ProSomnus, Inc. Common Stock (NASDAQ:OSA) Q4 2023 Earnings Call Transcript

ProSomnus, Inc. Common Stock (NASDAQ:OSA) Q4 2023 Earnings Call Transcript March 27, 2024

ProSomnus, Inc. Common Stock misses on earnings expectations. Reported EPS is $-0.42 EPS, expectations were $-0.31. OSA isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the ProSomnus Q4 2023 Earnings Investors Update. At this time, all participants are in listen-only mode. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Cavanaugh ProSomnus [ph] Investor Relations. Please go ahead.

Michael Cavanaugh: Thank you, and good afternoon. I’d like to thank everyone for joining us today. Earlier today, ProSomnus, Inc. issued a press release announcing our financial results for the quarter ended December 31, 2023 and describing the company’s recent business highlights. You can access a copy of the announcement on the company’s website at www.investors.prosomnus.com. With me on the call today are Len Liptak, Chief Executive Officer; and Brian Dow, Chief Financial Officer. As with our last call, Len will begin the call by discussing the fourth quarter and full-year 2023 business and operational highlights. Brian will then provide a review of our financial results and our financial outlook for 2024. We will not be hosting a question-and-answer session at the end of this call today.

Before we begin, I would like to inform you that comments mentioned on today’s call may be deemed to contain forward-looking statements. Statements that are not historical facts, including statements about the expected future financial performance, timing, outcome, and impact of the FDA’s review of the company’s 510(k) submissions for the severe OSA indication and planned 510(k) submission of the company’s RPMO2 remote patient monitoring device, financing, and strategic alternatives and other forward-looking comments are forward-looking statements. The words expect, believe, estimate, intend, plan and similar expressions indicate forward-looking statements, although not all forward-looking statements contain these or similar identifying words.

Forward-looking statements are not guarantees of future performance and are subject to various risks and uncertainties, assumptions, including assumptions about general economic market, industry, and operational factors, known or unknown, which could cause the actual results to vary materially from those indicated or anticipated. Such risks and uncertainties include, but are not limited to, changes in the time lines and potential outcomes of regulatory clearance and/or approval processes, development progress on future products, the availability of financing and strategic alternatives on economically reasonable terms, competition within the industries in which the company operates and variations in operating performance across competitors, changes in laws and regulations affecting ProSomnus’ business, the risk of downturns in the market and ProSomnus’ industry.

These risks and uncertainties are described in greater detail in our most recent Securities and Exchange Commission filings, including our most recent Form 10-Q for the quarter ended September 30, 2023, and our post-effective amendment on Form S3. Our SEC filings can be found through our company website at investors.prosomnus.com or at the SEC’s website at www.sec.gov. Investors are cautioned not to place undue reliance on such forward-looking statements. Forward-looking statements relate only to the date on which they were made, and the company undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date they were made, except as required by law or applicable regulation. Please note that this conference call is being recorded and will be available for audio replay on our investor website at prosomnus.com on the News and Events section under our Investor Relations page shortly after the conclusion of this call.

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Q&A Session

Today’s press release and supplementary financial data tables have also been posted to our website. And with that, I will now turn the call over to Len Liptak.

Len Liptak: Thank you, Mike. Good afternoon to everyone on today’s call. Before we begin, I would like to thank shareholders for supporting ProSomnus, and I would like to acknowledge team ProSomnus employees around the world, who continue to conduct themselves with the professionalism, acumen, dedication and resiliency that is necessary to educate health care providers on the merits of emerging therapies like ProSomnus. With our strong focus on profitable growth and differentiated devices that continue to demonstrate and scientific studies and clinical practice, efficacious, compliant, non-invasive, economical, patient-preferred and safe OSA therapy for patients, payers and providers, ProSomnus is making meaningful progress towards our mission of being the leading treatment and disease management device for the massive public health crisis that is obstructive sleep apnea or OSA.

Physicians, dental sleep medicine providers, patients and payers alike are increasingly turning to ProSomnus for the treatment of obstructive sleep apnea. Indeed, we believe, based on scientific data, technical merits, scalability, access to care and device demand in the period, ProSomnus is the leading non-CPAP OSA therapy. Highlights for the period that support our positioning as the leading non-CPAP OSA therapy include record revenue results, record revenue levels of $7.8 million for Q4 2023 and $27.7 million for the full-year 2023, eight consecutive quarters of sequential revenue growth, revenue growth that exceeds 35% and 43% for Q4 2023 and the full-year 2023, respectively. These results make ProSomnus what we believe to be one of the fastest-growing publicly listed medical device companies and one of the fastest growing, if not the fastest-growing publicly listed obstructive sleep apnea medical device company based on publicly available information, all while spending hundreds of millions of dollars less than many of our competitors in sales, marketing, business development, and market access.

ProSomnus’ revenue performance can be distilled down to four key drivers. First, product differentiation; second, our EVO line of precision devices establishing an enhanced level of patient care; third, our commercial referral initiative; and fourth, our scientific data. Starting with differentiation of our devices in the market, our devices exhibit differentiation on the technical designs, clinical utility and satisfaction, scientific data supporting efficacy and treatment outcomes, regulatory approvals and coding and reimbursement levels for commercial and government payers. Technical differentiation, our devices are engineered to perform the mechanisms of action of repositioning and stabilizing the mandible to minimize airway collapse more precisely, accurately and consistently than our competition.

Our technical differentiation translates into more consistent efficacy, which is critical for referring physicians. Clinical differentiation, post-market surveillance of over 10,000 cases shows that patients and providers are highly satisfied with their ProSomnus experience and would recommend ProSomnus. Physicians and dental providers who try ProSomnus routinely acknowledged treatment with ProSomnus as good clinical medicine, certainly they did not or could not say about legacy real devices or other sleep medicine therapies. Scientific differentiation. ProSomnus devices have demonstrated consistent median efficacy of 87% across over a dozen papers published in journals or presented at medical conferences. Regulatory differentiation. ProSomnus devices are co-verified as E0486 or K1027, unlike non-custom oral devices, which are coded as E0485 which are not recommended by various medical guidelines.

Reimbursement, unlike non-custom E0485 coated devices, which are not covered by insurance in Medicare, ProSomnus devices are coded E0486 and K1027 and enjoy broad coverage with commercial payers and Medicare. ProSomnus devices have earned a higher reimbursement rate in certain European countries as an acknowledgment of ProSomnus’ technical, clinical and scientific differentiation. Next, our ProSomnus EVO devices continue to be a growth driver. EVO devices comprised 85% of revenue in Q4, representing 111% growth from January to December. Our EVO devices are smaller, more durable, more comfortable, easy to use and to keep clean and are associated with excellent outcomes in clinical studies. ProSomnus EVO is the first sleep device for 100% made from a validated medical-grade Class VI material.

Class VI is the highest standard of material biocompatibility according to U.S. Pharmacopeia. Finally, our third growth driver in the period is our referral initiative. Our referral initiative represents our sales team’s efforts to create referral relationships between qualified dental sleep medicine providers and sleep physicians. Providers linked with sleep physicians for referrals exhibit a 43% increase pre versus post in utilization rates, underscoring the massive opportunity for non-CPAP therapy, which we estimate to encompass 3.6 million people and a $2.2 billion opportunity at average selling prices. Team ProSomnus accomplished these truly remarkable revenue results, while driving an 18% improvement in operating expenses on a percent of revenue basis in Q4 versus Q2.

We view this improvement in operating expenses on a percent revenue basis as a reflection of our focus on profitable growth and the direct managerial interventions to focus on resources — to focus our resources on our most profitable growth initiatives. Turning now to scientific results. The company made tremendous progress with respect to scientific data published and communicated in the period that directly feature ProSomnus devices. Preliminary data readout from the frontline OSA therapy study, a head-to-head study comparing ProSomnus devices with CPAP, presented at the World Sleep Congress in Brazil, reported that frontline treatment with ProSomnus EVO devices demonstrated at least non-inferior effectiveness to CPAP and 2x the mean disease alleviation of CPAP in an intent-to-treat format.

Data from another study involving 58 patients with moderate and severe OSA treated across six hospitals presented at the Interdisciplinary Belgian Dental and Surgical Sleep Meeting Association reported AHI events improved from a mean baseline of 20.5 events per hour to a mean residual AHI of 3.9 events per hour with ProSomnus EVO. 90% of patients were treated to an AHI of less than 15 events per hour, 79% of patients were treated to an AHI of less than 10 events per hour. Another clinical study conducted by the University of the Algarve in Portugal, central hospital involving 22 patients treated with the ProSomnus EVO device, which was also presented at the World Sleep Congress reporting mean AHI improvement from 21 events per hour to four events per hour with the ProSomnus EVO device, mean ODI improvement from 19 events per hour to four events per hour with the ProSomnus EVO.

95% of patients achieved an AHI of less than 10, and sleep time remains steady with the pretreatment mean sleep time of 412 minutes compared with 401 minutes of mean sleep time with the ProSomnus EVO device. Compliance was 100% at three month follow-up. Our product differentiation and scientific efforts are reflected in our recent 510(k) premarket notification to the FDA to expand the labeling for use of our EVO precision devices. We submitted what we believe to be a strong data set demonstrating efficacy well above other approved treatments for severe OSA, including HNS and orthodontic devices with what we believe to be far superior safety. Our revised data set, including 74 patients with severe OSA creates a compelling justification for use in this expanded population of patients.

We are actively working through the FDA process and we’ll provide updates as we progress. Continuous nightly oxygen monitoring is the future of Sleep Medicine. Continuous oxygen monitoring is to sleep apnea what continuous glucose monitoring is to diabetes. Clinical studies have demonstrated that sleep apnea-specific hypoxic burden which is derived from continuous oxygen monitoring is predictive of all cause morbidity and mortality, cardiovascular events, heart failure and overall health risk. To this end, ProSomnus demonstrated technical feasibility of our next-generation RPMO2, remote patient monitoring of oxygen device, data from our recently completed pilot study at the University of Calgary Medical Center validated that an oximeter embedded in a ProSomnus EVO precision oral device can indeed accurately, safely, and continuously monitor SpO2, pulse rate, nightly use time and more.

We expect to complete our full FDA test and apply for FDA clearance later this year. We fully expect the ProSomnus RPMO2 device to enable sleep medicine providers to manage their OSA patients according to psychological or physiologic parameters that are indicative of health risk to improve disease management and reduce the cost of care. Next, I’d like to share a few words about meaningful tailwinds that are helpful to ProSomnus’ mission. Several industry developments represent important immediate tailwinds and our long-term structural opportunities for ProSomnus. CPAP recalls persist, creating immediate opportunities for non-CPAP therapies like ProSomnus. Philips, ResMed and SoClean have been hit with involuntary and voluntary FDA recalls. As you know, Philips Respironics has completely shut down its sleep and respiratory medicine businesses affecting an estimated 5 million people alone.

In addition to CPAP recalls, a recent study published in Lancet titled “CPAP May Promote an Endothelial Inflammatory Milieu in Sleep Apnea After Coronary Revascularization”, concludes that greater CPAP levels increased pro-inflammatory lung effects, reduced cardioprotective effects and may counteract benefits of treating OSA with CPAP. The consensus opinion seems to be, and in our opinion is that the GLP-1s and other pharmaceutical treatments for sleep apnea will be net favorable for noninvasive efficacious treatments such as ProSomnus as these pharmaceuticals deliver more patients into the OSA treatment window for ProSomnus. Lastly, the UnitedHealthcare policy establishes an adequate trial of oral appliances as a prerequisite for hypoglossal nerve stimulation treatment.

Although it remains to be seen how this will be handled in clinical practice, this policy decision legitimizes custom oral appliances like ProSomnus as a safe, effective noninvasive mainstream treatment modality. As we drive our business towards our vision with the profitable growth stance, ProSomnus continues to make progress on strengthening our balance sheet. Brian will expand on our balance sheet strengthening activities in the following section. With that, I’d like to turn the call over to Brian Dow, our Chief Financial Officer for a review of our financials. Brian?

Brian Dow: Great. Thanks, Len, and thanks to all of you for joining the call today. The fourth quarter of 2023 was another record-breaking quarter with revenues totaling $7.8 million, representing an increase of 35% from the fourth quarter of 2022 and an 11% increase sequentially from the third quarter of 2023. For the full-year 2023, revenues totaled $27.7 million, an increase of 43% from $19.4 million for 2022. Total operating expenses for the fourth quarter were $12.8 million, an increase of 14% compared to $11.3 million for the third quarter of 2023 and an 8.5% increase from $11.8 million reported for the fourth quarter of 2022. On a full-year basis, operating expenses totaled $46.8 million, an increase of 51.5% from $30.9 million for the full-year 2022.

Operating expenses have been a focal point of attention over the past nine months. As we discussed after the second quarter of 2023, we began transitioning towards streamlining our organization and striking a more balanced profile between growth and the investments needed to achieve such growth. Since that time, our investments in operating expenses have moderated as both a percentage of revenue and from an aggregate dollar standpoint. Cost of revenue has increased relative to increasing production volumes and has also absorbed the impact of higher facility burden and broader economic pricing pressures. Sales and marketing expenses have contracted the levels reported for the fourth quarter and again, on increasing sales volumes and revenues during the period.

Development investments have been balanced relative to key initiatives. And lastly, G&A expenses have moderated but as a public company, we continue to incur the requisite expenses. In addition, during the fourth quarter, we continued to incur the trailing costs from the 2022 leaseback. Looking a little closer at operating expenses for the fourth quarter. Cost of revenue totaled $4.1 million for the fourth quarter ended December 31, 2023 representing 53% of revenue. This reflects an increase of $0.6 million or 15% and $1.4 million or 54% compared to the quarters ended September 2023 and December 2022 respectively. For the full-year 2023, cost of revenue increased to $13.6 million, representing 49% of revenue, an increase of $4.5 million compared to $9.1 million or 47% of revenue for the year ended December 31, 2022.

The increase was primarily due to product costs associated with higher sales volumes of our devices and increased overhead stemming from our move into our new manufacturing facility during early 2023. Sales and marketing expenses totaled $3.4 million for the fourth quarter ended December 31, 2023. This reflects a modest increase compared to the quarter ended September 2023 and an increase of $1 million or 40% to the quarter ended December 2022. Sales and marketing expenses for the full-year 2023 increased to $13.1 million, an increase of $4.2 million or 48% compared to the year ended December 31, 2022. Although expenses for the current quarter reflect increases relative to prior periods during the second half of 2023, we reduced our sales expense rate from $3.6 million for the second quarter to $3.4 million for the fourth quarter just completed.

This 6% reduction was achieved while driving two additional sequential quarters of top line growth over 13%. General and administrative expenses totaled $4 million for the fourth quarter ended December 31, 2023. This reflects an increase of $0.5 million or 16% compared to the quarter ended September 2023 and a decrease of $1.7 million or 30% compared to the quarter ended December 2022 respectively. For the full-year 2023, general and administrative expenses increased to $15.2 million, an increase of $5.3 million or 54% compared to $9.9 million for the year ended December 31, 2022. Within G&A, certain expenses reflect costs that scale with top line and production growth, such as credit card fees, but those are not the key drivers of incremental expenses versus prior year.

Q4 was another active quarter for us as a public company as we completed filing of our S-1 registration statement and proxy statement and held a special shareholder meeting stemming from our Series A preferred stock financing. In addition, a trailing obligation of the 2022 leaseback was the commitment to make our senior and subordinated indentures tradable through the depository trust company. Any one of these activities would be a solid accomplishment during the quarter. We accomplished all three while also closing the final tranche of our Series A financing and maintaining ongoing operations. To achieve this, we leveraged outside counsel and required the involvement of our current and predecessor audit firms. Our professional fees as a result ran higher than what we expensed during the third quarter of 2023.

With that said, turning back to the second quarter when we began our cost reductions, G&A finished the fourth quarter, 11% lower than the second quarter of 2023. Research and development expenses increased to $1.4 million for the quarter ended December 31, 2023. This reflects an increase of $300,000 or 16% and $300,000 or 28% compared to the quarters ended September 2023 and December 2022, respectively. For the full-year 2023, research and development expenses increased to $4.8 million, an increase of $1.8 million or 61% compared to the year ended December 31, 2022. This increase was primarily driven by an increase in expenses associated with the ongoing development of the RPMO2, the frontline OSA therapy study, FLOSAT and costs associated with preparing the 510(k) premarket notification to the FDA for the severe indication label expansion.

Other income and expense continues to be dominated by accounting fair value charges and noncash debt restructuring charges. Interest expense remains consistent, reflecting the interest expense associated with our senior and subordinate indentures accompanied by equipment financing interest. As our stock price fluctuates, our fair values will also fluctuate accordingly. Turning now to the balance sheet. Cash, restricted cash and cash equivalents totaled $7.1 million compared to $12 million for the third quarter of 2023. During the fourth quarter, we reclassified a $700,000 CD opened earlier in 2023 relating to our headquarters facility lease as restricted cash to reflect the limitations of its use for general purposes. The $4.9 million reduction of cash during the fourth quarter reflects $3.9 million used in ongoing operations accompanied by a $1 million outlay to renew our annual insurance.

This insurance expense will be amortized ratably over the next 12 months. As we’ve discussed on prior calls, we are aware of our capital requirements and the impacts of the current capitalization of the company on value realization. As such, we are reviewing and considering financing and strategic alternatives focusing on our ability to make ProSomnus precision appliances available to patients with OSA and the health professionals overseeing their care. This is a comprehensive process and while we are optimistic based on our current standing and progress made so far, nothing is done until it is formally done. We plan to disclose further developments as required by applicable law or regulation as applicable. Next, we are working closely with NASDAQ to regain minimum listing requirements.

We recently filed an appeal and were granted a hearing with NASDAQ next month, and we remain optimistic of our potential pathways to regain compliance with minimum listing requirements. Turning now to 2024. We are nearing the completion of the first quarter. We are pleased with the traction of our products so far this year, and as we’ve discussed previously, we usually experience seasonality that results in a 15% to 20% Q4 to Q1 decline in volumes and revenues. But that seasonality impact has been tempered so far in 2024 versus historical trends. We look forward to providing the results for the first quarter of 2024 and guidance for the remainder of 2024 on a future call. Again, thank you for joining us today. I look forward to speaking with you again, and I will now turn the call back to Len for closing remarks.

Len Liptak: Thank you, Brian. Thank you, everyone for joining us today. As Mike mentioned at the beginning of the call, we will not be hosting a Q&A session at the conclusion of today’s call. We remain excited about our prospects to further demonstrate our position as the leading non-CPAP therapy for the 1 billion people worldwide with obstructive sleep apnea. We look forward to providing updates as we progress our business forward, pursue our severe label expansion and take important next steps with our RPMO2 device over the coming quarter. Thank you for your continued support.

End of Q&A: Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.