Core Viewpoint - ProSomnus, Inc. is positioned to support patients with Obstructive Sleep Apnea (OSA) following the discontinuation of many OSA devices by Philips Respironics, which has affected approximately 4 million patients [1][2] Group 1: Company Positioning - ProSomnus offers precision intraoral devices that have shown excellent efficacy, adherence, and patient preference in clinical studies, including comparisons with CPAP devices [2] - The company connects sleep physicians with local providers who accept medical insurance and Medicare, ensuring high patient satisfaction [2] - ProSomnus is prepared to facilitate access to healthcare for millions of untreated OSA patients, emphasizing the safety and effectiveness of its devices based on scientific data from numerous studies [2] Group 2: Industry Implications - The exit of Philips Respironics from the U.S. sleep business creates a significant gap in the market, necessitating collaboration between healthcare providers and Dental Sleep Medicine (DSM) specialists to offer alternative treatment options [2][3] - Oral Appliance Therapy (OAT) is highlighted as a highly effective, non-invasive alternative to traditional CPAP therapy, particularly for patients with less severe OSA [2][3] - The discontinuation of CPAP devices is expected to lead to supply chain issues, affecting patient access to care, which ProSomnus aims to address with its precision appliances [2][3] Group 3: Market Context - OSA affects over 1 billion people globally and is associated with serious comorbidities such as heart failure, stroke, and type 2 diabetes [3] - ProSomnus devices are FDA-cleared, patented, and covered by various medical insurance plans, representing over 200 million covered lives [3][4]

Financial Performance - Revenue for Q3 2023 was $7.1 million, a 42% increase from $5.0 million in Q3 2022, while the net loss widened to $11.2 million from $3.5 million[144]. - For the nine months ended September 30, 2023, revenue reached $19.8 million, up 45% from $13.6 million in the same period of 2022, with a net loss of $17.2 million compared to $9.4 million[144]. - Revenue for the three months ended September 30, 2023, was $7.1 million, a 41.5% increase from $5.0 million in the same period in 2022[159]. - Revenue for the nine months ended September 30, 2023, was $19.8 million, a 45.7% increase from $13.6 million in the same period in 2022[165]. - Net loss for the three months ended September 30, 2023, was $11.2 million, a 216.7% increase from a net loss of $3.5 million in the same period in 2022[161]. - Total operating expenses for the nine months ended September 30, 2023, were $24.4 million, a 93.9% increase from $12.6 million in the same period in 2022[164]. Cash Flow and Financial Position - Cash and cash equivalents were $12.0 million at September 30, 2023, which may not be sufficient for continued operations for at least one year[170]. - The company expects to continue incurring operating losses and negative cash flows from operations for the foreseeable future[168]. - For the nine months ended September 30, 2023, net cash used in operating activities was $10.3 million, an increase from $4.8 million in the same period last year, primarily due to higher operating expenses[174]. - Net cash used in investing activities for the same period was $1.9 million, up from $0.3 million, entirely related to purchases of property and equipment[175]. - Net cash provided by financing activities amounted to $8.3 million, compared to $5.8 million in the prior period, driven by a Financing Transaction that generated cash proceeds of $9.5 million[176]. - As of September 30, 2023, total recorded contractual obligations were $48.7 million, with senior and subordinated convertible notes accounting for $35.9 million[177]. - Cash and cash equivalents as of September 30, 2023, totaled $12.0 million, with no material exposure to changes in fair value due to interest rate fluctuations[184]. Expenses and Cost Management - Sales and marketing expenses increased by $0.9 million, or 39.7%, for the three months ended September 30, 2023, primarily due to personnel expenses and travel[160]. - Research and development expenses rose by $0.4 million, or 51.1%, for the three months ended September 30, 2023, driven by increased headcount-related costs[162]. - General and administrative expenses increased by $1.8 million, or 117.3%, for the three months ended September 30, 2023, mainly due to professional services and legal fees[162]. - The company maintains a focus on research and development, expecting to increase expenses as new products and services are developed[156]. Strategic Initiatives - ProSomnus aims to expand its North American direct sales organization and enter international markets, focusing on dentists and physicians in sleep medicine[151]. - The company plans to extend its product line to capture a larger share of treatments for OSA and related conditions, utilizing its unique manufacturing platform[152]. - ProSomnus received FDA clearance for an intraoral device enabling remote patient monitoring services, which could create a recurring revenue stream[153]. Market and Reimbursement - The reimbursement rates for intraoral appliance therapy range from $2,000 to $3,500 per patient from private insurance and $1,250 to $1,800 from Medicare[143]. Debt and Interest Rates - The Subordinated Convertible Notes bear a variable interest rate at Prime Rate plus an additional 9% per annum, leading to increased interest expenses as rates rise[186]. - As of September 30, 2023, the accumulated deficit stood at $228.0 million[144]. - The company has no off-balance sheet arrangements that could materially affect its financial condition or results of operations as of September 30, 2023[177]. Inflation Impact - Inflation has increased costs related to labor and research and development, but it has not materially affected the company's results of operations[187].

Financial Performance - Revenue for Q2 2023 was $6.9 million, a 43% increase from $4.9 million in Q2 2022, driven by increased unit volume and sales and marketing investments [124]. - Net income for Q2 2023 was $0.9 million, compared to a net loss of $2.8 million in Q2 2022 [112]. - Revenue for the three months ended June 30, 2023, was $6,933,910, representing a 42.7% increase from $4,859,909 in the same period of 2022 [126]. - For the six months ended June 30, 2023, revenues increased by $4,139,238, or 48.1%, to $12,742,290, driven by increased unit volume and sales and marketing investments [129]. - The company reported a net loss of $5,987,241 for the six months ended June 30, 2023, compared to a loss of $5,804,378 in the same period of 2022 [131]. Gross Margin and Profitability - Gross margin for Q2 2023 was 54%, up from 52% in the same period last year [125]. - Gross profit for the three months ended June 30, 2023, was $3,763,116, with a gross margin of 54%, compared to a gross profit of $2,538,217 and a margin of 52% in the prior year [126]. - The gross margin for the six months ended June 30, 2023, was 53%, down from 55% in the same period of 2022, attributed to increased overhead costs from a new manufacturing facility [130]. Operating Expenses - Sales and marketing expenses increased by $1.6 million, or 80.9%, in Q2 2023 compared to Q2 2022, primarily due to personnel expenses and travel [125]. - Operating expenses increased significantly, with sales and marketing expenses rising by 80.9% to $3,642,718 and general and administrative expenses increasing by 247.5% to $4,480,124 [126]. - Total operating expenses for the six months ended June 30, 2023, were $16,694,902, an increase of 108.7% from $8,000,680 in the prior year [131]. Cash and Financing - Cash and cash equivalents were $6.2 million as of June 30, 2023, which the company believes is insufficient to continue operations for at least one year [135]. - The company expects to finance future cash needs through private or public equity offerings or debt financings, with no assurance of obtaining adequate funds [137]. - The company anticipates continued reliance on external financing, likely through preferred equity securities, common stock offerings, or incurring debt [145]. - As of June 30, 2023, total recorded contractual obligations amounted to $43,997,827, including $16,959,807 in senior convertible notes and $17,453,141 in subordinated convertible notes [147]. - As of August 1, 2023, the company maintained a minimum cash balance of $4.5 million, in compliance with its financial covenants [144]. Business Operations and Market Position - Over 200,000 ProSomnus precision devices have been prescribed to patients since market introduction [107]. - The company plans to expand its direct sales organization in North America and initiate marketing in several European countries [115]. - FDA clearance was received for an intraoral device enabling remote patient monitoring services, expected to create a recurring revenue stream [118]. - ProSomnus therapy is covered by approximately 70% private insurance, 25% Medicare, and 5% out-of-pocket payments [111]. - The company moved to a new manufacturing facility in 2023, quadrupling its previous capacity [125]. Other Financial Information - Total other income for the three months ended June 30, 2023, was $6,640,692, a change of $8,030,660 from an expense of $1,389,968 in the prior year [128]. - Cash and cash equivalents as of June 30, 2023, totaled $6.2 million, with no material exposure to interest rate changes [155]. - Inflation has not had a material effect on the company's results of operations for the periods presented [156]. - The accumulated deficit as of June 30, 2023, was $216.8 million [112].

Revenue Performance - Revenue for the three months ended March 31, 2023, increased by $2 million, or 55.2%, compared to the same period in 2022, driven by increased unit volume and sales and marketing investments [119]. - The company generated revenue of $5.8 million with a net loss of $6.9 million for the three months ended March 31, 2023, compared to revenue of $3.7 million and a net loss of $3.0 million for the same period in 2022 [107]. - Revenue for the three months ended March 31, 2023, was $5,808,380, an increase of $2,065,237 or 55.2% compared to the same period in 2022 [121]. - Revenue from the company's largest customer was 5.6% for the three months ended March 31, 2023, compared to 5.8% for the same period in 2022 [119]. Cost and Margin Analysis - Gross margin decreased to 52.5% for the three months ended March 31, 2023, down from 57% in the same period of 2022, primarily due to increased costs of materials and repairs [120]. - Total cost of revenue increased by $1.2 million, or 74.6%, for the three months ended March 31, 2023, compared to the same period in 2022, due to higher sales volume and material costs [119]. - Gross profit for the same period was $3,051,748, reflecting a gross margin of 52.5%, down from 57.8% in the prior year [121]. Expenses and Losses - Research and development expenses rose to $1,018,969, an increase of $461,336 or 82.7% year-over-year, driven by increased headcount [122]. - General and administrative expenses increased by $2,000,272 or 147.7%, totaling $3,353,007, primarily due to personnel costs and new facility expenses [123]. - Total other expenses increased by $1,631,303 or 146.1%, reaching $2,747,896, largely due to changes in the fair value of debt and warrant liabilities [124]. - Net loss for the three months ended March 31, 2023, was $6,892,171, an increase of $3,911,438 or 131.2% compared to the same period in 2022 [121]. Financial Position - The accumulated deficit as of March 31, 2023, was $217.7 million [107]. - Cash and cash equivalents as of March 31, 2023, were $11,600,000, expected to fund operations for at least 12 months [125]. - Net cash used in operating activities was $3,092,304 for the three months ended March 31, 2023, compared to $1,462,835 in the prior year [128]. Future Outlook - The company anticipates continuing to incur significant expenses and increasing operating losses for the next several years [126]. - Future cash needs may be financed through private or public equity offerings or debt financings, with potential dilution for existing shareholders [126]. - The company plans to expand its North American direct sales organization and enter several European markets to increase case volume and market presence [110]. - FDA clearance was received for an intraoral device enabling remote patient monitoring services, which could create a recurring revenue stream [113]. Market Adoption - The company has prescribed over 150,000 ProSomnus precision devices to date, indicating strong market adoption [102]. - The average reimbursement for intraoral appliance therapy ranges from approximately $2,000 to $3,500 per patient by private insurance and $1,250 to $1,800 by Medicare [106].

Market Opportunity - The estimated cost of undiagnosed obstructive sleep apnea (OSA) was $149.6 billion in 2015, with approximately 80% of OSA patients undiagnosed[17]. - Approximately 1 billion people worldwide suffer from OSA, with 74 million in North America, indicating a large and growing market opportunity[36]. - The failed CPAP opportunity is growing by 700,000 people in the U.S. each year, representing a significant market opportunity for ProSomnus[19]. - Approximately 74 million adults in North America have obstructive sleep apnea, with 18 million diagnosed, indicating a significant market opportunity[74]. - An estimated 7 million people in the U.S. with obstructive sleep apnea have stopped using CPAP, representing a $4 billion immediate opportunity for ProSomnus[74]. Product Efficacy and Patient Satisfaction - ProSomnus devices have demonstrated efficacy on par with CPAP for mild to moderate OSA patients, with 94% of patients successfully treated in the NOTUS3 clinical trial[27]. - ProSomnus devices have shown high patient satisfaction, with 100% of patients preferring them over CPAP and legacy dental products in a study[23]. - Clinical studies support a 98% success rate for ProSomnus devices in mild to moderate obstructive sleep apnea patients[77]. - ProSomnus precision devices demonstrated a weighted average success rate of 93% in treating mild to moderate OSA across five studies with 326 unique patients[80]. - A study indicated that 88.1% of patients with all severities of OSA were successfully treated, highlighting significant cost savings over alternative treatments like CPAP[83]. Financial Performance - Revenue for the year ended December 31, 2022, was $19.4 million, a 37.5% increase from $14.1 million in 2021, with a gross margin of 52.9%[33]. - Total revenue for 2022 was $19,393,343, representing a 37.5% increase from $14,074,649 in 2021[431]. - Gross profit for 2022 was $10,266,005, up from $7,310,330 in 2021, indicating a significant improvement in profitability[431]. - Total operating expenses increased to $21,741,498 in 2022, compared to $12,132,868 in 2021, reflecting a rise of 79.3%[431]. - Net loss from operations for 2022 was $(11,475,493), compared to $(4,822,538) in 2021, showing a worsening of 138.5%[431]. Manufacturing and Innovation - ProSomnus has developed a proprietary manufacturing platform that allows for scalable, mass-customized production of its medical devices[40]. - The typical manufacturing time for a ProSomnus intraoral device is seven production days, compared to several weeks for legacy dental products[70]. - The proprietary digital precision manufacturing platform allows for faster production and increased personalization of intraoral medical devices at lower costs compared to competitors[103]. - ProSomnus is developing a novel product to continuously monitor patients' physiological responses, addressing an important unmet need in disease management[21]. Regulatory Compliance - The company is subject to various regulations and product registration requirements in foreign countries, impacting design, development, manufacturing, and testing processes[145]. - The FDA requires clinical trials to support a PMA application, which must comply with investigational device exemption (IDE) regulations[126]. - The new Medical Devices Regulation (MDR) aims to establish a uniform regulatory framework across the EEA and enhance device safety and health standards[143]. - The company must comply with the Health Insurance Portability and Accountability Act (HIPAA) and the California Consumer Privacy Act (CCPA), which impose strict data privacy and security obligations[157]. Sales and Marketing Strategy - ProSomnus is expanding its direct sales organization in North America to increase case volume from therapy providers and physicians[41]. - The company plans to expand marketing and sales of ProSomnus devices into several European countries and further international markets[90]. - The company currently has 16 direct sales representatives and projects to increase this number to 80, which is a key growth driver for revenue[92]. Research and Development - Research and development expenses for ProSomnus were $3.0 million in 2022, up from $1.9 million in 2021, indicating a focus on technology innovation[106]. - The company is currently engaged with the FDA to determine the safety and efficacy of its devices for the treatment of severe OSA, with plans to apply for 510(k) clearance upon completion of clinical studies[119]. Compliance and Legal Risks - Violations of federal and state healthcare laws can result in significant penalties, including civil, criminal, and administrative penalties, as well as reputational harm and diminished profits[156]. - The federal Anti-Kickback Statute prohibits offering or receiving remuneration to induce purchases under federal healthcare programs, with broad interpretations of "remuneration" including stock and ownership interests[147]. Employee and Operational Insights - The company has 125 employees in North America and 4 in Europe, with no employees represented by a trade or labor union[179]. - The company experienced seasonality in revenues, with stronger performance in the fourth quarter compared to the first quarter[178].