Prosomnus Inc (OSA) 2023 Q3 法說會逐字稿

Good day and thank you for standing by. Welcome to the ProSomnus this third quarter 2023 earnings conference call. I'm Josh, and at this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question-and-answer session. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Michael Cavanaugh from ProSomnus, Investor Relations.

Thank you, and good afternoon. I'd like to thank everyone for joining us today. Earlier today for ProSomnus Incorporated issued a press release announcing our financial results for the quarter ended September 30, 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, Co-Founder and Chief Executive Officer, and Brian Dow, Chief Financial Officer. As with our last call, Len will begin the call by discussing the quarter's business and operational highlights. Brian will then provide a review of the financial results, and we will close the call with a question-and-answer session.

Before we begin, I would like to inform you that comments mentioned on 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 S-1 filed on February 10, 2023. Our SEC filings can be found through our company website at investors.prosomnus.com or at the SEC's website.

Investors are cautioned not to place undue reliance on such forward-looking statements and ProSomnus undertakes no obligation to publicly update or release any revisions to these forward-looking statements. Please note that this conference call is being recorded and will be available for audio replay on our website on the news and events section under our Investor Relations page shortly after the conclusion of this call. Today's press release and supplementary financial data tables have been posted to our website. And with that, I will turn the call over to Len.

Thank you for the kind introduction, Mike. On behalf of team ProSomnus, I am honored to report record results for ProSomnus in Q3 2023. There are four items that I would like to highlight in my opening remarks, but the overarching theme is that non-CPAP OSA therapy is one of the most compelling opportunities in MedTech and ProSomnus is well positioned as the leading non-CPAP OSA therapy. There's a lot of speculation about GLP-1 and noise generated by millions of dollars spent in marketing, creating the impression that OSA can be cured with a pill or a click of a button. Despite all this, what physicians are actually doing is increasingly turning to ProSomnus for non-CPAP therapy. You'll see that in our revenue results and our scientific data.

The first item I would like to highlight is record trailing 12-month revenue levels of $25.6 million, including $7.1 million of revenue for Q3 2023, and uncommon revenue growth of 46% year-to-date versus prior year-to-date. The second item is new and updated scientific data that further demonstrates the effectiveness of ProSomnus devices and supports ProSomnus as the leading non-CPAP OSA therapy. The third item is our recently closed $10 million in financing, which strengthens our balance sheet and gives us runway to execute our breakeven plan. The fourth but arguably most important item is cash flow breakeven. Our acute managerial attention to cash flow breakeven is underscored by our 19% improvement in operating expenses in Q3 versus Q2 as a result of immediate managerial interventions and adjustments.

A few comments about revenue. ProSomnus generated s record revenue $7.1 million in Q3 2023 and $25.6 million on a trailing 12-month basis, representing 42% growth in Q3 2023 over Q3 2022. The company has generated $19.8 million in revenue year-to-date, representing 46% growth over prior year. Q3 2023 marks seven consecutive quarters of sequential growth for ProSomnus. To underscore the ProSomnus growth story, ProSomnus has generated a 98% six-year company annual growth rate in Q3, while overcoming a cornucopia of adversity. COVID lockdowns, social justice protests, presidential cycles, two wars, publicly listing in the company's supply chain disruptions, inflation, increasing interest rates, competitive price drops, challenging capital markets, ProSomnus has persevered and arguably thrived despite these poor macroeconomic environments.

The takeaway, there is a strong, consistent demand for non-CPAP OSA therapy and ProSomnus is increasingly the leading choice. In North America, more patients have been treated with ProSomnus devices in Q3 2023 than any other non-CPAP therapy. This leads to our decision to update our company positioning statement from patient preferred OSA therapy to the leading non-CPAP OSA therapy. We believe this positioning is appropriate and defensible with respect to the number of patients treated. Our leadership posture with respect to advocacy, research and development, education, operational excellence, and scientific data in addition to ProSomnus being non-invasive therapy. There are two main drivers of revenue growth for Q3 2023. The first was our referral initiative. The second was a growing acceptance of ProSomnus EVO, our highly personalized, precision intraoral medical device.

Our referral initiative is an effort by our sales and marketing teams to navigate patients who fail or refused CPAP or prefer non-CPAP therapy from their sleep physicians to qualified experienced providers, making it easier for health care providers to personalize therapy for the needs, conditions, and preferences of each and every patient with OSA. The immediate opportunity for routing CPAP failures to refusal patients to ProSomnus is arguably one of the most attractive and important opportunities in medical technology. There are an estimated 3 million to 5 million patients who have failed and refused CPAP. who are likely candidates for ProSomnus therapy. The Philips CPAP Recall impacted an estimated 4 million people alone.

Our 15 sales representatives in North America engaged 112 sleep physicians to refer patients to 51 ProSomnus providers in Q3. Those 51 providers generated a 61% increase in utilization in Q3 2023 versus prior Q3 a 5.2 x higher utilization rate than ProSomnus providers who are not yet linked to sleep physicians. The potential for our referral initiative is compelling, and our team is just getting started with the implementation of our referral initiative. Another growth catalyst is our flagship device, the ProSomnus EVO. ProSomnus EVO prescriptions more than doubled in Q3 versus prior, posting 107.5% increase in Q3 versus Q3 2022. ProSomnus EVO is our flagship product. What differentiates ProSomnus EVO? First and foremost, ProSomnus EVO is engineered to better perform the three critical mechanisms of action for mitigating airway collapse. The first is jaw repositioning. The second is jaw stabilization. The third is jaw titration.

ProSomnus EVO has been measured before these mechanisms of action with 47% better precision than traditional oral devices. Post-market surveillance from 10,562 procedures revealed 99% patient satisfaction, 98% overall satisfaction, and 100% of providers reported that they would recommend ProSomnus to a colleague. Why? Bench testing quantifies that ProSomnus Evo is relative to predicates, 60% smaller volume in the mouth, 8% tougher and more durable, 82% more space for the tongue to stay forward to prevent airway collapse, and 67% better airway space for lip and mouth closure. And the only device to the best of our knowledge in sleep medicine made exclusively from certified medical-grade Class VI material per US Pharmacopeia standards.

In a provider patient preference study involving 39 dental sleep medicine providers, the main preference for EVO relative to their predicate devices was 4.5 out of 5, with 5 being significant preference. New and updated scientific data further establishes ProSomnus EVO as an efficacious, predictable treatment option for patients with OSA. Updated data from the frontline OSA treatment study known as FLOSAT was presented at five medical conferences in Q3, including the World Sleep Congress. FLOSAT is a head-to-head crossover study comparing the treatment effectiveness of ProSomnus EVO versus CPAP as a frontline treatment for patients diagnosed with moderate and severe OSA.

Both the primary and secondary study endpoints were successfully achieved for FLOSAT. The investigation reported that the effectiveness of EVO was a frontline therapy for OSA as at least non-inferior to CPAP, and EVO was preferred to CPAP as a frontline therapy. As an intent-to-treat analysis component of the study concluded that therapy with ProSomnus EVO was twice as effective as the CPAP as a front-line therapy for moderate and severe OSA patients. Importantly, EVO demonstrated a 75% improvement in AHI for patients with severe OSA with 85% of severe patients successfully treated according to the endpoint defined in the STAR trial, which is an AHI of less than 20 and a 50% improvement with one critical difference being no drug-induced sleep endoscopy screening and exclusion for concentric collapse. The flows that studies expect to be published in a leading medical journal in 2024.

Dr. Marc Braem, Professor of Translational Neurosciences at University of Antwerp, presented new research at the iBEDSSMA conference. This multicenter research involved the treatment of 58 OSA patients with ProSomnus EVO using a standard treatment protocol implemented across four different hospitals. The study found AHI improvement from a baseline of 20.5 events per hour to 3.9 events per hour with EVO and demonstrated excellent consistency and repeatability across the four hospitals. Dr. Raquel Silva from the University of Algarve in Faro, Portugal, presented new research at the World Sleep Congress. Her research investigated the efficacy and inherent associated with using ProSomnus' precision oral devices. ProSomnus EVO to treat 22 patients with mild, moderate, or severe OSA.

Her research concluded that the baseline AHI of 21 events per hour in 19 ODI events per hour improved to AHI of 4 events and ODI of 4 events per hour when treated with ProSomnus EVO, p-value of less than 00.001. 95% of patients were successfully treated to an AHI of less than 10. Pretreatment patients up to an average of 412 minutes per night with ProSomnus treatment patients slept an average of 401 minutes per night, during the three-month follow-up period, demonstrating excellent nightly adherence and usage.

Another important bit of new data comes from Dr. Erin Mosca's presentation at the CHEST conference. Dr. Mosca evaluated the efficacy of ProSomnus devices for the treatment of OSA according to the sleep apnea specific hypoxic burden scale instead of the AHI scale. This is important as the sleep medicine -- as the field of sleep medicine pivots from frequency-based indices such as AHI and ODI towards the health risks-oriented metrics such as sleep apnea, specific hypoxic burden, and sleep apnea specific heart rate variability, which research has demonstrated to be highly predictive of health outcomes. Dr. Mosca's investigation of 109 patients with OSA treated with ProSomnus devices concludes that 94% were successfully treated in terms of reducing sleep apnea to the hypoxic burden to a safe level.

Dr. Mosca's research indicates that ProSomnus devices are well positioned and efficacious at the field of sleep medicine, continues to pivot to risk-based indices that are predictive of outcomes. To the best of our knowledge, ProSomnus devices are the only devices to demonstrate efficacy in managing sleep apnea specific hypoxic burden. Perhaps the most welcome achievement in Q3 2023 was securing $10 million in financing. Our financing was comprised of Investors who know ProSomnus best. Existing Investors, Board members, members of our Executive team, one of our anchor Investors, Spring Mountain Capital, first invested in ProSomnus on the eve of COVID. They witness firsthand the ability of ProSomnus' management team to strengthen the company while operating under austere and uncertain conditions.

Last, but importantly, I'd like to discuss our cash flow breakeven plans. We are on the pathway to achieving cash flow breakeven within the runway afforded by our recent $10 million financing. We have adopted a disciplined metered growth stance with commensurate adjustments already implemented to how we operate the business. There are four components to our breakeven plan. The first component of our cash flow breakeven plan is continued revenue growth. We intend to leverage existing investments in sales and marketing in our referral initiative. Due to the success of our existing sales and marketing programs and the clinical performance of our novel, highly differentiated personalized devices, we expect to maintain a high growth rate going forward. Investments already made in 2023 to expand our sales team and implement our medical referral initiative have been paying dividends and are expected to continue to drive growth into 2024.

The second component of our breakeven plan is gross margin expansion. Investments already made in our new facility and new manufacturing technologies are expected to reduce our cost of sales going forward, expand our gross margins, and increase our gross profits. The third component consists of containment of discipline, calibration of sales, marketing, general and administrative medical affairs and research and development, executive and director compensation related expenses. The fourth component of our plan consists of operating expenditures that will moderate and taper the farther we get from our public transaction. I'm pleased to report that many of these cash flow breakeven activities are already in process. The team has identified specific interventions and have taken action. As a result, Q3 2023 EBITDA was 27% better than in Q2. This was largely driven by a 19% reduction in operating expenses and a 24% reduction in general administrative expenses sequentially.

In addition to these highlights, I am pleased to report that our new manufacturing facility earned ISO 13485 certification. Manufacturing operations remained strong in Q3 2023. Margins, manufacturing service and quality remained healthy despite the need to rapidly ramp up capacity in the period to service our growing demand. Our next-generation sensor device continues to make progress towards FDA clearance. Interviews with key opinion leaders at the World Sleep Conference offered additional verification of our sensor device concept. Our severe OSA clinical study, the SOS study continues to progress.

Consenting patients increased 51% from Q2 to Q3. Two new centers, Antwerp and Munich, have joined the study. We expect the new centers to bolster recruiting while increasing the overall robustness of the data. Overall, it has been a very productive and successful quarter for ProSomnus. We believe non-CPAP OSA therapy is a multi-billion-dollar opportunity involving 3 million to 5 million patients. And now with our personalized devices, scientific data, and high-performance team, ProSomnus is well positioned as the leading non-CPAP OSA treatment.

With that, I'd like to turn it over to Brian.

Great. Thanks, Len. And thanks, everyone, for joining us on the call today.

The third quarter financial results released earlier today contained three fundamental tenets that aligned with what we've guided to during our previous calls. Those tenants being continued revenue growth, implementation of cost reductions, and strengthening of the balance sheet. Taking those tenants in order. Our reported third quarter 2023 revenue of $7.1 million was another record-setting quarter, representing our seventh consecutive quarter of posting sequential quarter-over-quarter top line growth. The $7.1 million revenue represents a 2% increase compared to $6.9 million reported for the second quarter of 2023, a 42% increase compared to $5 million reported for the third quarter of 2022.

On a year-to-date basis, our third quarter revenue of $19.8 million exceeds the revenue reported for our full year 2022 with a quarter to go and represents a 46% increase compared to the year-to-date revenue of $13.6 million reported through three quarters last year. We continue to see utilization growth within existing accounts, strong provider retention rates, and an increase in new accounts. Gross margins for 2023 remained strong at 52% year-to-date, resulting in gross profit of 1$0.3 million, a 44% increase from $7.2 million recognized for the same period in 2022.

For the third quarter, gross margin of 49%, although consistent with prior year, is down sequentially quarter over quarter. As during the quarter, we added to direct labor in preparation for the fourth quarter and incurred period specific material charges. We expect Q4 to return closer to year-to-date levels. During previous calls, we shared our intentions to moderate our expenses and cash use. The third quarter results reflect the initial implementation of those intentions. On a sequential quarter-over-quarter basis, operating expenses for the third quarter decreased 19% to $7.7 million compared to $9.5 million for the second quarter of 2023.

Sales and marketing expenses decreased 11% sequentially to $3.2 million from $3.6 million as we optimized elements of our commercial operations, focusing on well-performing territories, taking action on underperforming territories, and driving efficiencies into our territory maps to ensure appropriate levels of coverage while efficiently structuring our operations. Research and development costs decreased as expected, 24% sequentially quarter-over-quarter to $1 million from $1.4 million as costs associated with initiating our SOS study were included in our reporting results last quarter as were key development costs of the RPMO2 sensor device.

We continue to invest in the RPMO2 sensor device, however, as the project is reaching the FDA submission phase, it has economically transition to less capital-intensive work. The SOS study is ongoing and reported expenses now reflect the ongoing enrollment and treatment of patients versus the upfront and assessment made to initiate the study. General and administrative expenses decreased 24% sequentially to $3.4 million from $4.5 million, in line with expectations as the impacts of public company expenses began to moderate during the second half of the year.

In addition to those reductions, we saw reduced professional services, fees back related financing costs that were completed during prior periods, private -- public company transition expenses are normalizing, and labor expenses are decreasing as we reduce reliance on temporary consulting services. The progress made in the third quarter was a solid step forward on what we view as a broader plan to moderate our operating expenses.

Taking a quick look at expenses for the quarter and year to date results on a year-over-year basis. Sales and marketing expenses for the periods ended September 30, 2023, increased to $3.2 million or 40% from $2.3 million for the quarter and to $9.7 million or 50.5% from $6.5 million year-to-date. The increases noted are driven largely by the 40% increase in revenue coming in part from the expansion of the sales team and related travel and in-person events. Investment in sales generally precede the actual revenue development, and that is reflected in these results. As we've discussed on prior calls, we made a substantial upfront investment during early 2023, and we are now seeing the leverage as we exit Q3.

Research and development expenses for the periods ended September 30, 2023, increased to $1.1 million or 51% from $700,000 for the quarter and to $3.4 million or 79% from $1.9 million in the prior year. Key elements of the increases noted include the development of the RPMO2, our FLOSAT study that has had multiple data readouts since mid-2023, as Len has discussed a few moments ago, and initiation of the SOS study during the first half of 2023. General and administrative expenses for the three and nine-month periods ended September 30 increased to $3.4 million or 117% from $1.6 million and up to $11.2 million or 157% from $4.2 million, respectively.

The period increases are reflective of public company expenses, increased staffing, and support functions, including our new facility. In order to finish discussing the income statement, I need to take a brief detour to the balance sheet to discuss our recently completed financing. During September, we announced our $10.4 million Series A convertible preferred stock financing. It was originally announced at $10.1 million, but the opportunity to increase the proceeds became available, so we did so. The financing has yielded approximately $9 million to ProSomnus. The financing was led by a long-time ProSomnus Investor and rounded out by existing Investors, new Investors and participation from management.

In a very challenging capital market environment, to complete a financing by itself is a significant achievement and to have it come from those who know the company best is a clear vote of confidence on ProSomnus. The financing was comprised of three elements. First, the issuance of 10,426 shares of Series A convertible stock, each of which will be convertible into 1,000 shares of our common stock, and one of two investment incentives. First, incentive one, afforded to our existing convertible debt holders, the option to reset the conversion price of their existing debt to $1, or incentive two to receive a warrant to purchase 1,000 shares of common stock at an exercise price of $1 per share for each share of Series A purchased.

The financing closed in three closings during September as reflected in the financial statements and an additional $900,000 closing during October. The $12 million of cash reported at September 30 reflects the proceeds from the first two closings of this financings with the additional $900,000 coming during October. Offset by cash used during the period of $3.7 million. The $3.7 million of cash used during the quarter represents a 32% sequential decrease from cash use in the second quarter of this year. From the elements of the financing, you can discern that this was an intricate transaction. The intricate nature of the transaction plays out, most notably back on the income statement.

I apologize for the modest page flipping here, but it was important to discuss the transaction before discussing the accounting and what you are seeing at the bottom of the income statement. As you turn back to the income statement, you will note the significant balances reported within the other income and expense category for the third quarter. Starting first with interest expense. Interest expense is pretty straightforward as it represents interest on our existing senior and subordinate indentures. The $1.5 million reported includes approximately $1 million of non-cash paid in kind interest on our subordinated indentures.

After interest expense, we navigate into some technical accounting matters, all of which are non-cash. We carry our debt, warrants, and earn-out liability stemming from our December listing at fair value. As such, we are required to revalue these liabilities and reflect the corresponding increases or decreases on the income statement. During the third quarter, we reported other noncash income of $8.2 million relating to the decrease in value associated with these liabilities. These noncash change in fair value accounting elements will continue going forward as the fair values change.

Now for the financing elements. First, loss on extinguishment of debt, a noncash expense of $9.7 million. As I noted in connection with our Series A convertible preferred stock financing, we offered our participating indenture holders the option to reset the conversion rate of their existing indentures in lieu of receiving warrants. The mechanics of simply reducing the conversion rate triggered extinguishment accounting under accounting guidelines resulting in a non-cash charge. To be clear, no new debt was issued, this expenses directly tied to the financing and will not reoccur.

Next, other expenses of approximately $4 million. This too is comprised of accounting entries for the financing. Due to the interplay between the debt exchange being classified for accounting as an extinguishment, the other interlinked elements of the financing arrangement, the Series A preferred stock and the common stock warrants are also reported at accounting fair value. Usually, proceeds are allocated over relative fair value and recorded accordingly. However, we were required to record our transaction at gross accounting fair value, resulting in the $4 million charge resulting from the accounting fair value in excess of the net cash received from the financing.

Although this expense is directly tied to the financing, I do expect a final noncash charge of roughly $900,000 during the fourth quarter relating to the final closing in October. I would now like to transition from the third quarter and take a look forward. Looking at revenue for the remainder of 2023, we expect to deliver on our previous guidance of over 40% year-over-year growth, which places 2023 revenue to north of $27 million. Looking now at cash and importantly, our plans to progress towards operating cash flow breakeven. We took significant steps towards cost, moderation, as reflected in our Q3 results. The optimization of our operations to achieve sustainable operations is not binary but is a process.

Over the next several months, we expect to reduce costs and cash use through continued top line growth, as we remain dedicated to disciplined responsible growth, improved margins as we have line of sight to improve our margins through leveraging scale capacity in our existing infrastructure and improvements to existing technologies already employed. Disciplined calibration of our sales and marketing expense, and specifically leveraging our team and the investments made previously, research and development expense reductions through transitioning key development projects from the development phase to commercial phases, and the positive cost differential between development and sustaining activities, and lastly, general and administrative expenses through ongoing moderation and normalization of operations.

We believe that our plan is achievable, however, it is not linear. The ProSomnus organization is familiar with navigating these types of situations, and we have buy-in from the entire team. We will remain opportunistic as to financing, partnering, and strategic opportunities as they arise. However, we remain focused on retaining -- or retaining a financially viable organization.

With that, I'd like to begin the question-and-answer portion of the call. Operator, please open the call for questions.

(Operator Instructions)

Scott Henry, ROTH Capital

Thank you. Good afternoon and really strong fundamental results. So I want to start with a couple specific questions then maybe finish with a broader question. I guess first of all, when we see OpEx of $7.7 million at the end of third quarter, we are starting to cut pretty significantly there. Should we -- do you think you have further to cut or is that sort of the baseline?

Hi Scott, it's Brian. Thanks for the question.

We think this is the start of our process. We have already identified working through the process other opportunities that we can implement that will be net neutral on a very a variety of aspects of our operation. We remain dedicated to maintaining a strong growth profile, but we do see the opportunity for greater efficiencies and additional areas and opportunities for further reductions.

Okay. And I'm not even going to ask you about all those charges in the other line.

(laughter)

-- follow anyways. But what I am going to ask is at the end of Q4, where would you expect shares outstanding to be and what would you expect interest expense to be including any accounting adjustments that come into that. Sometimes there's some amortization. Just trying to think of how to model those two categories.

Okay. I'm going to take those in order and let's make sure I don't miss one of those for a second. First, with respect to shares outstanding, we just issued our convertible preferred stock. So we have $16.3 million shares outstanding. I assume that -- our assumptions are that we will have roughly $16.3 million shares of common stock outstanding at the end of 2023. With the issuance of the preferred stock on an as-converted basis, we're looking at having an additional 10,000,400 shares -- 10,400,000 million shares outstanding. So if you were going to combine the two, you're looking at about $26.7 million on an as-converted basis.

Okay. And that's what you'll report. It sounds like that's what you use as the denominator.

It's for your own good.

When we're using EPS, we're going to be using the $16.3 million or 16.3 million shares will be the denominator we use as the preferred stock conversion will be seen as antidilutive.

Okay. So we'll just have to keep track of that is non-dilutive. Okay. Perfect.

And then, we got (multiple speakers)

Yes, interest expense that you're seeing is going to mirror what we've seen historically for the past several quarters because fundamentally the debt itself is not changing. It will remain in place.

Okay, great. Was there any pricing change in the quarter or is pricing pretty similar?

The pricing was pretty similar, Scott. The only thing we did see is a slight mix shift in favor of our EVO devices, which do carry a slightly higher average selling price. So not so much a price increase, but more of a mix shift.

Okay. And then the final question. I'll just give you some leeway to go wherever direction you want with this. But clearly a disconnect between the market cap and the fundamentals. I mean, you don't see 40% growth too many places. I mean, there's a lot of reasons that can happen, company-specific, market, and even Ozempic related, seems to hit a lot of companies. So not sure why it would, but it does. Ian, did you just want to comment on that, and it sounds like you're putting on a lot of paths to deal with that as far as just controlling what you can't control.

Yes. Scott, we agree that there's a significant disconnect between our results and what we see as reasonable comps for our business. But I think the main thing is, Scott, that we're very proud of this -- the value of our company, really has manifested in how our devices perform in the clinic and how our devices perform when treating patients. And that's playing out in the scientific data that we're sharing. And we think that that translates into a disconnect in value between how our therapies are performing and what we're seeing out there in the market.

Scott, I'm just going to take that one more step and from -- simply from a growth rate standpoint. When we're posting 40% percent growth rates, ongoing clinical data supporting what we're doing, that would tend to warrant a significantly higher valuation ascribed to other markets. And from a growth rate standpoint, we have performed in the upper echelon of growth of MedTech companies that historically command far better valuations in terms of both enterprise value and revenue multiples.

But from a where do we go from here standpoint; we are focusing on continuing to drive the kind of results that we have guided to. Meeting the expectations that we set out and driving value long-term for our shareholders for the patients and for the company at large. So as much as the market may ascribe a value, we see a different value profile and we're focusing on driving that value and getting the messaging out so that people can have an opportunity to understand how effective we are able to execute on this business and take advantage of the opportunity quarter after quarter. But I do thank you for the opportunity to comment on that.

Thanks for the question.

Okay. Thank you for taking all the questions.

Thanks, Scott.

Thanks, Scott.

(Operator Instructions)

Conner Chamberlain, Craig-Hallum.

Good afternoon, everyone. This is Conner on for Alex --

Hi, Conner.

-- my questions. Hi.

So for the sales growth this quarter, could you break apart the contribution maybe. How much is from the expanding sales force, more clinical data, or changes in the sleep apnea market with the Philips recall, you don't necessarily have to give specific numbers, but any commentary would be helpful. Thanks.

Yes. We look at -- we break down revenue, it looks like about two-thirds of the revenue growth is coming from existing providers. And the detail behind that, Conner is the existing providers are beneficiaries of a growing number of sleep physicians who are referring patients to them as a result of our referral initiative and the scientific data.

I think that there's been a pent-up demand. Physicians have been waiting for a trustworthy, credible non-CPAP, non-invasive therapy for their patients. And with ProSomnus' scientific data and our involvement in medical congresses, getting data presented from the podium participating in the scientific symposia and the scientific abstract sessions that they're increasingly seeing, ProSomnus is filling that need it. And so I think that's what we see happen in terms of revenue growth and how it ties back to scientific data and the different programming that we have in place.

Got you. And then can you maybe speak to what's the path for getting this severe OSA indication expansion?

Yes. Well, we are currently fielding our SOS study, which stands for severe OSA study, and it's a multicenter prospective study where we've done a pre-sub with the FDA to identify the clinical endpoints in the design of the experiment, and we're in the process of executing and implementing that clinical study plan. We think there's a -- the FDA has confirmed, there's a precedent that has been set by other device that they've cleared for severe OSA, which generally involve a percent reduction in AHI and a percent reduction in ODI as well as being able to achieve a certain safety profile.

Those are the three endpoints that the FDA seems most concerned about. And we feel very confident based on a retrospective analysis of our prior clinical data that we're going to be able to meet and exceed those endpoints. I think the data that came out of FLOSAT for severe patients was quite compelling and I think the data on sleep apnea specific hypoxic burden is going to be quite compelling to the FDA because that speaks more directly to the actual underlying health risk of OSA than just reducing the number of breathing events that happen per night.

So I think we're well positioned with respect to the FDA's expectation for clearing our therapy. But one never knows. One never knows that's always -- I think if you ask anyone about the FDA, you think you get a good idea of what's going on and they still -- they always can ask for more.

Got it. And then given the debt overhang and your guys' capital position, if you have a need to raise again, are there any more levers you can pull?

Obviously, that's one of the areas that we have spent a considerable amount of time evaluating. Yes, we do believe we still have some levers that we can work with. But in broad strokes, whatever we're going to be doing on the financing side, we'll be opportunistic in nature. Right now, we're focusing on taking the $10 million that we've just raised and using that to maintain the sustainability of the organization while still continuing to drive the company forward.

Perfect. And then one last one here. What's necessary to get this next-gen appliance ready for FDA approval and then subsequent launch next year?

Yes. So thanks for the question, Conner.

I made its validation. We want to make sure that the device not only meets or exceeds FDA expectations. We do want an FDA label that says that it's a validated medical device for oximetry and as opposed to kind of a consumer electronic analysis of oximetry. So that additional FDA validation is important to us, important to the brand, important to the commercial strategy. And so that's really the main thing. And then we have our own internal expectations, what the project -- what the product needs to be able to do. And so the R&D team is working to meet those requirements and they're making great progress doing so.

Awesome. Thanks for taking my questions.

Thanks, Conner.

Thank you. And that's all the time we have for questions. I would now like to turn the call back over to Len Liptak for any closing remarks.

Thank you. I'd like to conclude by thanking everyone for attending the ProSomnus Q3 earnings call. And once again, by highlighting our record revenue growth that places ProSomnus' multiple revenue, a significant discount to other high growth MedTech comparable companies, our substantial progress with updated a new scientific data that further establishes the effectiveness for some devices as the leading non-CPAP OSA therapy, our $10 million financing led by anchor Investors who have known invested in ProSomnus, and our plan to achieve cash flow breakeven with the runway created by our financing, which will be driven by revenue growth, gross margin expansion from existing investments, and disciplined cost management with many activities and interventions already in process are implemented.

And finally, on momentum, a growing number of physicians turned to ProSomnus for non-CPAP OSA therapy. Thank you.

Thank you. This concludes today's conference call. We thank you for your participation. You may now disconnect.