Vivos Therapeutics Inc

Previous wording

The Vivos Method is an advanced therapeutic protocol, which often combines the use of customized oral appliance specifications and proprietary clinical treatments developed by our company and prescribed by specially trained dentists in cooperation with their medical colleagues. Published studies have shown that using our customized appliances and clinical treatments led to significantly lower Apnea Hypopnea Index scores and have improved other conditions associated with OSA. Over 45,000 patients have been treated to date, worldwide, with our entire current suite of products by more than 2,000 trained dentists.

Current wording

The Vivos Method is an advanced therapeutic protocol, which often combines the use of customized oral appliance specifications and proprietary clinical treatments developed by our company and prescribed by specially trained dentists in cooperation with their medical colleagues. Published studies have shown that using our customized appliances and clinical treatments led to significantly lower Apnea Hypopnea Index scores and have improved other conditions associated with OSA. Over 47,000 patients have been treated to date, worldwide, with our entire current suite of products by more than 2,000 trained dentists.

Previous wording

On June 12, 2024, VSI Providers, PLLC, a wholly-owned subsidiary of the Company (“VSI”), and Rebis Health Holdings, LLC (“Rebis”), entered into a strategic alliance agreement (the “SAA”) providing for a joint marketing and distribution arrangement under which each party’s products and services will be offered together as a comprehensive solution to patients seeking sleep apnea treatment. Rebis and its affiliates operate multiple sleep testing and treatment centers in Colorado. VSI has a network of licensed dental professionals trained in providing various sleep apnea treatment-related services and, through its affiliates, access to additional products and services related to sleep apnea treatment. The Company and V-CO are third-party beneficiaries of the SAA. Under the SAA VSI is providing Rebis with access to licensed dental professionals trained in providing certain dental services (each a “VSI Dental Provider”) to provide such dental services in designated practice locations (as described in the SAA); provided, that nothing in the SAA restrict Rebis’ right to utilize the dental services of its own employees in a similar capacity as the VSI Dental Providers. Pursuant to the SAA, Rebis will be entitled to receive from VSI an agreed upon percentage of patient payments collected by VSI Dental Providers, less certain administrative fees charged by VSI and agreed to direct cost deductions.

Current wording

On June 12, 2024, VSI Providers, PLLC, a wholly-owned subsidiary of the Company (“VSI”), and Rebis Health Holdings, LLC (“Rebis”), entered into a strategic alliance agreement (the “SAA”) providing for a joint marketing and distribution arrangement under which each party’s products and services will be offered together as a comprehensive solution to patients seeking sleep apnea treatment. Rebis and its affiliates operate multiple sleep testing and treatment centers in Colorado. VSI has a network of licensed dental professionals trained in providing various sleep apnea treatment-related services and, through its affiliates, access to additional products and services related to sleep apnea treatment. The Company and V-CO are third-party beneficiaries of the SAA. Under the SAA VSI is providing Rebis with access to licensed dental professionals trained in providing certain dental services (each a “VSI Dental Provider”) to provide such dental services in designated practice locations (as described in the SAA); provided, that nothing in the SAA restricts Rebis’ right to utilize the dental services of its own employees in a similar capacity as the VSI Dental Providers. Pursuant to the SAA, Rebis will be entitled to receive from VSI an agreed upon percentage of patient payments collected by VSI Dental Providers, less certain administrative fees charged by VSI and agreed to direct cost deductions.

Previous wording

In addition to the Management Fee, V-CO will also receive a quarterly cash participation payment from AIM (the “Participation Payment”) equal to an agreed upon percentage of the net positive cash flow (as determined in accordance with U.S. generally accepted accounting principles) generated by the operations of the SAA and received by VSI pursuant to the SAA (“Net Cash Flow”). The Participation Payment shall accrue (the “Accrued Amount”) and not be paid until the Company on a consolidated basis is cash flow positive from operations, as reported in its Securities and Exchange Commission (“SEC”) filings (the “Participation Trigger Event”) (meaning the Company shall receive all Net Cash Flow (if any) from VSI until the occurrence of the Participation Trigger Event). The Profit Participation shall continue to be earned quarterly until the later of such time as (i) V-CO receives an amount equal to two (2) times its investment in the Private Placement; or (ii) or June 10, 2027. The MSA contains customary covenants regarding confidentiality and indemnification. Under the MSA, V-CO will also assign to AIM or its affiliates V-CO’s entire right, title, and interest in any intellectual property it creates while working for or on behalf of AIM.

Current wording

In addition to the Management Fee, V-CO will also receive a quarterly cash participation payment from AIM (the “Participation Payment”) equal to an agreed upon percentage of the net positive cash flow (as determined in accordance with U.S. generally accepted accounting principles) generated by the operations of the SAA and received by VSI pursuant to the SAA (“Net Cash Flow”). The Participation Payment shall accrue (the “Accrued Amount”) and not be paid until the Company on a consolidated basis is cash flow positive from operations, as reported in its SEC filings (the “Participation Trigger Event”) (meaning the Company shall receive all Net Cash Flow (if any) from VSI until the occurrence of the Participation Trigger Event). The Profit Participation shall continue to be earned quarterly until the later of such time as (i) V-CO receives an amount equal to two (2) times its investment in the Private Placement; or (ii) or June 10, 2027. The MSA contains customary covenants regarding confidentiality and indemnification. Under the MSA, V-CO will also assign to AIM or its affiliates V-CO’s entire right, title, and interest in any intellectual property it creates while working for or on behalf of AIM.

Previous wording

Product Sales Revenue. Throughout the latter part of 2023 and into the second quarter of 2024, the Company experienced a decline in Product Sales Revenue. As previously noted, we believe this decline was due in part to certain adverse events in the larger sleep apnea oral appliance market, and not specific to Vivos. Another factor contributing to the decline was our Reductions In Force (RIF) which we undertook during 2022 and 2023. However, those product sales revenue declines began to reverse somewhat in the second quarter of 2024. Enrolling new VIPs has historically been key to our ability to generate revenue from product sales, and lower VIP enrollments during 2023 and into the first quarter of 2024 also dampened product sales revenue. Equally as important, however, is the number of Vivos treatment case starts that our existing 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. Approximately 40% of our VIPs initiated a new case as of June 30, 2024. 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.

Current wording

Product Sales Revenue. Throughout the latter part of 2023 and into the second quarter of 2024, the Company experienced a decline in Product Sales Revenue. As previously noted, we believe this decline was due in part to certain adverse events in the larger sleep apnea oral appliance market, and not specific to Vivos. Another factor contributing to the decline was our Reductions In Force (RIF) which we undertook during 2022 and 2023. However, those product sales revenue declines began to reverse somewhat in the second quarter of 2024. Enrolling new VIPs has historically been key to our ability to generate revenue from product sales, and lower VIP enrollments during 2023 and into the first quarter of 2024 also dampened product sales revenue. Equally as important, however, is the number of Vivos treatment case starts that our existing 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. Approximately 32% of our VIPs initiated a new case as of September 30, 2024. 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.

Previous wording

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 allows us to leverage training and support across multiple VIP practices and gain economies of scale with the goal of faster growth, both in VIP enrollments and in Vivos case starts. As we cautioned previously, DSOs tend to move slowly when adopting new technologies or programs, and we do not expect DSO training or product sales to materially impact overall revenue in 2024. 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 subscription program was 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 program has not contributed meaningful revenue in the first six months of 2024.

Current wording

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 allows us to leverage training and support across multiple VIP practices and gain economies of scale with the goal of faster growth, both in VIP enrollments and in Vivos case starts. As we cautioned previously, DSOs tend to move slowly when adopting new technologies or programs, and we do not expect DSO training or product sales to materially impact overall revenue in 2024. 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 subscription program was 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 program has not contributed meaningful revenue in the first nine months of 2024.

Previous wording

Also, in October 2023, we announced an exclusive distribution agreement with NOUM DMCC, a Dubai-based company focused on diagnostic testing and treatment product distribution for healthcare providers and hospital networks treating obstructive sleep apnea patients throughout the Middle East-North Africa region. Subject to regulatory approvals, which are pending in several countries under the agreement, we could see revenue from this collaboration in the latter part of 2024.

Current wording

In October 2023, we announced an exclusive distribution agreement with NOUM DMCC, a Dubai-based company focused on diagnostic testing and treatment product distribution for healthcare providers and hospital networks treating obstructive sleep apnea patients throughout the Middle East-North Africa region. Subject to regulatory approvals, which are pending in several countries under the agreement, we could see revenue from this collaboration in the latter part of 2024.

Previous wording

An additional inflation-related risk is the Federal Reserve’s response, which up to this point has been to raise interest rates. Such actions have, in times past, created unintended consequences in terms of the impact on housing starts, overall manufacturing, capital markets, and banking. If such disruptions become systemic, as occurred in the recession of 2008, then the impact on our revenue, earnings and access to capital of both inflation and inflation-fighting responses would be impossible to know or calculate.

Current wording

An additional inflation-related risk is the Federal Reserve's involvement with interest rates with recent history both increasing and decreasing interest rates in order to manage inflation. Such actions have, in times past, created unintended consequences in terms of the impact on housing starts, overall manufacturing, capital markets, and banking. If such disruptions become systemic, as occurred in the recession of 2008, then the impact on our revenue, earnings and access to capital of both inflation and inflation-fighting responses would be impossible to know or calculate.

Previous wording

*War in Ukraine and Middle East Hostilities.*In addition, worldwide supply chain constraints and economic and capital markets uncertainty arising out of Russia’s invasion of Ukraine in February 2022 and the attacks by Hamas on Israel in October of 2023 and Israel’s responses have created much social unrest and protests, disrupted commercial and capital markets, and 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 capital when needed.

Current wording

*War in Ukraine and Middle East Hostilities.*In addition, worldwide supply chain constraints and economic and capital markets uncertainty arising out of Russia’s invasion of Ukraine in February 2022 and the attacks by Hamas on Israel in October of 2023 and Israel’s responses (including recent military engagement in Lebanon and with Iran) have disrupted commercial and capital markets, and emerged as potential 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 capital when needed.

Previous wording

The Company is working diligently to ensure its continued compliance with the Equity Requirement, including exploring a potential additional equity capital financing or financings to stay above the minimum threshold of the Equity Requirement. The Company anticipates that its previously disclosed strategic marketing and distribution alliance will also positively impact the Company’s revenue growth and stockholders’ equity in upcoming fiscal quarters. However, there is a risk that the Company will be unable to raise sufficient capital or generate sufficient revenue or operating results to maintain compliance with the Equity Requirement. If the Company fails to achieve ongoing compliance and its common stock is delisted by Nasdaq, such delisting would likely have a material adverse effect on the Company’s stock price, the ability of its stockholders to buy or sell their common stock, the ability of the Company to raise capital and on the Company’s reputation, all of which could make it significantly more difficult to operate the Company.

Current wording

The Company is working diligently to ensure its continued compliance with the Equity Requirement, including its $4.3 million shelf offering in September 2024 as well as exploring potential additional equity capital financings to stay above the minimum threshold of the Equity Requirement. The Company anticipates that its previously disclosed strategic marketing and distribution alliance will also positively impact the Company’s revenue growth and stockholders’ equity in upcoming fiscal quarters. However, there is a risk that the Company will be unable to raise sufficient capital or generate sufficient revenue or operating results to maintain compliance with the Equity Requirement. If the Company fails to achieve ongoing compliance and its common stock is delisted by Nasdaq, such delisting would likely have a material adverse effect on the Company’s stock price, the ability of its stockholders to buy or sell their common stock, the ability of the Company to raise capital and on the Company’s reputation, all of which could make it significantly more difficult to operate the Company.

Previous wording

Net revenue. We recognize revenue when we satisfy our performance obligations over time as our customers receive the benefit of the promised goods and services, which generally occurs over a short period of time. Performance obligations with respect to appliance sales are typically satisfied by shipping or delivering products to our VIPs or, in the case of enrollment or service revenue, upon our satisfaction of performance obligations associated with VIP enrollments. Revenue consists of the gross sales price, net of estimated allowances, discounts, and personal rebates that are accounted for as a reduction from the gross sale price.

Current wording

Net revenue. We recognize revenue when we satisfy our performance obligations over time as our customers receive the benefit of the promised goods and services, which generally occurs over a short period of time. Performance obligations with respect to appliance sales are typically satisfied by shipping or delivering products to our VIPs or, in the case of enrollment or service revenue, upon our satisfaction of performance obligations associated with VIP enrollments. Net 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.

Previous wording

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.

Current wording

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. A prior period amount of less than $0.2 million previously classified as “Loss on inventory write-down” has been reclassified to “Cost of sales” in the current period’s financial statements to better reflect the nature of these transactions and to enhance the comparability of financial statemen line items across periods.

Previous wording

Our consolidated statements of operations for the three and six months ended June 30, 2024 and 2023 are presented below (dollars in thousands):

Current wording

Our consolidated statements of operations for the three and nine months ended September 30, 2024 and 2023 are presented below (dollars in thousands):

Previous wording

Revenue increased by approximately $0.7 million, or 19%, to approximately $4.1 million for the three months ended June 30, 2024 compared to $3.4 million for the three months ended June 30, 2023. The increase in total revenue during the second quarter of 2024 was impacted by an increase of approximately $0.4 million in product revenue due to higher product sales, coupled with an increase of approximately $0.2 million in service revenue. The increase in product revenue is attributable to an increase of approximately $0.3 million in appliances sales, coupled with an increase of approximately $0.1 million in guide sales, all to existing VIPs. The increase in service revenue is attributable to an increase of approximately $0.3 million in VIP enrollment revenue followed by an increase decrease of approximately $0.1 million in sponsorship, seminar and other service revenue. This was offset by a decrease of approximately $0.1 million in Myofunctional therapy revenues. BIS and sleep testing services revenue remained unchanged for the three months ended June 30, 2024 and 2023.

Current wording

Revenue increased by approximately $0.6 million, or 17%, to approximately $3.9 million for the three months ended September 30, 2024 compared to $3.3 million for the three months ended September 30, 2023. The increase in total revenue during the third quarter of 2024 due to an increase of approximately $0.5 million in product revenue due to higher product sales and an increase of approximately $0.1 million in service revenue. The increase in product revenue is attributable to an increase of approximately $0.4 million in appliances sales and approximately $0.1 million in guide sales to existing VIPs. The increase in service revenue is attributable to an increase of approximately $0.2 million in sponsorship, seminar and other service revenue, offset by a decrease of $0.1 in VIP enrollments and Myofunctional therapy revenues. Lastly, BIS and sleep testing services revenue remained flat for the three months ended September 30, 2024 and 2023.

Previous wording

During the three months ended June 30, 2024, we enrolled 32 VIPs and recognized VIP enrollment revenue of approximately $1.2 million, an increase of approximately 28% in enrollment revenue, compared to the three months ended June 30, 2023, when we enrolled 43 VIPs for a total of approximately $0.9 million. Revenue growth in the second quarter of 2024 was impacted by a higher incidence of breakage in contracts, this accelerated revenue recognition on several contracts for VIPs who did not complete their training during the first 90 days of their enrollment. Approximately $0.6 million in revenue was attributable to breakage during the three months ended June 30, 2024, when compared to approximately $0.1 million during the three months ended June 30, 2023.

Current wording

During the three months ended September 30, 2024, we enrolled 5 VIPs and recognized VIP enrollment revenue of approximately $0.9 million, a decrease of approximately 6% in enrollment revenue, compared to the three months ended September 30, 2023, when we enrolled 29 VIPs for a total of approximately $1.0 million in revenue. Revenue decrease in the third quarter of 2024 was impacted by a reduction in VIP enrollments due to a change in sales strategy and focus toward sleep center affiliations, offset by a higher incidence of breakage in contracts. This accelerated revenue recognition on several contracts for VIPs who did not complete their training during the first 90 days of their enrollment. Approximately $0.5 million in revenue was attributable to breakage during the three months ended September 30, 2024, when compared to approximately $0.3 million during the three months ended September 30, 2023.

Previous wording

For the three months ended June 30, 2024, we sold 2,033 oral appliance arches for a total of approximately $2.0 million, a 28% increase in revenue from the three months ended June 30, 2023, when we sold 2,083 oral appliance arches for a total of approximately $1.5 million. The increase is directly attributable to a 71% decrease in discounts offered during the same period, with less than $0.1 million in discounts offered during the three months ended June 30, 2024 when compared to approximately $0.2 million during the three months ended June 30, 2024. Refer to “Material Items, Trends and Risks Impacting Our Business” section above for events that impacted our product sales.

Current wording

For the three months ended September 30, 2024, we sold 1,954 oral appliance arches for a total of approximately $2.0 million, a 34% increase in revenue from the three months ended September 30, 2023, when we sold 1,809 oral appliance arches for a total of approximately $1.5 million. The increase in revenue is directly attributable to an 83% decrease in discounts for such appliances, offered during the same period, with less than $0.1 million in discounts offered during the three months ended September 30, 2024 when compared to approximately $0.2 million during the three months ended September 30, 2024. Refer to the section “Material Items, Trends and Risks Impacting Our Business” above for events that impacted our product sales.

Previous wording

Cost of sales remained relatively constant with an increase of $0.1 million or 8% at approximately $1.4 million for the three months ended June 30, 2024, compared $1.3 million for the three months ended June 30, 2023. This was primarily related to $0.1 million in higher costs associated with appliance lab fees, directly related to an increase in lab fees from our primary vendors.

Current wording

Cost of sales remained relatively constant with a decrease of less than $0.1 million or 2% at approximately $1.5 million for the three months ended September 30, 2024, compared $1.6 million for the three months ended September 30, 2023. This was primarily related to $0.1 million decrease in sleep testing reporting and $0.1 million decrease in VIP training related costs, due to lower enrollments and fewer training sessions scheduled during the period.

Previous wording

For the three months ended June 30, 2024, gross profit increased by approximately $0.6 million to $2.7 million. This increase was attributable to an increase in revenue of approximately $0.7 million offset by an increase in cost of sales of approximately $0.1 million. Gross margin increased to 65% for the three months ended June 30, 2024, compared to 62% for the three months ended June 30, 2023, due primarily to the revenue increase.

Current wording

For the three months ended September 30, 2024, gross profit increased by approximately $0.6 million to $2.3 million. This increase was attributable to an increase in revenue of approximately $0.6 million. Gross margin increased to 60% for the three months ended September 30, 2024, compared to 53% for the three months ended September 30, 2023, due primarily to the revenue increase.

Previous wording

General and administrative expenses decreased approximately $1.8 million, or approximately 30%, to approximately $4.1 million for the three months ended June 30, 2024, as compared to $5.9 million for the three months ended June 30, 2023. The primary driver of this decrease was $0.8 million in professional fees and a change in personnel and related compensation of approximately $0.4 million, including salaries and benefits, paid time off, stock-based compensation, and other employee-related expenses, as a result of the reduction in force implemented during the second quarter of 2023. Other drivers of the decrease in general and administrative expenses included a decrease of approximately $0.2 million related to taxes, licenses and fees, a decrease of approximately $0.1 million related to insurance, a decrease of approximately $0.1 million in travel, meals and entertainment, a decrease of approximately $0.1 in training and education.

Current wording

General and administrative expenses decreased approximately $0.1 million, or approximately 2%, to approximately $4.5 million for the three months ended September 30, 2024, as compared to $4.6 million for the three months ended September 30, 2023. The primary driver of this decrease was $0.1 million in employee compensation, including salaries and benefits, paid time off, stock-based compensation, and other employee-related expenses, as a result of the reduction in force implemented during the second and third quarter of 2023 and 2024. Coupled with a decrease of approximately $0.1 million in travel, meals and entertainment, and a decrease of approximately $0.1 million related to taxes, licenses and other fees. This was offset by an increase of approximately $0.2 million related to professional fees including fees for consultants and legal services.

Previous wording

The liability for the warrants issued in the January 9, 2023 private placement totaled approximately $14.5 million which included 186,667 pre-funded warrants with a fair value of approximately $6.7 million and 266,667 additional common stock purchase warrants with a fair value of approximately $7.7 million. The difference between the fair value of the $14.5 million liability-classified warrants and the net proceeds received of approximately $8.0 million, or approximately $6.5 million, was recognized as a day-one non-operating expense. The change in fair value of the warrant liability was approximately $10.2 million, or $9.6 million of other income net of issuance costs of $0.6 million, for the six months ended June 30, 2023. The net impact of the private placement warrants for the six months ended June 30, 2023 was approximately $3.2 million of other income. The derivative warrant liability was eliminated in November 2023, and as a result, no change in fair value of warrant liability was recorded in the first half of 2024.

Current wording

The liability for the warrants issued in the January 9, 2023 private placement totaled approximately $14.5 million which included 186,667 pre-funded warrants with a fair value of approximately $6.7 million and 266,667 additional common stock purchase warrants with a fair value of approximately $7.7 million. The difference between the fair value of the $14.5 million liability-classified warrants and the net proceeds received of approximately $8.0 million, or approximately $6.5 million, was recognized as a day-one non-operating expense. The change in fair value of the warrant liability was $1.6 million for the three months ended September 30, 2023 was driven by a decrease of 62% in the stock price or approximately $7.95 per share during the period. The derivative warrant liability was eliminated in November 2023, and as a result, no change in fair value of warrant liability was recorded in the third quarter of 2024.

Previous wording

Revenue increased approximately $0.2 million, or 3%, to approximately $7.5 million for the six months ended June 30, 2024 compared to $7.3 million for the six months ended June 30, 2023. The increase in total revenue during the second quarter of 2024 was impacted by an increase of approximately $0.3 million in product revenue due to higher product sales, coupled with a decrease of approximately $0.1 million in service revenue. The increase in product revenue is attributable to an increase of approximately $0.1 million in appliances sales, coupled with an increase of approximately $0.2 million in guide sales, all to existing VIPs. The decrease in service revenue is attributable to a decrease of approximately $0.2 million in Myofunctional therapy revenues followed by a decrease of approximately $0.1 million in VIP enrollment revenue. This was offset by an increase of approximately $0.2 million in sleep testing services, sponsorship, seminar and other service revenue. BIS revenue remained unchanged for the six months ended June 30, 2024 and 2023.

Current wording

Revenue increased approximately $0.8 million, or 7%, to approximately $11.3 million for the nine months ended September 30, 2024 compared to $10.6 million for the nine months ended September 30, 2023. The increase in revenue during the nine months of 2024 due to an increase of approximately $0.8 million in product revenue due to higher product sales. The increase in product revenue is attributable to an increase of approximately $0.5 million in appliances sales, coupled with an increase of approximately $0.3 million in guide sales to existing VIPs. The decrease in service revenue is attributable to a decrease of approximately $0.2 million in Myofunctional therapy revenues followed by a decrease of approximately $0.2 million in VIP enrollment revenue. This was offset by an increase of approximately $0.3 million in sponsorship, seminar and other service revenue, and an increase of approximately $0.1 million in sleep testing services. BIS revenue remained unchanged for the nine months ended September 30, 2024 and 2023.

Previous wording

During the six months ended June 30, 2024, we enrolled 82 VIPs and recognized VIP enrollment revenue of approximately $2.1 million, a decrease of approximately 6% in enrollment revenue, compared to the six months ended June 30, 2023, when we enrolled 81 VIPs for a total of approximately $2.2 million. Revenue decrease in the first six months of 2024 was impacted by updates to key inputs in our revenue recognition methodology, primarily estimated customer lives. As part of our annual process, the estimated customer lives are calculated separately for each year and was estimated to be 27 months in 2024, an increase of 17%, compared to 23 months in 2023, and an even higher increase of 50% when compared to 18 months in 2022. Estimated customer lives impacts the amortization of revenue to be spread over a longer period of time, thus decreasing the revenue that is recognized over the same period when compared to 2023. Although this negatively impacts our revenue recognition, it is a result of customers staying active for a longer period of time, thus increasing our customer retention year-over-year. Additionally, our revenue was impacted by new entry levels into the VIP program, ranging from $2,500 to $50,000 and adding an $8,000 pediatric program, all of which were received positively by our providers. However, the lower priced enrollment options resulted in lower revenue per contract. This, coupled with lower enrollments during 2023, resulted in lower service revenue for the first half of 2024.

Current wording

During the nine months ended September 30, 2024, we enrolled 87 VIPs and recognized VIP enrollment revenue of approximately $3.0 million, a decrease of approximately 6% in enrollment revenue, compared to the nine months ended September 30, 2023, when we enrolled 110 VIPs for a total of approximately $3.2 million. Revenue decrease in the first nine months of 2024 was due to changes to key inputs in our revenue recognition methodology, primarily estimated customer lives. As part of our annual process, the estimated customer lives are calculated separately for each year and was estimated to be 27 months in 2024, an increase of 17%, compared to 23 months in 2023, and an even higher increase of 50% when compared to 18 months in 2022. Estimated customer lives impacts the amortization of revenue to be spread over a longer period of time, thus decreasing the revenue that is recognized over the same period when compared to 2023. Although such adjustment to customer lives negatively impacts our revenue recognition, increasing estimated customer lives results in customers staying active for a longer period of time, thus increasing our customer retention year-over-year. Additionally, our revenue was lowered by a sales strategy shift and focus toward sleep center affiliations, coupled with lower enrollments late 2023 and all of 2024, which resulted in lower service revenue for the nine months ended September 30, 2024. This was offset by a higher incidence of breakage in contracts, this accelerated revenue recognition on several contracts for VIPs who did not complete their training during the first 90 days of their enrollment. Approximately $1.5 million in revenue was attributable to breakage during the nine months ended September 30, 2024, when compared to approximately $0.4 million during the nine months ended September 30, 2023.

Previous wording

For the six months ended June 30, 2024, we sold 4,029 oral appliance arches for a total of approximately $2.9 million, a 5% increase in revenue from the six months ended June 30, 2023, when we sold 4,452 oral appliance arches for a total of approximately $2.8 million. The increase is directly attributable to a 45% decrease in discounts offered during the same period, with less than $0.2 million in discounts offered during the six months ended June 30, 2024 when compared to approximately $0.4 million of discounts offered during the six months ended June 30, 2023. Refer to “Material Items, Trends and Risks Impacting Our Business” section above for events that impacted our product sales.

Current wording

For the nine months ended September 30, 2024, we sold 5,993 oral appliance arches for a total of approximately $5.6 million, a 17% increase in revenue from the nine months ended September 30, 2023, when we sold 6,261 oral appliance arches for a total of approximately $4.8 million. The increase is directly attributable to a 66% decrease in discounts offered during the same period, with less than $0.2 million in discounts offered during the nine months ended September 30, 2024 when compared to approximately $0.6 million of discounts offered during the nine months ended September 30, 2023. Refer to the section “Material Items, Trends and Risks Impacting Our Business” above for events that impacted our product sales.

Previous wording

Cost of sales remained relatively constant with an increase of less than $0.1 million, or 2%, at approximately $2.9 million for the six months ended June 30, 2024, compared to slightly over $2.8 million for the six months ended June 30, 2023. This was primarily related to $0.3 million in higher costs directly related to an increase in lab fees from our primary vendors, offset by a decrease of less than $0.3 million related to lower costs associated with the ring lease program and VIP training.

Current wording

Cost of sales remained relatively constant with an increase of less than $0.1 million, or 1%, at approximately $4.4 million for the nine months ended September 30, 2024, compared to slightly under $4.4 million for the nine months ended September 30, 2023. This was primarily due to $0.7 million in higher costs directly related to an increase in lab fees from our primary vendors, offset by a decrease of less than $0.3 million related to lower costs associated with the ring lease program and a decrease of slightly over $0.2 million in VIP training, and a decrease of approximately $0.2 million for inventory obsolescence expense.

Previous wording

For the six months ended June 30, 2024, gross profit increased by approximately $0.2 million to $4.6 million. This increase was attributable to a slight increase in revenue of approximately $0.2 million offset by an increase in cost of sales of less than $0.1 million. Gross margin remained constant at 61% for the six months ended June 30, 2024, compared to the six months ended June 30, 2023.

Current wording

For the nine months ended September 30, 2024, gross profit increased by approximately $0.7 million to $6.9 million. This increase was attributable to an increase in revenue of approximately $0.8 million offset by an increase in cost of sales of less than $0.1 million. Gross margin increased to 61% for the nine months ended September 30, 2024, compared to 59% for the nine months ended September 30, 2023.

Previous wording

General and administrative expenses decreased by approximately $3.4 million, or approximately 27%, to approximately $9.0 million for the six months ended June 30, 2024, as compared to $12.4 million for the six months ended June 30, 2023. The primary driver of this decrease was $1.7 million in professional fees and a change in personnel and related compensation of approximately $1.1 million, including salaries and benefits, paid time off, stock-based compensation, and other employee-related expenses, as a result of the reduction in force implemented beginning with the second quarter of 2023. Other drivers of the decrease in general and administrative expenses included a decrease of approximately $0.2 million related to bad debt expense, a decrease of approximately $0.2 million related to insurance, and a decrease of approximately $0.1 million in training and education. This was offset by an increase of approximately $0.1 million in fees related to being a public company.

Current wording

General and administrative expenses decreased by approximately $3.5 million, or approximately 20%, to approximately $13.5 million for the nine months ended September 30, 2024, as compared to $17 million for the nine months ended September 30, 2023. The primary cause of this decrease was $1.6 million in professional fees and a change in personnel and related compensation of approximately $1.1 million, including salaries and benefits, paid time off, stock-based compensation, and other employee-related expenses, as a result of the reduction in force implemented beginning with the second and third quarter of 2023 and 2024. Other cause of the decrease in general and administrative expenses included a decrease of approximately $0.2 million related to change in allowance for credit losses, a decrease of approximately $0.3 million related to insurance, a decrease of approximately $0.2 million in travel, meals and entertainment, and a decrease of approximately $0.1 million in training and education. This was offset by an increase of approximately $0.1 million in fees related to being a public company.

Previous wording

Sales and marketing expenses decreased by $0.2 million to $1.0 million for the six months ended June 30, 2024, compared to slightly over $1.2 million for the six months ended June 30, 2023. This decrease was primarily driven by lower commissions and digital media and marketing supplies.

Current wording

Sales and marketing expenses decreased by $0.5 million or 29% to $1.3 million for the nine months ended September 30, 2024, compared to approximately $1.9 million for the nine months ended September 30, 2023. This decrease was primarily driven by lower commissions and digital media and marketing supplies.

Previous wording

Depreciation and amortization expense was approximately $0.3 million for the six months ended June 30, 2024 and 2023. Depreciation and amortization decreased slightly during the period due to some assets being fully depreciated and a small amount of depreciable assets placed into service.

Current wording

Depreciation and amortization expense was approximately $0.4 million for the nine months ended September 30, 2024 and approximately $0.5 million for the nine months ended September 30, 2023. Depreciation and amortization decreased slightly during the period due to some assets being fully depreciated and a small amount of depreciable assets placed into service.

Previous wording

The liability for the warrants issued in the January 9, 2023 private placement totaled approximately $14.5 million which included 186,667 pre-funded warrants with a fair value of approximately $6.7 million and 266,667 additional common stock purchase warrants with a fair value of approximately $7.7 million. The difference between the fair value of the $14.5 million liability-classified warrants and the net proceeds received of approximately $8.0 million, or approximately $6.5 million, was recognized as a day-one non-operating expense. The change in fair value of the warrant liability was approximately $10.2 million, or $9.6 million of other income net of issuance costs of $0.6 million, for the three months ended June 30, 2023. The net impact of the private placement warrants for the three months ended June 30, 2023 was approximately $3.2 million of other income. The derivative warrant liability was eliminated in November 2023, and as a result, no change in fair value of warrant liability was recorded in the second quarter of 2024.

Current wording

The liability for the warrants issued in the January 9, 2023 private placement totaled approximately $14.5 million which included 186,667 pre-funded warrants with a fair value of approximately $6.7 million and 266,667 additional common stock purchase warrants with a fair value of approximately $7.7 million. The difference between the fair value of the $14.5 million liability-classified warrants and the net proceeds received of approximately $8.0 million, or approximately $6.5 million, was recognized as a day-one non-operating expense. The change in fair value of the warrant liability was approximately $10.2 million, or $9.6 million of other income net of issuance costs of $0.6 million, for the nine months ended September 30, 2023. The net impact of the private placement warrants for the nine months ended September 30, 2023 was approximately $3.9 million of other income. The derivative warrant liability was eliminated in November 2023, and as a result, no change in fair value of warrant liability was recorded nine month ended September 30, 2024.

Previous wording

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 $5.7 and $7.2 million for the six months ended June 30, 2024 and 2023, respectively, resulting in an accumulated deficit of approximately $98.7 million as of June 30, 2024.

Current wording

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 $8.3 and $9.3 million for the nine months ended September 30, 2024 and 2023, respectively, resulting in an accumulated deficit of approximately $101.4 million as of September 30, 2024.

Previous wording

Net cash used in operating activities amounted to approximately $5.6 and $6.4 million for the six months ended June 30, 2024 and 2023, respectively. As of June 30, 2024, the Company had total liabilities of approximately $9.5 million.

Current wording

Net cash used in operating activities amounted to approximately $9.8 and $9.2 million for the nine months ended September 30, 2024 and 2023, respectively. As of September 30, 2024, the Company had total liabilities of approximately $7.7 million.

Previous wording

As of June 30, 2024, we had approximately $6.9 million in cash and cash equivalents, which will not be sufficient to fund operations and strategic objectives over the next twelve months from the date of issuance of these financial statements. Without additional financing, these factors raise substantial doubt regarding our ability to continue as a going concern.

Current wording

As of September 30, 2024, we had approximately $6.3 million in cash and cash equivalents, which will not be sufficient to fund operations and strategic objectives over the next twelve months from the date of issuance of these financial statements. Without additional financing, these factors raise substantial doubt regarding our ability to continue as a going concern.

Previous wording

We have successfully implemented cost savings measures and significantly reduced cash used in operations. However, sales did not grow in 2023 or in the first half of 2024 as anticipated, as our product offerings and strategies continue to be refined. As such, we have raised equity capital in late 2023 and early 2024 and will be required to obtain additional financing to satisfy our cash needs and bolster our stockholders’ equity for Nasdaq compliance purposes, as management continues to work towards increasing revenue to achieve cash flow positive operations in the foreseeable future.

Current wording

We have implemented cost savings measures that lead to reduced impact to cash used in operations. However, sales did not grow in 2023 or in the first half of 2024 as anticipated, as our product offerings and strategies continue to be refined. As such, we have raised equity capital in late 2023 and early 2024 and will be required to obtain additional financing to satisfy our cash needs and bolster our stockholders’ equity for Nasdaq compliance purposes, as management continues to work towards increasing revenue to achieve cash flow positive operations in the foreseeable future.

Previous wording

The following table presents a summary of our cash flow for the six months ended June 30, 2024 and 2023 (in thousands):

Current wording

The following table presents a summary of our cash flow for the nine months ended September 30, 2024 and 2023 (in thousands):

Previous wording

Net cash used in operating activities of approximately $5.6 million for the six months ended June 30, 2024 is a decrease of approximately $0.8 million compared to net cash used in operating activities of approximately $6.4 million for the six months ended June 30, 2023. This decrease is due primarily to a $1.5 million decrease in net loss for the six months ended June 30, 2024, the absence of a 2023 unfavorable net change in the fair value of warrant liability of approximately $2.3 million, offset by an increase of $0.3 million in accounts receivable a decrease of approximately $0.3 million in contract liability, a decrease of approximately $0.3 million in accounts payable, accrued expenses and other liabilities and a decrease of approximately $0.8 million in fair value of warrants issued for services.

Current wording

Net cash used in operating activities of approximately $9.8 million for the nine months ended September 30, 2024 is an increase of approximately $0.6 million compared to net cash used in operating activities of approximately $9.2 million for the nine months ended September 30, 2023. This increase is due primarily to a $1.2 million decrease in account payable for the nine months ended September 30, 2024, a decrease of $0.7 million of prepaid expenses and other assets, $0.5 million in accounts receivable, a decrease of approximately $0.5 million in contract liability, and a decrease of approximately $0.4 million in accrued expenses and other liabilities. This was offset by the absence of a 2023 unfavorable net change in the fair value of warrant liability of approximately $3.9 million.

Previous wording

For the six months ended June 30, 2024, net cash used in investing activities consisted of capital expenditures for software of $0.2 million related to the development of software for internal use expected to be placed in service in 2024. This compares to net cash used in investing activities for the six months ended June 30, 2023 of $0.5 million due to capital expenditures for internally developed software and an asset purchase.

Current wording

For the nine months ended September 30, 2024, net cash used in investing activities consisted of capital expenditures for software of $0.4 million related to the development of software for internal use expected to be placed in service in 2024. This compares to net cash used in investing activities for the nine months ended September 30, 2023 of $0.7 million due to capital expenditures for internally developed software and an asset purchase.

Previous wording

Net cash provided by financing activities of $11.4 million for the six months ended June 30, 2024, is attributable to proceeds of $11.0 million from the issuance of Common Stock, net of approximately $0.4 million of professional fees and other issuance costs, in our February warrant inducement and June private placement. This compares to net cash used in investing financing for the six months ended June 30, 2023 of $7.4 million, attributable to gross proceeds of $8.0 million from the issuance of Common Stock, net of approximately $0.6 million of professional fees and other issuance costs, from our private placement in January 2023.

Current wording

Net cash provided by financing activities of $14.8 million for the nine months ended September 30, 2024, is attributable to proceeds of $15.7 million from the issuance of Common Stock and Warrants, net of approximately $0.9 million of professional fees and other issuance costs, in our February warrant inducement, as well as the June and September private placements. This compares to net cash used in investing financing for the nine months ended September 30, 2023 of $7.4 million, attributable to gross proceeds of $8.0 million from the issuance of Common Stock, net of approximately $0.6 million of professional fees and other issuance costs, from our private placement in January 2023.

Previous wording

Our critical accounting policies and estimates are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies Involving Management Estimates and Assumptions” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as amended. 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 and six months ended June 30, 2024.

Current wording

Our critical accounting policies and estimates are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies Involving Management Estimates and Assumptions” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as amended. 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 and nine months ended September 30, 2024.