Vivos Therapeutics, Inc.: Form 10-Q for the period ended Sep 30, 2023

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 (“CPAP”) or palliative oral appliance therapies. Our alternative treatments are part of The Vivos Method.

The Vivos Method is an advanced therapeutic protocol, which often combines the use of customized oral appliance specifications and proprietary clinical treatments developed by our company and prescribed by specially trained dentists in cooperation with their medical colleagues. Published studies have shown that using our customized appliances and clinical treatments led to significantly lower Apnea Hypopnea Index scores and have improved other conditions associated with OSA. Approximately 40,000 patients have been treated to date worldwide with our entire current suite of products by more than 1,850 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.

See Note 1 to the accompanying financial statements for additional background information on our Company and current product and service offerings.

Impact of COVID-19

In December 2019, a novel strain of coronavirus known as COVID-19 was reported to have surfaced in China, and by March 2020 the spread of the virus resulted in a world-wide pandemic. By March 2020, the U.S. economy had been largely shut down by mass quarantines and government mandated stay-in-place orders (the “Orders”) to halt the spread of the virus, now widely acknowledged to have been generally ineffective, and in many ways, harmful. As a result, nearly all of these Orders have been relaxed or lifted, but there is considerable uncertainty about whether the Orders will be reinstated should a new COVID-19 variant or entirely new virus emerge.

Our business was materially impacted by COVID-19 in 2020 and to some extent thereafter through the early part of 2023 due to the actions of governmental bodies that mandated quarantines and lockdowns that resulted in many of our VIPs and potential VIPs having to close their offices. The impact of COVID-19 on our business diminished somewhat as 2023 has progressed. It appears that the latest COVID-19 subvariants evoke generally milder symptoms and do not pose the same health or economic threat as previous strains. However, the residual effects of the pandemic on dental workforce availability as well as patient precautionary measures continued to negatively impact our VIP dental practices and our revenue across the U.S. and Canada during 2022 and into 2023. We believe new enrollments during the third quarter of 2023 continued to be negatively impacted by the ongoing overall workforce uncertainties in the dental market. In addition, new variants of COVID-19 continue to arise, and such variants may in the future cause an adverse effect on the dental market. As such, the long-term financial impact on our business of COVID-19 as well as these other matters cannot reasonably be fully estimated at this time.

Material Items, Trends and Risks Impacting Our Business

We believe that the following items and trends may be useful in better understanding our results of operations.

New VIP Enrollments (Service Revenue). Enrolling denta1 practices as VIPs is the first step in our ability to generate new revenue. As part of the VIP enrollment fee, we enter into a service contract with VIPs under which they receive training on the use of the Vivos treatment modalities. VIPs have the ability to start generating revenue for us and themselves after this training. To entice dentists to enroll as VIPs, we have worked with different marketing programs (which we generally call a “discovery track”) with respect to the payment of VIPs enrollment fee, including discounts and payment plans. Once VIPs execute their VIP enrollment agreement, the discovery track allows the VIP 45 to 60 days to obtain financing and pay the enrollment fee. Ongoing support and additional training is provided throughout the year under the services contract, which includes access to our proprietary Airway Intelligence Services, which provides the VIP with resources to help simplify the sleep apnea diagnostic and Vivos treatment planning process.

In addition to enrollment service revenue, we offer additional services, such as our Billing Intelligence Services offering, and MyoCorrect orofacial myofunctional therapy services, which was introduced in April 2021. Revenue for these services is recognized as the Company’s performance obligations are satisfied in accordance with ASC 606.

We are also engaging in strategic collaborations to market the benefits of the Vivos treatment modalities and VIP enrollment to dentists, including our cooperative relationships with various medical providers to deliver diagnostic and medical consultation services to people across North America who suffer from OSA.

We recognize revenue on VIP enrollments once the contract is executed, payment is received, and as the Company’s performance obligations are satisfied in accordance with ASC 606.

Product Sales 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. Approximately 35% of our VIPs initiated a new case during the first nine months of 2023. 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.

In addition, an important aspect of our strategy to increase product revenues relates to the products and related intellectual property we acquired in March 2023 from Advanced Facialdontics, LLC (“AFD”), including the POD®, a custom single arch device with an FDA 510(k) clearance for treating TMD and/or Bruxism (teeth grinding or clenching). During the remainder of 2023 and beyond, we will look to increase sales of these acquired products, but we may be unable to do so to our advantage. As described further below, during 2023 we entered into a distribution agreement with Lincare, a leading durable medical equipment (“DME”), to distribute certain of our products, including those we acquired from AFD.

Marketing to DSOs. During the second half of 2021, we increased our efforts to market The Vivos Method and related products and services to larger dental support organizations (“DSOs”). Marketing to DSOs creates an opportunity to enroll and onboard multiple dental practices as VIPs under one common ownership structure. This would allow us to leverage training and support across multiple VIP practices and gain economies of scale with the goal of faster growth, both in VIP enrollments and in Vivos case starts. As of September 30, 2023, we believe we have made important progress in penetrating this market, but as we cautioned previously, DSOs tend to move slowly when adopting new technologies or programs. Our other dentist enrollment program, which we refer to as the Airway Alliance Program (“AAP”), was also established in the fourth quarter of 2021 and launched in the first quarter of 2022. This program is designed to attract the vast majority of the estimated 200,000 U.S. and Canadian dentists who are being strongly encouraged by the American Dental Association to screen their patients for sleep apnea. The AAP gives these dentists a simple yet profitable way to screen their patients for mild to moderate OSA using the SleepImage® home sleep test. Patients with mild to moderate OSA can be referred to a fully trained local VIP dentist for treatment. The AAP program did not contribute meaningfully to revenue during the third quarter of 2023.

Clinical Trial Work. Our efforts to engage in research to demonstrate the clinical efficacy of our products and obtain additional regulatory clearances for the use of our products is an important aspect of our overall strategy. In this regard, on May 29, 2023, we and Stanford University executed an agreement to commence a sponsored clinical research study to evaluate the efficacy of our FDA-cleared DNA appliance compared to the standard of care, CPAP for treatment of sleep apnea. Our DNA device is currently indicated for the treatment of mild to moderate sleep apnea and jaw repositioning in adults. Enrollment of 150 patients with moderate to severe sleep apnea (apnea-hypopnea index score of 15 or greater) will be randomly assigned to either treatment with our FDA-cleared DNA appliance or CPAP. The protocol has been finalized and enrollment will begin later in 2023. This trial may not meet its designated endpoints, and therefore additional FDA clearances for the DNA device may not be obtained.

Distribution Agreements. During 2023, we entered into distribution collaborations with third parties to expand access of our products to potential patients. We hope that these strategic initiatives will lead to revenue growth opportunities for us in 2024 and beyond, and our ability to capitalize on these initiatives is expected to be a material aspect of our sales and marketing program going forward.

For example, on June 1, 2023, we entered into a non-exclusive distribution agreement with Lincare, a leading supplier in the United States of respiratory products, such as continuous positive airway pressure (CPAP) equipment. Lincare currently provides respiratory products to approximately 1.8 million patients nationwide. Pursuant to this agreement, Lincare began to distribute certain of our products in the United States, including the Vida™, VidaSleep™, and Versa®. The distribution agreement was subject to a 90-day pilot program in Colorado and Florida. Within weeks of starting the pilot program, Lincare reported an initial 36% positive patient response to our products subject to the agreement.

On October 24, 2023, we announced the successful conclusion of this pilot program and an amendment to our Lincare agreement to appoint Lincare as our exclusive DME distributor in the U.S. for a period of 6-months to distribute the products described above. Plans are already underway to extend the scope of the distribution territory beyond the initial two markets into Texas, Virginia, North Carolina, New Jersey and at least one other major market. Others are expected to follow soon thereafter. We are hopeful that this new form of arrangement with Lincare and possibly other DME companies will help us increase our product revenues during the last quarter of 2023, and in 2024 and beyond.

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, we could see revenue from this collaboration in 2024.

Impact on Sales from Unregistered Oral Appliance Publicity. On or about March 1, 2023, CBS News reported the tragic case of a woman with a malocclusion and breathing problem who had received treatment via a fixed oral appliance known as the AGGA (Anterior Growth Guidance Appliance). According to the televised CBS report, the device created serious issues with her dentition and jaws, resulting in the loss of several anterior teeth. The patient filed a $10 million lawsuit against the treating dentist.

News of this lawsuit quickly spread throughout the country, and particularly within the dental and orthodontic communities. Within days, rumors and wildly untrue statements were published on social media platforms and elsewhere that began to associate and confuse Vivos appliances with the AGGA. Vivos management immediately responded to correct any misstatements and to set the record straight.

Vivos was not named in the lawsuit, nor was our device implicated in creating the tooth displacement and other concerns that gave rise to the lawsuit. To our knowledge, in approximately 40,000 patients treated, Vivos oral appliances have never caused the loss of even a single tooth, and we have never been sued over a patient complaint or safety issue. Vivos has never had any association or affiliation with the AGGA device or its promoters, nor has the Company ever endorsed these kind of counterfeit fixed oral appliances that make unproven and unsubstantiated claims.

The AGGA is a non-FDA cleared oral appliance developed by Dr. Steve Galella, a dentist from Tennessee. He has actively promoted and taught other dentists about his device for many years through the Las Vegas Institute (LVI) and elsewhere. Dr. Galella has claimed that the AGGA can “grow, expand, and remodel an adult’s jaw”, and that roughly 10,000 OSA and TMD patients have been successfully treated using this device.

The FDA regulates and categorizes all medical devices claiming to treat obstructive sleep apnea (OSA) and/or TMD disorders as Class II devices and requires that they have a 510k clearance in order to be used with patients. The AGGA device does not have any such FDA clearance, nor are there any known peer-reviewed and published studies validating the safety and efficacy of this device. In stark contrast, all Vivos oral appliances are duly registered or cleared by the FDA according to strict FDA guidelines. Our appliances and attending protocols for proper use are also backed by extensive peer reviewed published research. Moreover, Vivos appliances operate on a completely different mechanism of action than that of the AGGA and similar devices on the market. Vivos has always maintained that such appliances tend to create inflammation and pose other risks that are unacceptable. The AGGA is a fixed appliance, whereas Vivos appliances are removable devices.

Our core product is The Vivos Method, not any one single device. We believe this is a key distinguishing factor for our approach. The Vivos Method involves far more than just our oral appliances. It begins with proper and thorough diagnosis and ends with a customized multidisciplinary treatment plan that likely incorporates one or more of several treatment modalities, including oral myofunctional therapy, SOT chiropractic, physical therapy, laser therapy, nutritional counseling, CPAP, mandibular advancement, CARE device therapy, and more. The Vivos Method is thus a fully integrated end-to-end diagnostic, training, and treatment platform that can adapt to the needs of virtually any and every breathing disordered sleep patient.

Unfortunately, and despite our best efforts to distance ourselves and our products from the AGGA device, the entire matter generated a certain amount of confusion and fear amongst both existing VIP dentists and other non-affiliated dentist prospects. Thus, new provider enrollments and sales of Vivos appliances in the third quarter decreased as word spread. By the latter part of June, we began to see a partial rebound in both new enrollments and appliance sales. Nevertheless, certain Vivos-trained providers remain very cautious and are being far more selective in their cases, which has continued to impact appliance sales through the end of the third quarter.

We believe that this is a short-term phenomenon and should not be a long-term hindrance to new case starts or new VIP enrollments, but the full impact of this phenomenon is hard to predict.

Inflation. The U.S has been experiencing 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.

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.

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

Seasonality. We believe that the patient volumes of our VIPs will be sensitive to seasonal fluctuations in urgent care and primary care activity. Typically, the fourth quarter tends to be one where we see higher enrollment levels for new VIP dentists, however, as previously mentioned reported, in the fourth quarter of 2022 we did not see that same pattern emerge. The first and second quarters of each year tend to be our weakest quarter of the year for new enrollments, and to a certain extent, appliance sales as well. This was the case in the first half of 2023. Winter months see a higher occurrence of influenza, bronchitis, pneumonia and similar illnesses; however, the timing and severity of these outbreaks vary dramatically. Additionally, as consumers shift toward high deductible insurance plans, they are responsible for a greater percentage of their bill, particularly in the early months of the year before other healthcare spending has occurred, which may lead to lower than expected patient volume or an increase in bad debt expense during that period. Our quarterly operating results may fluctuate in the future depending on these and other factors.

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

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 responses have 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.

Potential Nasdaq Delisting. As previously reported, we are currently subject to two Nasdaq Stock Market (“Nasdaq”) listing deficiencies, one related to Nasdaq’s $1.000 minimum bid price requirement (the “Minimum Bid Requirement”) and a second related to Nasdaq’s $2,500,000 minimum stockholders’ equity requirement (the “Minimum Stockholders’ Equity Requirement”).

On September 21, 2023, we received a written notice from the Nasdaq staff confirming that since, as of that date, we failed to meet the Minimum Bid Requirement, and because as of the period ended June 30, 2023 we also failed the Minimum Stockholders’ Equity Requirement, Nasdaq would commence delisting proceedings against us. As permitted under Nasdaq rules, we appealed the Nasdaq staff’s determination and requested a hearing (the “Hearing”) before a Nasdaq Hearing Panel (the “Hearing Panel”). The Hearing request stayed any delisting or suspension action by the Nasdaq staff pending the issuance of the Hearing’s Panel decision. The Hearing took place on November 9, 2023.

Prior to the date of the Hearing, we effectuated a reverse stock split of our issued and outstanding shares of common stock at a ratio of 1-for-25 (the “Reverse Stock Split”). The Reverse Stock Split became effective on October 25, 2023, and our common stock began trading on a post-Reverse Stock Split basis on the Nasdaq on October 27, 2023. To satisfy the Minimum Bid Requirement, our common stock was required to trade at above $1.00 per share for at least 10 trading days, and this was achieved on November 9, 2023. We therefore believe that the Hearing Panel should find that we have regained compliance with the Minimum Bid Requirement.

At the Hearing on November 9, 2023, we presented our plan to regain compliance with the Minimum Stockholders’ Equity Requirement, which plan includes raising additional equity capital. The Hearing Panel has 30 days to render its decision. We believe that we will be able to regain and maintain compliance with both the Minimum Bid Requirement and the Minimum Stockholders’ Equity Requirement, which would allow our common stock to continue to trade on Nasdaq. However, there can be no assurance that the Hearing Panel will agree with our plan, that will be provided adequate time to achieve compliance or, even if provided adequate time, that we will in fact be able to regain and maintain compliance with both requirements, in which case our common stock would be subject to delisting from Nasdaq.

Key Components of Condensed Consolidated Statements of Operations

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

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

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

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

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

Other income. Other income relates to the PPP loan forgiven in January 2022 by the SBA, and the ERTC received in April and May 2023 from the IRS.

Restatement of March 31, 2022 Financial Statements

As described in Note 2, “Restatement of Consolidated Financial Statement,” in Item 1 of Part 1 of Amendment No. 1 to our Quarterly Report on Form 10-Q for the three months ended March 31, 2022, originally filed with the SEC on May 16, 2022 and such Amendment No. 1 filed on November 25, 2022 (the “10-Q/A”), we determined it was necessary to restate our financial statements for the three months ended March 31, 2022.

The restatement of the previously filed financial statements was due to our management (with the concurrence of the Audit Committee of our Board of Directors) determining that our existing revenue recognition policy was not consistent with the guidance in ASC 606. After analyzing our contracts using the five-step process in ASC 606, we have determined that for VIP enrollment contracts, it is necessary for us to separately identify the performance obligations and recognize the revenue as the performance obligations are satisfied over the customer life as applicable. We identified a material weakness related to the operating effectiveness of our review controls in that we did not put the appropriate resources in place to be able to identify technical accounting issues and perform review functions appropriately for the revenue recognition issue described above and for those items which we had previously identified in Part II, Item 9A of our Form 10-K for the fiscal year ended December 31, 2022.

Results of Operations

Comparison of the three months and nine months ended September 30, 2023 and 2022

Our condensed consolidated statements of operations for the three months and nine months ended September 30, 2023 and 2022 are presented below (dollars in thousands):

Comparison of the three months ended September 30, 2023 and 2022

Revenue

Revenue decreased approximately $0.9 million, or 22%, to approximately $3.3 million for the three months ended September 30, 2023 compared to $4.2 million for the three months ended September 30, 2022. Revenue during the third quarter of the year was impacted by a decrease of approximately $0.5 million in product revenue, coupled by a decrease of approximately $0.4 million in service revenue. The decrease in total revenue is attributable to a decrease of approximately $0.6 million in VIP revenue, followed by a decrease of approximately $0.5 million in appliance sales to VIPs, a decrease of less than $0.1 million from our two company-owned dental centers, and a decrease of less than $0.1 million from BIS services. This was offset by an increase of approximately $0.2 million from sleep testing services and $0.1 million in Myofunctional therapy services. Sponsorship, conference and training related revenue remained relatively unchanged for the three months ended September 30, 2023, when compared to the three months ended September 30, 2022.

During the three months ended September 30, 2023, we enrolled 29 VIPs and recognized VIP revenue of approximately $1.0 million, a decrease of 37% in enrollment revenue, compared to the three months ended September 30, 2022, when we enrolled 56 VIPs for a total of approximately $1.6 million. Revenue growth continues to be impacted by the new entry levels into the VIP program, ranging from $2,500 to $50,000, and adding an $8,000 pediatric program, which was received positively by our providers. Average enrollments during the period increased from approximately $28,000 during the three months ended September 30, 2022 to approximately $34,000 during the three months ended September 30, 2023.

For the three months ended September 30, 2023, we sold 1,809 oral appliance arches for a total of approximately $1.5 million, a 27% decrease in revenue from the three months ended September 30, 2022 when we sold 3,057 oral appliance arches for a total of approximately $2 million, refer to “Material Items, Trends and Risks Impacting Our Business” section above for events that impacted our product sales. For the three months ended September 30, 2023 and 2022, we recognized approximately $0.2 million in revenue from Myofunctional therapy services. Additionally, we recognized approximately $0.2 million and $0.3 million in BIS for the three months ended September 30, 2023 and 2022, respectively. Lastly, for the three months ended September 30, 2023 we recognized less than $0.1 million in revenue from our company-owned dental centers, compared to a little over $0.1 million for the three months ended September 30, 2022, and over $0.3 million in sleep testing services revenue, compared to $0.1 million for the three months ended September 30, 2022.

Cost of Sales and Gross Profit

Cost of sales decreased by approximately $0.4 million to approximately $1.4 million for the three months ended September 30, 2023 compared to approximately $1.8 million for the three months ended September 30, 2022. This decrease was primarily due to lower costs associated with appliances driven by the lower sales explained above, and lower membership support costs, offset slightly by an increase in medical reporting services costs.

For the three months ended September 30, 2023, gross profit decreased by approximately $0.6 million to $1.9 million. This decrease was attributable to the decrease in revenue of approximately $0.9 million coupled with the decrease in cost of sales of $0.4 million. Gross margin decreased to 57% for the three months ended September 30, 2023 when compared to 59% for the three months ended September 30, 2022.

General and Administrative Expenses

General and administrative expenses decreased approximately $2.0 million, or approximately 31%, to approximately $4.6 million for the three months ended September 30, 2023, as compared to $6.6 million for the three months ended September 30, 2022. The primary driver of this decrease was 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 related to expense cuts including a reduction in force. Other drivers of the decrease in general and administrative expenses included a decrease of approximately $0.5 million related to professional fees, a decrease of approximately $0.3 million in travel expenses, and a decrease of approximately $0.1 million for insurance, offset by an increase of $0.1 million for annual meeting and proxy related fees.

Sales and Marketing

Sales and marketing expense decreased by $0.5 million to $0.6 million for the three months ended September 30, 2023, compared to $1.1 million for the three months ended September 30, 2022. This decrease was primarily driven by a $0.3 million decrease in commissions, as well as a $0.2 million decrease related to a reduction in website development, materials and product samples as well as print media and marketing supplies, and a decrease of $0.2 million in conventions and tradeshow expenses, this was offset by an increase of approximately $0.1 for digital marketing campaigns.

Depreciation and Amortization

Depreciation and amortization expense was approximately $0.2 million for the three months ended September 30, 2023 and 2022. Depreciation and amortization remained constant during the period due to an immaterial amount of depreciable assets placed into service.

Excess warrant fair value and change in fair value of warrant liability, net of issuance costs

The change in fair value of the warrant liability was $1.6 million for the three months ended September 30, 2023, driven by a decrease of 62% in the stock price or approximately $7.95 per share during the period.

Comparison of the nine months ended September 30, 2023 and 2022

Revenue

Revenue decreased approximately $1.5 million, or 13%, to approximately $10.6 million for the nine months ended September 30, 2023 compared to $12.1 million for the nine months ended September 30, 2022. Revenue during the first nine months of the year was impacted by a decrease of approximately $1.6 million in product revenue, offset by an increase of approximately $0.1 million in service revenue. The decrease in total revenue is attributable to a decrease of approximately $1.3 million in appliance sales to VIPs, followed by a decrease of approximately $0.4 million in VIP revenue, a decrease of approximately $0.3 million from our two company-owned dental centers, and a decrease of approximately $0.3 million in BIS revenue. This was offset by an increase of approximately $0.1 million from sleep testing services and devices and an increase of approximately $0.1 million in sponsorship, conference and training related revenue, respectively. Myofunctional therapy remained relatively unchanged at $0.7 million for the nine months ended September 30, 2023 and 2022.

During the nine months ended September 30, 2023, we enrolled 110 VIPs and recognized VIP revenue of approximately $3.2 million, a decrease of 12% in enrollment revenue, compared to the nine months ended September 30, 2022, when we enrolled 146 VIPs for a total of approximately $3.6 million. Revenue growth in 2022 was impacted by prior period adjustment decreasing revenue by $0.4 million. New entry levels into the VIP program, ranging from $2,500 to $50,000 and adding an $8,000 pediatric program, which was received positively by our providers. Average enrollments increased from approximately $25,000 during the nine months ended September 30, 2022 to approximately $29,000 during the nine months ended September 30, 2023.

For the nine months ended September 30, 2023, we sold 6,261 oral appliance arches for a total of approximately $4.6 million, a 20% decrease in revenue from the nine months ended September 30, 2022 when we sold 9,343 oral appliance arches for a total of approximately $5.8 million, refer to “Material Items, Trends and Risks Impacting Our Business” section above for events that impacted our product sales. For the nine months ended September 30, 2023 and 2022, we recognized approximately $0.7 million, respectively, in revenue from Myofunctional therapy services and recognized approximately $0.7 and $0.9 million in BIS, respectively. Lastly, for the nine months ended September 30, 2023 we recognized approximately $0.9 million in home sleep testing services revenue, compared to $0.3 million for the nine months ended September 30, 2022 and $0.1 million in revenue from our company-owned dental centers, compared to approximately $0.5 million for the nine months ended September 30, 2022.

Cost of Sales and Gross Profit

Cost of sales decreased by approximately $0.2 million to approximately $4.2 million for the nine months ended September 30, 2023 compared to approximately $4.4 million for the nine months ended September 30, 2022. This was primarily related to a decrease of approximately $0.6 million in lower costs associated with appliances driven by the lower sales explained above, and a decrease of approximately $0.2 million related to VIP training. This was offset by an increase of approximately $0.4 million due to higher costs associated with the ring lease program, and an increase of approximately $0.2 million in membership support costs.

For the nine months ended September 30, 2023, gross profit decreased by approximately $1.3 million to $6.3 million. This decrease was attributable to a decrease in revenue of approximately $1.5 million offset by a decrease in cost of sales of $0.2 million. Gross margin decreased to 60% for the nine months ended September 30, 2023, compared to 63% for the nine months ended September 30, 2022.

General and Administrative Expenses

General and administrative expenses decreased approximately $5.1 million, or approximately 23%, to approximately $17.0 million for the nine months ended September 30, 2023, as compared to $22.1 million for the nine months ended September 30, 2022. The primary driver of this decrease was a change in personnel and related compensation of approximately $2.7 million, including salaries and benefits, paid time off, stock-based compensation, and other employee-related expenses. Other drivers of the decrease in general and administrative expenses included a decrease of approximately $0.5 million related to professional fees, a decrease of approximately $1.0 million in travel expenses, and a decrease of approximately $0.5 million for insurance, offset by an increase of $0.1 million for annual meeting and proxy related fees.

Sales and Marketing

Sales and marketing expense decreased by $2.1 million to $1.9 million for the nine months ended September 30, 2023, compared to $4.0 million for the nine months ended September 30, 2022. This decrease was primarily driven by a $0.8 million decrease in commissions, as well as a $0.9 million decrease related to a reduction in website development, materials and product samples as well as print media and marketing supplies, and a decrease of $0.5 million in conventions and tradeshow expenses.

Depreciation and Amortization

Depreciation and amortization expense was approximately $0.5 million for the nine months ended September 30, 2023 and 2022. Depreciation and amortization remained constant during the period due to an immaterial amount of depreciable assets placed into service.

PPP Loan Forgiveness

PPP loan forgiveness was approximately $1.3 million for the nine months ended September 30, 2022 when compared to the nine months ended September 30, 2023. The PPP loan was forgiven by the SBA in its entirety in 2022.

Excess warrant fair value and change in fair value of warrant liability, net of issuance costs

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 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 $11.0 million, or $10.4 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 on net loss for the nine months ended September 30, 2023 was approximately $3.9 million of other income.

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 $9.3 and $17.8 million for the nine months ended September 30, 2023 and 2022, respectively, resulting in an accumulated deficit of approximately $88.8 million as of September 30, 2023.

Net cash used in operating activities amounted to approximately $9.2 and $16.6 million for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, the Company had total liabilities of approximately $10.3 million.

As of September 30, 2023, the Company had approximately $1.0 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 the Company’s ability to continue as a going concern. See Note 15 for additional information regarding the Company’s financing activity following the quarter ended September 30, 2023.

The Company previously disclosed that its goal was to decrease costs and increase revenues during 2023 with the aim of becoming cash flow positive from operations by the first quarter of 2024 without the need for additional financing, if possible. The Company has successfully implemented cost savings measures and significantly reduced cash used in operations. However, sales have not grown during 2023 as anticipated as our product offerings and strategies are refined. As such, the Company now anticipates that it will be required to obtain additional financing to satisfy its cash needs, as management continues to work towards increasing revenue and achieving cash flow positive operations in the foreseeable future. See Note 15 for additional information regarding the Company’s financing activity following the quarter ended September 30, 2023

Until a state of cash flow positivity is reached, management is reviewing all options to obtain additional financing to fund operations. This financing is expected to come primarily from the issuance of equity securities in order to sustain operations until the Company 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 some or all of its operations, all of which could have a material adverse effect on the Company and stockholders.

The Company does 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 its financial condition, results of operations, liquidity, capital expenditures or capital resources.

Cash Flows

The following table presents a summary of our cash flow for the nine months ended September 30, 2023 and 2022 (in thousands):

Net cash used in operating activities of approximately $9.2 million for the nine months ended September 30, 2023 is a decrease of approximately $7.4 million compared to net cash used in operating activities of approximately $16.6 million for the nine months ended September 30, 2022. This decrease is due primarily to the decrease in our net loss of approximately $8.4 million, a favorable net change in the fair value of warrant liability of approximately $10.4 million, offset by day-one non-operating warrant expense of approximately $6.5 million, a decrease of approximately $1.2 million for the PPP loan, an increase of approximately $1.2 million for the employee retention credit liability, a decrease of approximately $0.7 million in prepaid expenses and other current assets, and a decrease of approximately $0.7 million in stock-based compensation. This was offset by a decrease of approximately $0.2 million in accounts receivable related to the MID clinics and VIP enrollments under payment plans, a decrease of approximately $0.2 million in fair value of compensation based warrants issued.

For the nine months ended September 30, 2023, net cash used in investing activities consisted of capital expenditures for software of $0.7 million related to the development of software for internal use, expected to be placed in service in late 2023, as well as a purchase of a patent portfolio in February 2023. This compares to net cash used in investing activities for the nine months ended September 30, 2022 of $0.7 million due to capital expenditures for internally developed software.

Net cash provided by financing activities of $7.4 million for the nine months ended September 30, 2023, is attributable to proceeds of $8.0 million from the issuance of Common Stock, net of approximately $0.6 million of professional fees and other issuance costs, in our private placement in January 2023 and proceeds from the exercise of pre-funded warrants in connection with the same private placement. There was no cash used for financing activities for the nine months ended September 30, 2022.

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, 2022. We have reviewed and determined that those critical accounting policies and estimates remain our critical accounting policies and estimates as of and for the nine months ended September 30, 2023.

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 condensed 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 condensed consolidated financial statements included in this Report.

Trade Policy Risk. Certain of our products or components are manufactured outside the United States. Most products imported into the United States is subject to duty and restrictive quotas on the amount of products that can be imported from certain countries into the United States each year. Because of the duty rates and quotas, changes in U.S. trade policy as reflected in various legislation, trade preference programs and trade agreements have the potential to materially impact our sourcing strategy and the competitiveness of its contract manufacturers. We manage this risk by continually monitoring U.S. trade policy, analyzing the impact of changes in such policy and adjusting its manufacturing and sourcing strategy accordingly.

Foreign Currency Risk. We receive United States dollars for all of our product sales. Currently, all inventory purchases from our non-U.S. contract manufacturers are also denominated in United States dollars; however, should we make purchases in foreign currencies in the future, purchase prices for our products may be impacted by fluctuations in the exchange rate between the United States dollar, which may have the effect of increasing our cost of goods in the future.

Commodity Price Risk. We are subject to commodity price risk arising from price fluctuations in the market prices of sourced titanium and steel products or the various raw materials components of its manufactured products. We are subject to commodity price risk to the extent that any fluctuations in the market prices of its purchased titanium and steel products and raw materials are not reflected by adjustments in selling prices of its products or if such adjustments significantly trail changes in these costs. We neither enter into significant long-term sales contracts nor enter into significant long-term purchase contracts. We do not engage in hedging activities with respect to such risk.

Credit Risk. Credit risk relates to the risk of loss resulting from non-performance or non-payment by counterparties pursuant to the terms of their contractual obligations. Risks surrounding counterparty performance and credit could ultimately impact the amount and timing of expected cash flows. Certain financial instruments potentially subject our company to a concentration of credit risk. These financial instruments consist primarily of cash and cash equivalents and accounts and vendor receivables. We place our cash and cash equivalents with high-credit, quality financial institutions. The balances in these accounts exceed the amounts insured by the Federal Deposit Insurance Corporation.

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) are designed to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the appropriate time periods, and that such information is accumulated and communicated to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure. As of the end of the period covered by this quarterly report, we, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were not effective because of our previously reported material weakness in our internal control over financial reporting, which we describe in Part II, Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).

Remediation of Material Weakness

We are committed to maintaining a strong internal control environment and implementing measures designed to help ensure that significant deficiencies contributing to the material weakness are remediated as soon as possible. We believe we have made progress towards remediation and continue to implement our remediation plan for the previously reported material weakness in internal control over financial reporting, described in Part II, Item 9A of our Annual Report on Form 10-K, which includes steps to increase dedicated personnel, improve reporting processes, design, and implement new controls, and enhance related supporting technology. We will consider the material weakness remediated after the applicable controls operate for a sufficient period of time, and management has concluded, through testing, that the controls are operating effectively.

However, we cannot provide assurance that these or other measures will fully remediate our material weaknesses in a timely manner. If our remediation of these material weaknesses is not effective, it may cause our company to become subject to investigation or sanctions by the SEC. It may also adversely affect investor confidence in our company and, as a result, the value of our common stock. There can be no assurance that all existing material weaknesses have been identified, or that additional material weaknesses will not be identified in the future.

Changes in Internal Control over Financial Reporting

Due to the identification of the material weakness described above, we continue to seek to strengthen our internal control structure by adding accounting staff, adding additional levels of review, adding accounting technical support, and engaging a consulting team to assist with the creation and implementation of processes. Except as described herein, we made no other changes in internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the nine months ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.