ProSomnus, Inc.

Good day, and thank you for standing by. Welcome to the Prosomnus Q1 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand your conference over to your speaker today, Mike Cavanaugh, Investor Relations. Please go ahead.

Thank you and welcome to Persomnus' first quarter... Thank you and welcome to Persomnus' first quarter investor update call.

On the call with me today... are Len Liptak, Chief Executive Officer, and Brian Dow, Chief Financial Officer. Before we begin, I would like to inform you that comments mentioned in today's call may be deemed to contain forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in our Securities and Exchange Commission filings including our most recent Form 10-K filed on April 14, 2023. Our SEC filings can be found through our website at www.prosomnus.com or at the SEC's website. Investors are cautioned not to place undue reliance on such forward-looking statements. Please note that this conference call will be available for audio replay on our website in the events section under our investor relations page. Today's press release is also available on our website. The format of today's call will consist of providing you with an overview of prosomnus and the highlights of our first quarter results as described in our press release announced earlier today, followed by a question and answer session. And with that, I will turn it over to Len.

Thank you, Mike. Good afternoon. It is an honor to represent Presomnus Sleep Technologies today, including our team members and the growing number of providers who trust Presomnus devices for the treatment of patients with obstructive sleep apnea. In Q1 2023, our first full quarter of being a public company, Presomnus made meaningful commercial, operational, financial, and strategic progress towards realizing our vision of being the leading solution for the treatment and management of obstructive sleep apnea. I am pleased to report record revenues of $5.8 million in Q1 2023, representing 55% growth after the same period last year, an estimated 8% times faster than industry growth. In terms of growth rate, we believe that this result places Persomnus somewhere within the top 5% of publicly traded medical device companies, and that our record revenue growth in the period indicates further validation of our value proposition, growing acceptance of our precision intrarural medical devices, our plans to further accelerate growth, and our ability to efficiently service demand thanks to our digital manufacturing capabilities. One key driver of growth in this period is the performance of our precision intraoral medical devices. Case feedback cards from over 8,800 cases indicated that 98% of patients and 97% of providers were satisfied with their presomnus treatment experience, and 100% would recommend presomnus. Initial quality for our mass individualized precision devices was 98% in Q1 2023, measured by first-time fit, and 96% total quality over our device's three-year useful period. Expansion of our direct sales and scientific marketing capabilities was another key driver of our revenue growth. We added seven direct sales representatives relative to the prior corresponding period from 13 in Q1 2022 to 21 in Q1 2023. We remain on track to achieve our previously disclosed target of 30 to 35 direct sales representatives by the end of the year. The expansion of our direct sales and marketing capabilities translated into a 34% increase in utilization rate per active center. The increase in utilization rate is a function of our direct sales teams collaborating with centers to increase referral relationships from sleep physicians, combined with sleep physicians growing acceptance of Prosomnus' precision oral appliance therapy as an alternative to CPAP and hypoglossal nerve stimulation. Operations had a particularly strong Q1 2023. Of strategic importance, our team successfully relocated manufacturing to our new state-of-the-art facility, quintupling our capacity potential in preparation for future growth. During the period, while completing our relocation, the team sustained gross margins in line with Q4 2022 and maintained our best-in-class service levels. The average production time for our mass individualized precision devices was under seven days in Q1 2023. This type of service enables PROSOMNAS to help therapy providers get patients into treatment faster at a time when patients are reporting significant delays and lead times of over three months for getting alternative therapies such as CPAPs. 99.6% of our devices were delivered on time and in full in Q1 2023, according to our internal metrics. And over 99% of our devices were delivered on time and in full according to customer feedback cards. This level of consistent, predictable service enables therapy providers to operate their centers more efficiently and provide a better, more convenient experience for their patients. Prosomnus made important strategic headway in Q1 2023. Several scientific abstracts featuring Prosomnus devices were accepted for presentation and publication at leading medical conferences. These abstracts will report on the efficacy, effectiveness, compliance rates, and safety profiles for treatment associated with PROSOMUS devices. Importantly, preliminary results from the FLOSAT study, which stands for Frontline OSA Treatment, is scheduled for the prestigious American Thoracic Society meeting in May. The FLOSAT study is a prospective head-to-head crossover trial comparing the effectiveness and patient preference for precision oral appliance therapy with presomnus devices versus CPAP for patients with moderate to severe OSA. The FLOSAT study is now fully enrolled. We are also pleased to share first enrollment in the SOS study, the severe OSA study. The SOS study is a prospective single arm multi-center trial that is designed to evaluate the safety and efficacy of presomnus precision devices for the treatment of patients with severe OSA. Severe OSA represents approximately 30% of patients with OSA. PROSOMUS intends to use data from the SOS study to apply for an expanded indication for use with the FDA. If successful, the PROSOMUS EVO would be the first internal medical device cleared for the treatment of patients with severe OSA. We expect initial data readout from SOS in the first half of 2024. I'd like to turn now to our new product development efforts and other key growth initiatives, We continue to advance our next-generation precision-controlled device with an embedded remote patient monitoring capability, which will measure oxygen levels, ODI, heart rate, and sleep quality, and provide data via a cloud-based system directly to a provider portal and a patient's smartphone app. This unique functionality will provide physicians with valuable new tools to help manage their patients' OSA, and we believe has the ability to fundamentally change how OSA is treated and managed and the associated business models for both personas and providers. We remain on track to introduce this commercially in late 2023. With that, I will wrap up my prepared remarks and will hand the call over to Brian to discuss the financials. Brian?

Thanks, Len, and good afternoon, everyone. As Len mentioned a few moments ago, the first quarter of 2023 was another strong top-line quarter with revenues totaling $5.8 million. representing an increase of 55% from the first quarter of last year. On a sequential quarter basis, the fourth quarter is historically the strongest seasonal quarter and results in sequential quarter over quarter softness of 15 to 20% in results for the subsequent first quarter. However, this year, Our strong revenue performance of the fourth quarter 2022 continued during the first quarter 2023 as revenues of $5.8 million were reported for both periods, with a slight uptick from Q4 of 2022 hidden in the rounding. We ended the quarter with gross margin of 53% compared to 58% for the same period a year ago, with modest period fluctuations being largely driven by the strategic new manufacturing facility and the prioritization of service levels and quality. We expect these period fluctuations will mitigate going forward with scale of additional volume. Operating expenses for the quarter were $7.2 million, representing a 79% increase compared to $4 million in the same period in 2022, but down 1.6 million or 18% sequentially compared to the fourth quarter of 2022. Sales and marketing expenses increased by $700,000, or 33%, for the three-month period ended March 31, 2023, compared to the same period last year, and an increase of $400,000, or 17%, sequentially, compared to the fourth quarter of 2022. The increases noted reflect the strong top-line results and are driven largely by personnel expenses as we implemented planned expansion of the sales team and the timing of in-person events. Research and development expenses increased by roughly half a million dollars to 1 million dollars for the quarter ended March 31st, 2023 compared to the 3 months ended March 31, 2022 and down modestly when reviewed sequentially compared to the 4th quarter of 2022. R&D expenses and the year-over-year increases noted reflect the investments we are making in two key areas. First, the development of our digitally-enabled remote patient monitoring device and ancillary support infrastructure in preparation for a late 2023 introduction. And second, the clinical work being done to expand the labeling for our devices in the case of our SOS study and to further enhance our commercial positioning through the execution of our FLOSAT head-to-head comparison study. General and administrative expenses increased by $2 million for the quarter ended March 31st, 2023, compared to the same quarter in the prior year, and decreased $1.9 million sequentially compared to the fourth quarter of 2022. The first quarter of 2023 reflects our first full quarter operating as a public company. This comes with additional operational costs that are typical for compliance, professional services, and personnel-related expenses. The 1st quarter was also burdened with some lingering expenses stemming from the December merger combined with the 1st quarter being compliance heavy from a reporting standpoint. We expect our expense to mitigate modestly going forward. Total other expense increased by 1.6M dollars to an expense of 2.7M dollars for the 3 months ended March 31, 2023 from an expense of 1.1M dollars for the same period last year. This increase was primarily driven by an increase in accounting fair value of our debt and merger-related liabilities. At March 31, 2023, we had cash and cash equivalents of $11.6 million available to fund our ongoing business activities. We believe that our cash can be sufficient to fund our projected operating requirements for at least 12 months. Taking a look forward towards the remainder of 2023 and consideration of our the ongoing planned investments we have been and continue to be making in our commercial organization, we continue to expect strong top-line year-over-year growth for 2023. The first several months have demonstrated the strength and we expect strong results going forward. To that end, the guidance we provided six weeks ago remains relevant and now supported by our first quarter results as we expect year-over-year top-line revenue growth of 35% landing 2023 revenue just over $26 million. Thank you to all of you for making time to join today's call and your ongoing support of Prosominus as we continue to afford personalized treatment solutions to millions of patients managing OSA.

I will now turn the call back to Lynn for closing remarks. Thank you, Brian.

The fund has made tremendous progress since June 1, 2023, before establishing our precision devices as the leading solution to the treatment and management of the almost 1 billion people worldwide who suffer from sleep apnea. This progress was underscored by record demand, 55% revenue growth over prior, and meaningful operational financial and strategic progress. I'd like to conclude my remarks by thanking each of you for supporting the fund. Thank you for joining us today. Operator, you now open the call for Q&A.

Certainly. As a reminder, to ask a question, please press star 1-1 on your telephone. Wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And one moment for our first question. And our first question will come from Alex Nowak of Craighalen. Your line is open.

Hey, Lynn and Brian. It's Chase on for Alex. Congrats on the quarter here. It's a good first quarter result. I guess kind of digging in, you know, results were kind of right in line with our expectations. You know, maybe some extra color on kind of what you're hearing from the field from especially those new reps you've added in the U.S. so far in Q1 and in Q2 here. And then maybe, you know, in Europe as well, you know, relative to what you had there, you've really expanded your footprint. Some kind of specific color in Europe would be helpful as well, just to get a sense of what's happening in the field.

Yes, certainly. Thanks for the question. In the U.S., what we're really hearing is that sleep physicians are open to exploring alternative therapies in a way that they haven't been for quite some time. Some of that is due to the data that we're providing, and the outcomes that are associated with how patients are being treated with our devices. And then also some of that is also potentially effects of some CPAP recalls that are going on and shaping their expectations for these alternative therapies. I think that our sales team is finding that they're having success with sleep physicians and encouraging sleep physicians to refer patients, particularly those who refuse or fail CPAP, referring those patients to our dental therapy providers in the local area. That model seems to be working very well and is off to a very encouraging start. For Europe, we are expanding Europe, largely focusing on high-value countries with attractive treatment guidelines that are favorable to rural client therapy, as well as countries that have reimbursements in place. and we're building our sales team strategically in those markets, and that's going quite well. For Europe, Europe is in a little bit different stage of development where in the United States, we, for the last several years, established a really strong relationship with dental therapy providers, dental medicine therapy providers, and now we can start to drive referrals to those dental medicine therapy providers. In Europe, it's a little different in that we're establishing performance with those dental and medicine therapy providers. So it's a slightly different stage of development in terms of our brand establishing our value proposition, but it's going quite well over in Europe in terms of convincing them to consider switching to our products, to our devices, because largely we have a lot more data. And now when we approach therapy providers in Europe, and we did when we started to establish our business, in North America.

Got it. And maybe digging in a little bit, you kind of talked about those CPAP failures. They're starting to really flow through to your sleep dentist. You also mentioned those utilization rates increasing 35%, I believe is what you said, from those existing customers. Is that from kind of that pull-through of those filled patients that you're really driving into your ecosystem? Or is that kind of a shift change in how your existing customers are thinking about your solution?

It's largely the former in that our sales team work very closely with the local dental and medicine therapy providers. They reach out to local state physicians and I think the main difference is that we may have a large and focused effort to by providing them with data and registries and testimonials that describe what our therapy can do for patients who refuse or fail CPAP. And I think that they just need to find that approach compelling and are more willing to refer those patients to, you know, some therapy providers in the area. That's going to have a lot to do with that. But I think it also is fair to say that they're likely more open to this approach because of the macro dynamics of this, you know, the C-PAP recall, as well as a lot of the marketing that's applied across the ground. It's a great way to create a favorable macro environment to get patients to open up and consider alternative therapies.

Got it. And then kind of following back up on that recently announced data that you guys had put out on that retrospective study against legacy OAT devices. Is that something you've been able to kind of share with prospective new customers yet? Any feedback there? Because that seems like, you know, that could potentially really shift kind of people's thinking around you related to those legacy appliances.

Yes, it's really powerful.

It's efficient because, as you may know, after a long experience,

therapy, and it is a barrier that we have to overcome. And when we speak with them, it's important to be able to demonstrate that our devices are different and that the different features and technologies of our devices are associated with better outcomes. And the abstracts, like the one you referenced, and others certainly have data that demonstrate that our unique technologies are associated with better outcomes, which is generally enough to get them to try referring some patients over to their therapy providers to treat them.

And then maybe just last for Brian, a housekeeping item. I didn't see average share count ending March in the press release. Is that something you could provide us just from a modeling perspective?

Yes. Average share count was 15,041,464.

Great. Thanks, guys.

Thank you. I'm going to have to.

And one moment for our next question. And our next question will come from Scott Henry of Roth Capital.

Your line is open, Scott.

Thank you, and good afternoon. I don't know if you mentioned, but you had mentioned in the past the number of units in the quarter. Did you give that for first quarter?

No, we have not given that number, Scott.

Would you like to, or is it a number you're not going to give anymore?

No, we're not giving that number right now, nor are we going to be giving guidance on the actual volumes. We're going to stick to giving the guidance on the revenue front at this point.

Okay, great. Would you say that pricing was stable in the quarter?

Yes, ASPs remained stable during the quarter and comparable to what we saw in the fourth quarter.

Okay, great. And I did hear you confirm 2023 guidance of 35% or more in revenues. Any thoughts on Q2, how we should think about that? Or are you staying with the annual?

No, we're going to stay with the annual guidance we've given. We are with the 35% guidance we've given for the year. we're comfortable saying that we're going to have a strong second quarter. Obviously, if you hit those nice and strong breaks, we're going to have strong quarters for the rest of the year.

Okay, great. And G&A in the quarter, I mean, we're in the early days of it being a public company. Would you say first quarter G&A was representative of what we should expect the rest of the year?

I'd like to think it was a little bit heavy, Scott, simply from the standpoint that we had some trailing expenses that we had to square away from the transactions in the fourth quarter. And then, obviously, first quarter or two of public company life requires a little bit of transitionary work that's going to come in. So I would expect it to mitigate modestly as we look towards the rest of the year.

Okay, great. Just a couple more questions. Thank you for taking them all. With regards to the next generation product with the monitor inside, I believe you said introduction late 2023. What are the risks to that timing? How could it change and what do we think about as the key variables?

There are always risks to scaling up new technologies and there are always regulatory risks. We commercialize new technologies. Those are probably the two major risks that we face. The team is doing an excellent job of mitigating risks and developing the product in accordance with our product development process. And we feel comfortable and confident in the progress that we've made in the time that we've put forth.

Okay, great. And, you know, one of the... With a company that's growing really fast and is still investing for growth, one of the metrics that I think can be interesting is customer acquisition cost. Where is it relative to margins and how is it trending? Any comments on that metric of customer acquisition cost? I imagine when you add a sales rep, initially it goes up, but then it trims down, although it's a mix of all of them. Just You know, any comments in general?

You know, you're right on, Scott. When we bring in new sales reps, it does take a brief period of time to get them up and running, and same with the development of the territories that we're putting them into. What we're seeing from our side is that we're having good traction with our new reps that are coming in. They're getting up to speed, and the territories that we're putting them in are developing nicely and in line with expectations. So, yes, that is something that we keep an eye on. And to your point about making the investments for growth, we are making those investments, but we're trying to be prudent to make sure that we're timing it correctly in order to be both capital efficient and get the correct return on the investments we're making in the commercial organization. But, yes, that is something that we monitor, and so far the way we're seeing it, it's on track and moving in the direction we wanted it to.

Okay. And I guess for my final question, I'll just – reflect on a conversation I had with someone this past weekend, which is always an interesting start to a question. I was talking to someone, and they're a CPAP user, and they don't like the device, but they still use it. I asked them, how often do you use it? 50% of the time, and we know based on the data you show that you're better off using an appliance and CPAP at 50%. But this patient or this person will probably continue to go on CPAP. I didn't get positive feelings from his wife about how well it was working either. So the question is, how do you confront this and try to get your product as first line? I mean, as opposed to CPAP failures, why not just start out with it? If the patients aren't complying as well, and you have the data to show that, Just how do you think about that in changing that practice?

Great question, Scott. We think of it in a dynamic way. We normally approach sleep physicians and talk about their failures and work seasons and see if we can treat those patients. And then once we have success with our dental therapy providers in treating those patients, then we can use those experiences as an argument to justify the transitioning more patients to frontline therapy. So it's an evolutionary process, and that's absolutely part of our long-term thinking here, is to make it our new frontline therapy. We think that the preliminary data that we have certainly supports that type of strategy, and we'll continue to strengthen the data that we have. We do think that's a very viable approach, particularly for mild and moderate patients, where we've demonstrated excellent excellent adherence, relatively few adverse events and side effects compared to other treatment options, and a lower cost to serve the patient, not to mention faster times of getting the patient into therapy in comparison to some of the lag times we're seeing with CPAP and other surgical procedures. So we think for all of those reasons, we do have a viable claim for frontline therapy, but we want to do it appropriately and we want to do it systemically.

Okay, great. Thanks for the call, Lynn, and thank you for taking the questions.

Thanks, Scott.

Thanks, Scott. And that's all the time allotted for questions. I would now like to turn the call back over to Lynn. Great.

Well, thank you very much for joining us today. We really appreciate that. That concludes our call for today.

This concludes today's conference call. Thank you for participating. You may now disconnect.