for the three months ended March 31, 2021. This increase is due primarily to the increase in our net loss of approximately $2.0 million, offset by a decrease of approximately $1.4 million in accounts payable, an increase of approximately $0.4 million in accounts receivable related to a decrease in VIP enrollments, and a decrease of approximately $0.3 million in accrued expenses due to increase in consulting fees, legal fees, third party lab fees associated with the production of our appliances, an increase of approximately $0.1 million in prepaid expenses and current assets primarily driven by annual renewals of subscriptions and other paid services, and an increase of approximately $1.3 attributable to PPP loan forgiveness on January 21, 2022.

For the three months ended March 31, 2022, net cash used in investing activities consisted of capital expenditures for property and equipment of $0.1 million. Capital expenditures for property and equipment were primarily attributable to leasehold improvements for The Vivos Institute that opened in August 2021.

For the three months ended March 31, 2022, there was no cash used in financing activities.

Critical Accounting Policies Involving Management Estimates and Assumptions

Our critical accounting policies and estimates are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. We have reviewed and determined that those critical accounting policies and estimates remain our critical accounting policies and estimates as of and for the three months ended March 31, 2022.

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.

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