UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
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For the transition period from to
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
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(1)On April 24, 2024, the
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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As of May 10, 2024, there were
TABLE OF CONTENTS
PROSOMNUS, INC.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROSOMNUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share amounts and par value)
| March 31, 2024 |
| December 31, 2023 | |||
ASSETS |
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Current assets: |
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Cash |
| $ | |
| $ | |
Restricted cash | | | ||||
Accounts receivable, net |
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Inventory |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Finance lease right-of-use assets | | | ||||
Operating lease right-of-use assets | | | ||||
Other assets |
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Total assets |
| $ | |
| $ | |
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT |
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Current liabilities: |
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Accounts payable | $ | | $ | | ||
Accrued expenses and other current liabilities | | | ||||
Equipment financing obligation | | | ||||
Finance lease liabilities | | | ||||
Operating lease liabilities | | | ||||
Senior Convertible Notes at fair value, current portion | | | ||||
Subordinated Convertible Notes at fair value | | — | ||||
Total current liabilities | | | ||||
Equipment financing obligation, net of current portion | | | ||||
Finance lease liabilities, net of current portion | | | ||||
Operating lease liabilities, net of current portion | | | ||||
Senior Convertible Notes at fair value, net of current portion | — | | ||||
Subordinated Convertible Notes at fair value | — | | ||||
Earnout and warrant liability | | | ||||
Total liabilities | | | ||||
Commitments and contingencies | ||||||
Redeemable convertible preferred stock: | ||||||
Redeemable Convertible Series A Preferred Stock, $ | | | ||||
Stockholders’ deficit: | ||||||
Preferred stock, $ | ||||||
Common Stock, $ | | | ||||
Additional paid-in capital | | | ||||
Accumulated deficit | ( | ( | ||||
Total stockholders’ deficit | ( | ( | ||||
Total liabilities, redeemable convertible preferred stock and stockholders’ deficit | $ | | $ | | ||
See accompanying notes to unaudited condensed consolidated financial statements.
1
PROSOMNUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)
Three Months Ended March 31, | ||||||
| 2024 |
| 2023 | |||
Revenue | $ | | $ | | ||
Operating expenses: | ||||||
Cost of revenue | | | ||||
Sales and marketing | | | ||||
General and administrative | | | ||||
Research and development | | | ||||
Total operating expenses | | | ||||
Net loss from operations | ( | ( | ||||
Other income (expense) | ||||||
Interest expense, net | ( | ( | ||||
Change in fair value of earnout liability | | | ||||
Change in fair value of debt | | ( | ||||
Change in fair value of warrant liability | | ( | ||||
Other expense, net | ( | ( | ||||
Total other income (expense), net | | ( | ||||
Net income (loss) | $ | | $ | ( | ||
Net income (loss) per share attributable to common stockholders | ||||||
Basic | $ | | $ | ( | ||
Diluted | $ | ( | $ | ( | ||
Weighted average shares of Common Stock used in per share calculation: | ||||||
Basic | | | ||||
Diluted | | | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
PROSOMNUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS’ DEFICIT (UNAUDITED)
For the three months ended March 31, 2024
(In thousands, except share data)
Redeemable Convertible | ||||||||||||||||||||
Preferred Stock | Additional | Total | ||||||||||||||||||
Series A | Common Stock | Paid-In |
| Accumulated | Stockholders' | |||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
|
| Capital |
| Deficit |
| Deficit | ||||||
Balance as of December 31, 2023 | | $ | | | $ | | $ | | $ | ( | $ | ( | ||||||||
Issuance of shares, net | — | — | | — | — | — | — | |||||||||||||
Issuance costs - ProSomnus Inc. | — | — | — | — | ( | — | ( | |||||||||||||
Stock-based compensation expense | — | — | — | — | | — | | |||||||||||||
Net income | — | — | — | — | — | | | |||||||||||||
Balance as of March 31, 2024 | | $ | | | $ | | $ | | $ | ( | $ | ( | ||||||||
For the three months ended March 31, 2023
(In thousands, except share data)
Redeemable Convertible | ||||||||||||||||||||
Preferred Stock | Additional | Total | ||||||||||||||||||
Series A | Common Stock | Paid-In |
| Accumulated | Stockholders' | |||||||||||||||
Shares |
| Amount |
| Shares |
| Amount |
|
| Capital |
| Deficit |
| Deficit | |||||||
Balance as of December 31, 2022 | — | $ | — | | $ | | $ | | $ | ( | $ | ( | ||||||||
Stock-based compensation expense | — | — | — | — | | — | | |||||||||||||
Net loss | — | — | — | — | — | ( | ( | |||||||||||||
Balance as of March 31, 2023 | — | $ | — | | $ | | $ | | $ | ( | $ | ( | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
PROSOMNUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended March 31, | ||||||
| 2024 |
| 2023 | |||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||
Net income (loss) | $ | | $ | ( | ||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||
Depreciation and amortization |
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Amortization of assets obtained under finance leases | | | ||||
Amortization of operating right-of-use assets | | | ||||
Noncash interest |
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Allowance for credit losses |
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Stock-based compensation |
| |
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Change in fair value of earnout liability | ( | ( | ||||
Change in fair value of debt | ( | | ||||
Change in fair value of warrant liability |
| ( |
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Loss on disposal of property and equipment | — |
| | |||
Right-of-use asset impairment | — | | ||||
Other non-cash operating expense |
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Changes in operating assets and liabilities: |
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Accounts receivable |
| ( |
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Inventory |
| |
| ( | ||
Prepaid expenses and other current assets |
| |
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Other assets |
| ( |
| — | ||
Accounts payable |
| |
| ( | ||
Accrued expenses and other current liabilities |
| ( |
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Operating lease liabilities | ( | | ||||
Net cash used in operating activities |
| ( |
| ( | ||
CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of property and equipment |
| ( |
| ( | ||
Net cash used in investing activities |
| ( |
| ( | ||
CASH FLOWS FROM FINANCING ACTIVITIES: |
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Principal payments on finance lease obligations |
| ( |
| ( | ||
Principal payments on equipment financing obligation | ( | ( | ||||
Net cash used in financing activities |
| ( |
| ( | ||
Net change in cash and restricted cash |
| ( |
| ( | ||
Cash and restricted cash at beginning of period |
| |
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Cash and restricted cash at end of period | $ | | $ | | ||
Supplemental disclosure of cash flow information: |
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Cash paid for interest | $ | | $ | — | ||
Supplemental disclosure of noncash investing and financing activities: |
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ROU assets obtained in exchange for finance lease obligations | $ | | $ | — | ||
See accompanying notes to unaudited condensed consolidated financial statements.
4
PROSOMNUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 — DESCRIPTION OF THE BUSINESS
Company Organization
ProSomnus, Inc., and its wholly owned subsidiaries, ProSomnus Holdings, Inc. and ProSomnus Sleep Technologies, Inc. (collectively, the “Company”) is an innovative medical technology company that develops, manufactures, and markets its proprietary line of precision intraoral medical devices for treating and managing patients with obstructive sleep apnea (“OSA”).
The Company is located in Pleasanton, California and was incorporated as a Delaware company on May 3, 2022. Its accounting predecessor company, ProSomnus Sleep Technologies, Inc. was incorporated as a Delaware company on March 2, 2016.
On December 6, 2022, Lakeshore Acquisition I Corp. (“Lakeshore”) consummated a series of transactions that resulted in the combination (the “Business Combination”) of Lakeshore with ProSomnus Holdings, Inc. and its wholly-owned subsidiary, ProSomnus Sleep Technologies, Inc., pursuant to an Agreement and Plan of Merger, dated May 9, 2022. Pursuant to the Merger Agreement, Lakeshore merged with and into ProSomnus Holdings, and changed its name to ProSomnus, Inc.
The transaction was accounted for as a reverse recapitalization with ProSomnus Sleep Technologies, Inc. being the accounting acquirer and Lakeshore as the acquired Company for accounting purposes. Accordingly, all historical financial information presented in the consolidated financial statements represents the accounts of ProSomnus Sleep Technologies, Inc.
NOTE 2 — BASIS OF ACCOUNTING AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States of America (“U.S GAAP”). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded in accordance with SEC rules and regulations and GAAP applicable to interim unaudited financial statements. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for audited annual financial statements. In the opinion of management, the condensed consolidated financial statements reflect all adjustments of a normal and recurring nature that are considered necessary for a fair presentation of the results for the interim periods presented. These unaudited condensed consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC on March 27, 2024.
The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the year ending December 31, 2024 or any future periods. The condensed consolidated balance sheet as of December 31, 2023 has been derived from audited financial statements at that date but does not include all of the information required by GAAP for complete financial statements.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
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Liquidity and Management’s Plans
The Company has incurred recurring losses from operations and recurring negative cash flows from operating activities. The Company expects operating losses and negative cash flows from operations to continue for the foreseeable future.
As discussed further in Note 14- Subsequent Events, on May 7, 2024 (the “Petition Date”), the Company voluntarily entered into a Restructuring Support Agreement (including all exhibits thereto, collectively, the “RSA”) with (i) certain of its existing affiliates and subsidiaries (as set forth in the RSA, and together with the Company, the “Company Parties”); and (ii) certain sponsoring Senior Noteholders and Subordinated Noteholders (the “Sponsoring Noteholders”). The Company commenced a voluntary petition (the “Chapter 11 Cases”) under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”).
Pursuant to Section 362 of the Bankruptcy Code, the filing of the Chapter 11 Cases automatically stayed most actions against the Company, including actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Company property. Subject to certain exceptions under the Bankruptcy Code, the filing of the Company Chapter 11 Cases also automatically stayed the filing of most legal proceedings and other actions against or on behalf of the Company or their property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the Company bankruptcy estates, unless and until the Court modifies or lifts the automatic stay as to any such claim.
In accordance with ASC Subtopic 205-40, Presentation of Financial Statements-Going Concern (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about our ability to meet our obligations as they become due within one year after the date that the financial statements are issued. Management considered the Company’s current financial condition and liquidity sources, including cash and managed accessibility, forecasted future cash flows and the Company’s obligations due one year from the issuance date of the financial statements. As a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities are subject to significant uncertainty. While operating as a debtor-in-possession entity pursuant to the Bankruptcy Code, the Company may sell, or otherwise dispose of or liquidate, assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business, for amounts other than those reflected in the accompanying unaudited Interim Consolidated Financial Statements. Further, the Chapter 11 plan is likely to materially change the amounts and classifications of assets and liabilities reported in our unaudited Interim Condensed Consolidated Balance Sheet as of March 31, 2024 and going forward. In performing this evaluation, management concluded that under the standards of ASC 205-40, substantial doubt exists about the Company’s ability to continue as a going concern due to the risks and uncertainties surrounding the Chapter 11 Cases, the defaults under the Company’s debt agreements and the Company’s financial condition. The Company’s future plans, including those in connection with the Chapter 11 Cases, are not yet finalized, fully executed or approved by the Bankruptcy Court, and therefore cannot be deemed probable of mitigating this substantial doubt within 12 months of the date of issuance of these financial statements. The Company’s condensed consolidated financial statements included herein do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern and instead have been prepared assuming that the Company will continue as a going concern and contemplating the realization of assets and the satisfaction of the Company’s liabilities and commitments incurred in the normal course of business.
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. GAAP assuming that the Company will continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
Management’s Plans Related to Going Concern
The Company’s ability to continue as a going concern depends principally on its ability to successfully exit the Chapter 11 Cases, including the completion of the financings proposed within the RSA. Upon the successful exit from the Chapter 11 Cases, the Company’s ability to continue as a going concern will depend upon its ability to execute on its plans to achieve revenue growth forecast, control operating costs, and obtain additional financing. The Company’s successful exit from the Chapter 11 Cases, the outcome of such exit, and the Company’s post exit operating plans are subject to many factors currently unknown and there can be no assurance that the current operating plan or cash flow break-even plan will be achieved in the time frame anticipated by the Company.
6
The Company has entered into a RSA with certain of its Sponsoring Noteholders. The material terms include an aggregate of $
Although the Company intends to pursue the RSA in accordance with the stated terms; there can be no assurance that the Company will be successful in completing the Restructuring, whether on the same or different terms than those provided in the RSA.
In addition to the Chapter 11 Cases, based on the Company’s current level of expenditures and future cash flow projections, the Company believes it’s current unrestricted cash balance will not be sufficient for the Company to continue operations as a going concern for at least one year from the issuance date of these condensed consolidated financial statements. Additionally, the indentures governing the Company’s Senior Convertible Notes and Subordinated Convertible Notes (as defined below and, collectively the “Convertible Notes”) contain monthly and quarterly financial covenants. Failure to comply with the covenants or obtain a waiver and extension from the holders of each series of our Convertible Notes could result in an event of default under each of the indentures governing our Convertible Notes and result in an acceleration of the Convertible Notes. The Company believes these factors raise substantial doubt about its ability to continue as a going concern.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities. Though macroeconomic factors such as inflation, exchange rate fluctuations and concerns about an economic downturn present additional uncertainty, the Company continues to use the best information available to form its critical accounting estimates. Actual results could differ from these estimates, and such differences could materially affect the results of operations reported in future periods. The Company’s significant estimates in these consolidated financial statements relate to the fair values, and the underlying assumptions used to formulate such fair values, of its Series A Preferred Stock, Convertible Notes, earn-out liability, and warrants. Estimates also include the provision for credit losses, warranty and earned discount accruals, measurements of tax assets and liabilities and stock-based compensation.
Concentrations, Credit Risk and Market Risk
Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of accounts receivable and cash.
The Company sells its products to customers primarily in North America and Europe. To reduce credit risk, management performs periodic credit evaluations of its customers’ financial condition.
The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits as guaranteed by the Federal Deposit Insurance Corporation (“FDIC”). As of March 31, 2024 and December 31, 2023, the Company had $
Fair Value of Financial Instruments
The accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date.
This accounting standard establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs that may be used to measure fair value:
7
Level 1 Inputs — The valuation is based on quoted prices in active markets for identical instrument.
Level 2 Inputs — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model — based valuation techniques for which all significant assumptions are observable in the market.
Level 3 Inputs — The valuation is based on unobservable inputs that are supported by minimal or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar techniques that incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument, or valuations that require significant management judgment or estimation.
Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.
The Company’s financial instruments consist primarily of cash, accounts receivable (net of allowance for doubtful accounts), accounts payable and accrued expenses, long-term debt instruments, earnout and warrant liabilities.
The carrying amounts of financial instruments such as cash, restricted cash, accounts receivable, prepaid expenses and other current assets, accounts payable, and accrued expenses approximate the related fair values due to the short-term maturities of these instruments. The carrying value of the Company’s equipment financing obligation is considered to approximate its fair value because the interest rate is comparable to current rates for financing available to the Company. Under the fair value option as prescribed by FASB Accounting Standards Codification (“ASC”) 825, Financial Instruments, The Company has elected to record the Company’s convertible debt instruments at fair value. The Company’s earnout and warrant liabilities are presented at fair value on the condensed consolidated balance sheets.
The following tables provide a summary of the financial instruments that are measured at fair value on a recurring basis (in thousands):
| March 31, 2024 | |||||||||||
| Fair Value |
| Level 1 |
| Level 2 |
| Level 3 | |||||
Senior Convertible Notes | $ | | $ | — | $ | — | $ | | ||||
Subordinated Convertible Notes | | — | — | | ||||||||
Earnout liability | | — | — | | ||||||||
Warrant liability | | — | — | | ||||||||
| December 31, 2023 | |||||||||||
| Fair Value |
| Level 1 |
| Level 2 |
| Level 3 | |||||
Senior Convertible Notes | $ | | $ | — | $ | — | $ | | ||||
Subordinated Convertible Notes | | — | — | | ||||||||
Earnout liability | | — | — | | ||||||||
Warrant liability | | — | — | | ||||||||
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash and cash equivalents. At March 31, 2024 and December 31, 2023, the Company had
8
Restricted Cash
The Company’s restricted cash as of March 31, 2024 and December 31, 2023 of $
Impairment of Long-Lived Assets
The Company’s long-lived assets primarily include property and equipment and finance and operating right-of-use assets. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured at the amount by which the carrying amount of the asset exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of carrying amount or the fair value less costs to sell. During 2023, the Company moved to its new headquarters and principal manufacturing facility. Upon moving, the Company expensed a total of $
Senior and Subordinated Convertible Notes
The Company accounts for its Notes, as derivatives in accordance with, ASC 815, Derivatives and Hedging, depending on the nature of the derivative instrument. ASC 815 requires each contract that is not a derivative in its entirety be assessed to determine whether it contains embedded derivatives that are required to be bifurcated and accounted for as a derivative financial instrument. The embedded derivative is bifurcated from the host contract and accounted for as a freestanding derivative if the combined instrument is not accounted for in its entirety at fair value with changes in fair value recorded in earnings, the terms of the embedded derivative are not clearly and closely related to the economic characteristics of the host contract, and a separate instrument with the same terms as the embedded derivative would qualify as a derivative instrument. Embedded derivatives are measured at fair value and remeasured at each subsequent reporting period, and recorded within Convertible Notes, net on the accompanying condensed consolidated balance sheets and changes in fair value recorded in other expense within the condensed consolidated statements of operations. Debt discounts under these arrangements are amortized to interest expense using the interest method over the earlier of the term of the related debt or their earliest date of redemption.
The Company has analyzed the redemption, conversion, settlement, and other derivative instrument features of its Convertible Notes.
| ● | The Company identified that the (i) redemption features, (ii) Lender’s Optional Conversion feature, (iii) Lender’s Optional Conversion upon Merger Event feature and (iv) additional interest rate upon certain events feature meet the definition of a derivative. The Company analyzed the scope exception for all the above features under ASC 815-10-15-74(a). |
| ● | Based on the further analysis, the Company identified that the (i) Lender’s Optional Conversion feature, (ii) Lender’s Optional Conversion upon Merger Event feature and (iii) additional interest rate upon certain events feature, do not meet the settlement criteria to be considered indexed to equity. The Company concluded that each of these features should be classified as a derivative liability measured at fair value with the changes in fair value in the condensed consolidated statement of operations. |
| ● | The Company also identified that the redemption features are settled in cash and do not meet the indexed to equity and the equity classification scope exception, thus, they must be bifurcated from the Convertible Notes and accounted for separately at fair value on a recurring basis reflecting the changes in fair value in the condensed consolidated statement of operations. |
The Company determined the Convertible Notes contained multiple embedded derivatives that are required to be bifurcated, two of which are conversion features.
As per ASC 815, the fair value election is allowable provided the debt was not issued at a substantial premium. The Company concluded that the Convertible Notes were not issued at a premium and hence the Company elected the fair value option under ASC 815-15-25. The Company elected to record changes in fair value through the condensed consolidated statement of operations as a fair
9
value adjustment of the convertible debt at each reporting period (with the portion of the change that results from a change in the instrument-specific credit risk recorded separately in other comprehensive income, if applicable). The Company has elected to separately present interest expense related to the Convertible Notes within the condensed consolidated statement of operations. Thus, the multiple embedded derivatives do not need to be separately bifurcated and fair valued. The Convertible Notes are reflected at their respective fair values on the condensed consolidated balance sheets.
Warrants
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own Common Stock, par value $
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and then remeasured at fair value at each balance sheet date thereafter. Changes in the estimated fair value of the liability classified warrants are recognized as other income or expense on the condensed consolidated statements of operations.
Revenue Recognition
The Company creates customized precision milled intraoral medical devices and recognizes revenue upon meeting the following criteria:
| ● | Identifying the contract with a customer: Customers submit an order in the form of a prescription and oral scan to the Company. |
| ● | Identifying the performance obligations within the contract: The sole performance obligation is the delivery of a completed customized intraoral device. |
| ● | Determining the transaction price: Prices are determined by standardized pricing sheets and adjusted for discounts, allowances and remakes. |
| ● | Allocating the transaction price to the performance obligations: The full transaction price is allocated to the completed intraoral device as it is the only element in the transaction. |
| ● | Recognizing revenue as the performance obligation is satisfied at a point in time: revenue is recognized upon transfer of control which occurs upon shipment of the product. |
The Company does not require collateral or any other form of security from customers. Inbound shipping and handling costs related to sales are billed to customers. The Company charges for inbound shipping/handling and the costs are classified as Cost of Revenue. Outbound shipping costs are not billed to customers and are included in sales and marketing expenses. Taxes collected from customers and remitted to governmental authorities are excluded from revenue.
Standalone selling price for the various intraoral device models are determined using the Company’s standard pricing sheet. The Company invoices customers upon shipment of the product and invoices are due within
10
recorded in accounts receivable and revenue as all revenue recognition criteria have been met. The Company does not have a financing component related to its revenue arrangements.
The Company utilizes the practical expedient which permits expensing of costs to obtain a contract when the expected amortization period is one year or less. Accordingly, the Company expenses employee sales commissions when incurred as the period over which the sales commission asset that would have been recognized is less than one year.
Leases
The Company assesses at contract inception whether a contract is, or contains, a lease. Generally, the Company determines that a lease exists when (1) the contract involves the use of a distinct identified asset, (2) the Company obtains the right to substantially all economic benefits from use of the asset, and (3) the Company has the right to direct the use of the asset. A lease is classified as a finance lease when one or more of the following criteria are met: (1) the lease transfers ownership of the asset by the end of the lease term, (2) the lease contains an option to purchase the asset that is reasonably certain to be exercised, (3) the lease term is for a major part of the remaining useful life of the asset, (4) the present value of the lease payments equals or exceeds substantially all of the fair value of the asset or (5) the asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. A lease is classified as an operating lease if it does not meet any of these criteria.
At the lease commencement date, the Company recognizes a right-of-use (“ROU”) asset and a lease liability for all leases, except short term leases with an original term of twelve months or less. The ROU asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease. The ROU asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, less any lease incentives received. All ROU assets are periodically reviewed for impairment in accordance with standards that apply to long-lived assets. The lease liability is initially measured at the present value of the lease payments, discounted using an estimate of the Company’s incremental borrowing rate for a collateralized loan with the same term as the underlying leases for operating leases and the implied rate in the lease agreement for finance leases.
Lease payments included in the measurement of lease liabilities consist of (1) fixed lease payments for the noncancelable lease term, (2) fixed lease payments for optional renewal periods where it is reasonably certain the renewal option will be exercised, and (3) variable lease payments that depend on an underlying index or rate, based on the index or rate in effect at lease commencement. The Company’s real estate operating lease agreement requires variable lease payments that do not depend on an underlying index or rate established at lease commencement. Such payments and changes in payments are recognized in operating expenses when incurred.
Lease expense for operating leases consists of the fixed lease payments recognized on a straight-line basis over the lease term plus variable lease payments as incurred. Lease expense for finance leases consists of the amortization of assets obtained under finance leases on a straight-line basis over the lease term and interest expense on the lease liability based on the discount rate at lease commencement.
Net income (Loss) per Share Attributable to Common Stockholders
Basic net income (loss) per share attributable to Common Stockholders is calculated by dividing the net income (loss) attributable to Common Stockholders by the weighted average number of shares of Common Stock outstanding during the period, without consideration of potentially dilutive securities.
Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock and potentially dilutive securities outstanding for the period. For the purposes of the diluted net income (loss) per share calculation, common stock options, RSU awards, Convertible Series A Preferred Stock, warrants to purchase common stock, earnout shares, and convertible notes are considered to be potentially dilutive securities. For the periods presented that the Company has reported a net loss, diluted net loss per common share is the same as basic net loss per common share for those periods.
Recent Accounting Pronouncements
During November 2023, the FASB issued ASU 2023-07, Segment Reporting-Improvements to Reportable Segment Disclosures. The new FASB guidance requires incremental disclosures related to a public entity’s reportable segments but does not change the
11
definition of a segment, the method for determining segments, or the criteria for aggregating operating segments into reportable segments. The FASB issued the new guidance primarily to provide financial statements users with more disaggregated expense information about a public entity’s reportable segments. The ASU is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods in fiscal years beginning after December 15, 2024. The guidance is effective for the Company’s 2024 Form 10-K. The Company is currently evaluating the impact of adoption on the Company’s consolidated financial statements and its related disclosures.
In December 2023, the FASB released ASU 2023-09, titled "Enhancements to Income Tax Disclosures," with the aim of improving the clarity and usefulness of income tax disclosures. The update focuses primarily on enhancing disclosures related to rate reconciliation and income taxes paid. ASU 2023-09 becomes effective for annual reporting periods starting after December 15, 2024, with early adoption permitted. While the changes prescribed by ASU 2023-09 are implemented prospectively, retrospective application is also allowed. The Company has chosen not to early adopt this standard and is currently evaluating the impact of adoption on the Company’s consolidated financial statements and its related disclosures.
The Company continues to monitor new accounting pronouncements issued by the FASB and does not believe any other accounting pronouncements issued through the date of this report will have a material impact on the Company's consolidated financial statements.
NOTE 3 — INVENTORY
Inventory consists of the following (in thousands):
March 31, | December 31, | |||||
| 2024 |
| 2023 | |||
Raw materials | $ | | $ | | ||
Work-in-process |
| |
| | ||
$ | | $ | | |||
NOTE 4 — PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
March 31, | December 31, | |||||
| 2024 |
| 2023 | |||
Manufacturing equipment | $ | | $ | | ||
Computers and software |
| |
| | ||
Construction in progress | | — | ||||
Leasehold improvements |
| |
| | ||
| |
| | |||
Less: accumulated depreciation |
| ( |
| ( | ||
Property and equipment, net | $ | | $ | | ||
Depreciation and amortization expense for property and equipment was $
The Company disposed property and equipment assets of $
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NOTE 5 — ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
March 31, | December 31, | |||||
| 2024 |
| 2023 | |||
Compensation related accruals | $ | | $ | | ||
Marketing programs | | | ||||
Interest | | | ||||
Warranty | | | ||||
Professional fees | | | ||||
Inventory purchases and freight | — | | ||||
Other | | | ||||
$ | | $ | | |||
NOTE 6 — LEASES
The Company has entered into
On May 17, 2022, the Company signed a
For the corporate headquarters lease, the Company provided a $
The Company’s finance leases consist of various machinery, equipment, computer-related equipment, or software and have remaining terms from less than
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The components of the Company’s lease cost, weighted average lease terms and discount rates are presented in the tables below (in thousands, except lease term and discount rate):
| Three months ended March 31, | |||||
2024 |
| 2023 | ||||
Operating lease expense: |
|
|
|
| ||
Operating lease cost | $ | | $ | | ||
Finance lease expense: |
|
| ||||
Amortization of assets obtained under finance leases | | | ||||
Interest on lease liabilities | | | ||||
Variable lease expense | | — | ||||
Total expense | $ | | $ | | ||
March 31, | December 31, | |||||
Operating leases: | 2024 |
| 2023 | |||
Weighted average remaining lease term (in years) | ||||||
Weighted average discount rate | | % | | % | ||
Finance leases: | ||||||
Weighted average remaining lease term (in years) | ||||||
Weighted average discount rate | | % | | % | ||
| Three Months Ended March 31, | |||||
2024 |
| 2023 | ||||
Supplemental cash flow information related to operating leases was as follows (in thousands): |
|
|
| |||
Operating cash flows from operating leases | $ | | $ | | ||
Operating cash flows from finance leases (interest) | | | ||||
Right-of-use assets consisted of the following (in thousands):
March 31, | December 31, | |||||
2024 |
| 2023 | ||||
Manufacturing equipment |
| $ | | $ | | |
Computers and software | | | ||||
Leasehold improvements |
| |
| | ||
Total |
| |
| | ||
Less accumulated amortization |
| ( |
| ( | ||
| |
| | |||
| |
| | |||
Total ROU assets | $ | | $ | | ||
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At March 31, 2024, the following table presents maturities of the Company’s finance and operating lease liabilities (in thousands):
Three Months Ended March 31, 2024 |
| Finance | Operating | |||
2024 (remaining 9 months) | $ | | $ | | ||
2025 | | | ||||
2026 | | | ||||
2027 |
| | | |||
2028 | |
| | |||
Thereafter | | | ||||
Total minimum lease payments | |
| | |||
Less amount representing interest | ( |
| ( | |||
Present value of minimum lease payments | |
| | |||
Less current portion | ( |
| ( | |||
Lease obligations, less current portion | $ | | $ | | ||
NOTE 7 — DEBT
Equipment Financing Obligation
At March 31, 2024, the Company’s future principal maturities under the equipment financing obligations are summarized as follows (in thousands):
Three Months Ended March 31, 2024 |
| Amount | |
2024 (remaining 9 months) | $ | | |
2025 | | ||
2026 | | ||
Total principal maturities | | ||
Less: current portion | ( | ||
Equipment financing obligation, net of current portion | $ | | |
Convertible Debt Agreements
Senior Convertible Notes
On December 6, 2022, the Company entered into the Indenture for Senior Secured Convertible Notes due December 6, 2025, dated December 6, 2022 by and among the Company, ProSomnus Holdings and ProSomnus Sleep Technologies, as guarantors, and Wilmington Trust, National Association, as trustee and collateral agent (as amended, the “Senior Indenture”), and issued Senior Secured Convertible Notes, due December 6, 2025 (the “Existing Senior Convertible Notes”), with an aggregate principal amount of $
On June 29, 2023, the Company entered into the First Supplemental Indenture, dated as of June 29, 2023, by and among the Company, ProSomnus Holdings and ProSomnus Sleep Technologies, as guarantors, and Wilmington Trust, National Association (the “First Senior Supplemental Indenture”). The First Senior Supplemental Indenture, among other things, (i) effects certain changes to the minimum EBITDA and minimum revenue financial covenants (ii) requires mandatory redemption of the Existing Senior Convertible Notes in consecutive
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On September 20, 2023, the Company entered into the Second Supplemental Indenture (the “Second Senior Supplemental Indenture”) to the Senior Indenture, by and among the Company, ProSomnus Holdings and ProSomnus Sleep Technologies, as guarantors, and Wilmington Trust, National Association, as trustee and collateral agent. The Second Senior Supplemental Indenture amends the Senior Indenture to, among other things, permit the sale of the securities underlying the convertible debt (the “Securities”) and the Exchanges.
Subordinated Convertible Notes
On December 6, 2022, the Company entered into that certain Indenture for Subordinated Secured Convertible Notes due April 6, 2026, dated December 6, 2022 by and among the Company, ProSomnus Holdings and ProSomnus Sleep Technologies, as guarantors, and Wilmington Trust, National Association, as trustee and collateral agent (as amended, the “Subordinated Indenture”), and issued the Subordinated Secured Convertible Notes due April 6, 2026 (“Existing Subordinated Convertible Notes” and, together with the Existing Senior Convertible Notes, the “Existing Convertible Notes”), with an aggregate principal amount of approximately $
On June 6, 2023, in accordance with the Subordinated Indenture, the conversion rate of the Subordinated Convertible Notes increased from approximately
On June 29, 2023, the Company entered into the First Supplemental Indenture, dated as of June 29, 2023, by and among the Company, ProSomnus Holdings and ProSomnus Sleep Technologies, as guarantors, and Wilmington Trust, National Association (the "First Subordinated Supplemental Indenture”), which, among other things, (i) effects certain changes to the minimum EBITDA and minimum revenue financial covenants and (ii) corrects an error in the definition of Conversion Rate.
On September 8, 2023, the Company issued
On September 20, 2023, the Company entered into the Second Supplemental Indenture (the “Second Subordinated Supplemental Indenture”) to the Subordinated Indenture, pursuant to which the Company issued the Existing Subordinated Convertible Notes. The Second Subordinated Supplemental Indenture amends the Subordinated Indenture to, among other things, permit the sale of the Securities and the Exchanges.
On December 6, 2023, in accordance with the Subordinated Indenture, the conversion rate of the Subordinated Convertible Notes increased from approximately
16
The Convertible Notes include the following embedded features:
Embedded Feature | Nature | Description |
Optional redemption – Election of Company | Redemption feature (embedded call option) | At any time after the later of (i) the |
Mandatory redemption – Events of Default | Redemption feature (embedded contingent call option) | The Company is required to prepay all of the outstanding principal balance and accrued and unpaid interest upon bankruptcy-related events of default. |
Lenders’ Optional redemption – Events of Default | Redemption feature (embedded contingent call option) | Holders of at least |
Lender’s Optional Conversion | Conversion feature | At each Lenders’ option, subject to specific conditions, it may convert all or any portion of its Notes at an initial conversion rate, which is reduced (and only reduced) at various dates and subject to certain adjustments to the conversion rate in the case of specified events. If a note is converted, the Company will adjust the conversion rate to account for any accrued and unpaid interest on such note plus any Make-Whole Amount related to such note. |
Lenders’ Optional Conversion Upon Merger Event | Other feature | Upon a merger event, Note holders of each $ |
Additional interest rate upon certain non-credit related events | Other feature | Upon an event of default, additional interest will be incurred. Additional interest will also be incurred if the Notes are not freely tradeable. |
Ability to pay interest in kind (PIK Interest)* | Other feature | The Company has the election to pay interest in cash or in-kind. |
*The PIK interest feature is only present in the Subordinated Convertible Note, and not available in the Senior Convertible Notes.
The Company assessed the embedded features within these Convertible Note and determined the following:
| ● | The Optional Redemption feature (1), the Mandatory redemption feature (2) and the Lender’s Optional redemption feature (3) met the definition of a derivative and were not clearly and closely related to the host contract and required separate accounting. Further, the redemption features are settled in cash and would therefore not meet the indexed to equity and equity classification scope exception. Thus, these redemption features were concluded to be embedded derivatives that should be bifurcated from the loan and accounted for separately at fair value on a recurring basis. |
| ● | The Lender’s Optional Conversion feature (4) and the Lender’s Optional Conversion Upon Merger (5) event features also met the definition of a derivative and were not clearly and closely related to the host contract and required separate accounting. The economic characteristics of the Lender’s Optional Conversion feature (4) and the Make Whole premium on Lenders’ Optional Conversion Upon Merger Event (5) were based on fair value of the underlying shares. The settlement amount of the interest make-whole is not indexed to the issuer’s equity but is based on stated interest cash flows. The Lenders Optional Conversion Upon Merger event feature is contingent on merger event. This exercise contingency is allowable as it is not based on market or an observable index. The Company noted that features (4) and (5) did not meet the indexed to equity and equity classification scope exception. Therefore, these conversion features were concluded to be embedded derivatives that should be bifurcated from the loan and accounted for separately at fair value on a recurring basis through the consolidated statements of operations. |
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| ● | The additional interest rate upon certain non-credit related events (6) are triggered based on timely filing of financial information and the tradability of the Notes, these are not related to the economic characteristics of debt. Therefore, this feature is not clearly and closely related to the debt host. The additional interest payment is settled in cash and hence did not meet the derivative scope exception. However, since the probability of the Convertibles Notes being freely tradeable or Company’s failure to timely file is estimated to be less than |
| ● | The ability to pay PIK interest feature is clearly and closely related to the debt, and was not be evaluated separately as a derivative feature. |
The Company determined the Notes contained multiple embedded derivatives that are required to be bifurcated, two of which are conversion features. As per ASC 815, if there is a conversion feature that is required to be bifurcated, the cash conversion feature and beneficial conversion feature guidance is not applicable to such conversion feature and the fair value election is allowable provided the debt was not issued at a substantial premium. As the proceeds received at issuance from these Convertible Notes do not exceed the principal amount that will be paid at maturing, there is no substantial premium.
Further, ASC 815-15-25 provides that if an entity has a hybrid financial instrument that would require bifurcation of embedded derivatives under ASC 815, the entity may irrevocably elect to initially and subsequently measure a hybrid financial instrument in its entirety at fair value with changes in fair value recognized in earnings. The Company elected to measure the Senior and Subordinated Convertible Notes in their entirety at fair value with changes in fair value recognized as non-operating gain or loss in the consolidated statements of operations at each balance sheet date in accordance with ASC 815-15-25.
Financing Transaction
On September 20, 2023, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”, and the transactions contemplated by the Securities Purchase Agreement, the “Financing Transaction”) with certain third-party and related party investors (the “Investors”), pursuant to which the Company issued (i) an aggregate of
Fair Value Election
The Company has elected to measure the Convertible Notes, including the New Notes, in their entirety at fair value with changes in fair value recognized as non-operating gain or loss in the condensed consolidated statements of operations (with the portion of the change that results from a change in the instrument-specific credit risk recorded separately in other comprehensive income, if applicable).
The estimated fair values of the convertible debt were determined using a Monte Carlo Simulation method. The Company simulated the stock price using a Geometric Brownian Motion until maturity. For each simulation path the Company calculated the convertible bond value at maturity and then discount that back to the valuation date. Finally, the value of the convertible bond is determined by averaging the discounted cash flows of all the simulated paths.
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The following assumptions were used as of March 31, 2024 and December 31, 2023:
Monte Carlo Simulation Assumptions | |||||||||||
Asset | Risky | Expected | Risk-Free | ||||||||
As of March 31, 2024 | Price | Yield |
| Volatility |
| Interest Rate |
| ||||
Senior Convertible Notes | $ | | | % | | % | | % | |||
Subordinated Convertible Notes | | | % | | % | | % | ||||
Monte Carlo Simulation Assumptions | |||||||||||
Asset | Risky | Expected | Risk-Free | ||||||||
As of December 31, 2023 | Price | Yield |
| Volatility |
| Interest Rate |
| ||||
Senior Convertible Notes | $ | | | % | | % | | % | |||
Subordinated Convertible Notes | | | % | | % | | % | ||||
The following is a summary of changes in fair value of the Convertible Notes for three months ended March 31, 2024 and 2023 (in thousands):
Senior | Subordinated | |||||
Beginning fair value, December 31, 2023 | $ | | $ | | ||
Paid-in-kind interest | — | | ||||
( | ( | |||||
Ending fair value, March 31, 2024 | $ | | $ | | ||
Senior | Subordinated | |||||
Beginning fair value, December 31, 2022 | $ | | $ | | ||
Paid-in-kind interest | — | | ||||
| | |||||
Ending fair value, March 31, 2023 | $ | | $ | | ||
The Convertible Notes are subject to minimum revenue, cash, and EBITDA financial covenants. From July 1, 2023, the Convertible Notes require the Company to maintain a minimum cash balance of $
NOTE 8 – COMMON STOCK WARRANTS
As of March 31, 2024 and December 31, 2023, the Company has
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The following is a summary of the Company’s liability classified and equity classified warrant activity as of March 31, 2024:
Outstanding | Outstanding | |||||||||||||||||||||||||||||||||||
Issuance | December 31, | March 31, | ||||||||||||||||||||||||||||||||||
Liability Classified Warrants |
| Period |
| 2023 |
| Granted |
| Exercised |
| Cancelled |
| 2024 |
| Expiration | ||||||||||||||||||||||
Convertible Notes Warrants - Senior Debt | Dec-22 | 169,597 | — | — | — | 169,597 | Dec-27 | |||||||||||||||||||||||||||||
Convertible Notes Warrants - Subordinated Debt | Dec-22 | 1,745,310 | — | — | — | 1,745,310 | Dec-27 | |||||||||||||||||||||||||||||
1,914,907 | — | — | — | 1,914,907 | ||||||||||||||||||||||||||||||||
Outstanding | Outstanding | |||||||||||||||||||||||||||||||||||
Issuance | December 31, | March 31, | ||||||||||||||||||||||||||||||||||
Equity Classified Warrants |
| Period |
| 2023 |
| Granted |
| Exercised |
| Cancelled |
| 2024 |
| Expiration | ||||||||||||||||||||||
Private Warrants | Dec-22 | 196,256 | — | — | — | 196,256 | Dec-27 | |||||||||||||||||||||||||||||
Additional Private Warrants | Dec-22 | 300,685 | — | — | — | 300,685 | Dec-27 | |||||||||||||||||||||||||||||
Public Warrants | Dec-22 | 4,100,239 | — | — | — | 4,100,239 | Dec-27 | |||||||||||||||||||||||||||||
Transaction Warrants | Sep-Oct -23 | 5,454,524 | — | — | — | 5,454,524 | Sep-28 | |||||||||||||||||||||||||||||
10,051,704 | — | — | — | 10,051,704 | ||||||||||||||||||||||||||||||||
Estimated Fair Value of Outstanding Warrants Classified as Liabilities
The estimated fair value of outstanding warrants classified as liabilities is determined at each consolidated balance sheet date. Any decrease or increase in the estimated fair value of the warrant liability since the most recently reported balance sheet date is recorded in the condensed consolidated statements of operations as a change in fair value of warrant liability.
The fair value of the outstanding warrants accounted for as liabilities as of March 31, 2024 and December 31, 2023 use Level 3 inputs and are calculated using the Black-Scholes option pricing model with the following assumptions:
Exercise | Asset | Dividend | Expected | Risk-Free | Expected | ||||||||||
As of March 31, 2024 | Price | Price | Yield |
| Volatility |
| Interest Rate |
| Life | ||||||
Convertible Notes Warrants | $ | | $ | | | % | | % | | % | | years | |||
Exercise | Asset | Dividend | Expected | Risk-Free | Expected | ||||||||||
As of December 31, 2023 | Price | Price | Yield |
| Volatility |
| Interest Rate |
| Life | ||||||
Convertible Notes Warrants | $ | | $ | | | % | | % | | % | | years | |||
The changes in fair value of the outstanding warrants classified as liabilities for the three months ended March 31, 2024 and 2023 are as follows (in thousands):
Convertible Notes Warrants - Senior Debt | Convertible Notes Warrants - Subordinated Debt | Total | ||||||
Warrant liability, December 31, 2023 | $ | | $ | | $ | | ||
Change in fair value | ( | ( | ( | |||||
Warrant liability, March 31, 2024 | $ | | $ | | $ | |
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Convertible Notes Warrants - Senior Debt | Convertible Notes Warrants - Subordinated Debt | Total | ||||||
Warrant liability, December 31, 2022 | $ | | $ | | $ | | ||
Change in fair value | | | | |||||
Warrant liability, March 31, 2023 | $ | | $ | | $ | |
NOTE 9 – COMMON STOCK
The Company has authorized for issuance of
The Company has reserved shares of Common Stock for the following as of March 31, 2024 and December 31, 2023:
March 31, | December 31, | |||||
2024 | 2023 | |||||
2022 Equity Incentive Plan reserve |
| | | |||
Reserve for earn-out shares | | | ||||
Reserve for exercise of Public Warrants | | | ||||
Reserve for exercise of Private and Additional Private Warrants | | | ||||
Reserve for Transaction Warrants | | | ||||
Reserve for exercise of SPA warrants | | | ||||
Reserve for convertible debt | | | ||||
Employee stock purchase plan | | | ||||
Reserve for convertible Series A Preferred Stock | | | ||||
Total |
| | ||||
NOTE 10 – PREFERRED STOCK
The Company has authorized the issuance of
The Company’s Board of Directors has designated
During the three months ended March 31, 2024 and 2023 there were
Dividends
Dividends on each share of Series A Preferred Stock are payable at the rate of
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March 15 and September 15 of each year, respectively, with the first payment date being March 15, 2024, the dividend for which reflects the period from closing through March 15, 2024.
Dividends are payable in shares of Common Stock (a “PIK Dividend”). The number of dividend shares is equal to the Stated Value of each such share of Series A Preferred Stock multiplied by the dividend rate of
Pursuant to the terms of the Certificate of Designations of Series A Preferred Stock, in the event the Company is unable to issue the PIK Dividend as scheduled, the conversion ratio of the Series A Preferred Stock into Common Stock will be adjusted to reflect the Common Stock that would have otherwise been issued. Due to the Company’s negative net stockholder’s value as of March 1, 2024, among other considerations, including applicable Delaware Law, the Company was unable to issue the March 1, 2024 PIK Dividend. As a result the conversion ratio of the Series A Preferred Stock into Common Stock was updated in accordance with the terms of the Series A Preferred Stock.
Conversion Features
Each share of Series A Preferred Stock is convertible at any time and in the sole discretion of the holder, into shares of Common Stock at a conversion rate of $
The Company can initiate a mandatory conversion at any time when the resale of issued Common Stock is covered under an effective registration statement or can be sold without volume limitations under Rule 144 (or successor rule), as determined by the counsel to the Company. The Series A Preferred Stock will automatically convert into shares of Common Stock at the Conversion Rate, as follows: (i)
The Company analyzed the embedded conversion options for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the conversion options are equity classified.
Voting Rights
Each Series A Preferred Stockholder is entitled to the whole number of votes equal to the number of shares of Common Stock into which such holder’s Series A Preferred Stock would be convertible on the record date for the vote or consent of stockholders at a conversion price of $
Liquidation Preferences and Redemption Rights
The Series A Preferred Stock has senior ranking over Common Stock of the Company, and junior to the Company’s indebtedness, in each case for purposes of dividends, distributions, and payments in a liquidation event.
In the event of a liquidation event, holders of Series A Preferred Stock are entitled to receive in cash out of the assets of the Company legally available, whether from capital or from earnings available for distribution to its stockholders, before any amount shall be paid to
22
the holders of Common Stock, an amount in cash per share of Series A Preferred Stock equal to the greater of: (i)
The Series A Preferred Stock are redeemable upon the occurrence of any transaction or series of related transactions pursuant to which the Company effects (i) any merger or consolidation of the Company where the Company is not the surviving entity, (ii) any sale of all or substantially all of its assets, or (iii) any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (a “Fundamental Transaction”). In the event of a Fundamental Transaction, holders of Series A Preferred Stock are entitled to receive in cash the greatest of: (i)
As part of the Company’s analysis of the classification of the Series A Preferred Stock, the Company considered the guidance in ASC 480-10-S99-3A and in particular paragraphs 2 and 3f, which require preferred securities that are redeemable for cash or other assets to be classified outside of permanent equity if they are redeemable upon the occurrence of an event that is not solely within the control of the issuer. Due to the consideration payable upon a Fundamental Transaction and the liquidation preferences of the Series A Preferred Stock providing for payout on the Series A Preferred Stock prior to payment to the Common Stockholders, the Company cannot avail itself of the limited exception of paragraph ASC 480-10-S99-3A-3f. As a result, the Company concluded that the Series A Preferred Stock are subject to ASR 268, Presentation in Financial Statements of “Redeemable Preferred Stocks,” and should be classified outside of permanent equity.
NOTE 11 - EARN-OUT SHARES
In connection with the Business Combination, certain of the Company’s original stockholders are entitled to receive up to
| (1) | the first tranche of |
(2) | the second tranche of |
(3) | the third tranche of |
The Earn-out shares will be allocated among the Company’s stockholders in proportion to the number of shares issued to them at the closing that continue to be held by them.
Due to the variability in the number of Earn-out shares at settlement which could change upon a control event, the Earn-out arrangement contains a settlement provision that violates the indexation guidance under ASC 815-40 and liability classification is required. The Company recorded the earnout liability initially at fair value, and subsequently remeasures the liability with changes in fair value recorded in the condensed consolidated statement of operations at each reporting period.
23
The changes in fair value of the earnout liability for the three months ended March 31, 2024 and 2023 are as follows:
Amount | |||
Earnout liability, December 31, 2023 | $ | | |
Change in fair value | ( | ||
Earnout liability, March 31, 2024 | $ | | |
Amount | |||
Earnout liability, December 31, 2022 | $ | | |
Change in fair value | ( | ||
Earnout liability, March 31, 2023 | $ | | |
NOTE 12 — STOCK-BASED COMPENSATION
During May 2023, the Company issued
2022 Equity Incentive Plan
During 2022, the Company established the 2022 Equity Incentive Stock Plan (the "2022 Plan"), which authorizes the issuance of incentive and nonqualified stock options and restricted stock units (“RSUs”) for the acquisition of shares of Common Stock, as well as grants of restricted Common Stock units to employees, officers, directors, and consultants of the Company. The 2022 Plan provides that the exercise price of incentive stock options cannot be less than
As of March 31, 2024, there were
Stock option activity for the three months ended March 31, 2024 was as follows:
Weighted-Average | ||||||||||
Stock-Based Compensation | Number of | Weighted-Average | Remaining | Aggregate | ||||||
| Options |
| Exercise Price | Contractual Term | Intrinsic Value | |||||
Outstanding at December 31, 2023 |
| | $ | | $ | | ||||
Granted | — | — | ||||||||
Exercised | — | — | ||||||||
Cancelled | ( | | ||||||||
Outstanding at March 31, 2024 | | $ | | $ | — | |||||
Exercisable at March 31, 2024 | — | — | ||||||||
Vested and expected to vest as of March 31, 2024 | | $ | | $ | — | |||||
As of March 31, 2024, unamortized compensation expense related to unvested stock options was $
Dividend Rate—The expected dividend rate was assumed to be
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Expected Volatility—The expected volatility was derived from the historical stock volatilities of several public companies within the Company’s industry that the Company considers to be comparable to the business over a period equivalent to the expected term of the stock option grants.
Risk-Free Interest Rate—The risk-free interest rate is based on the interest yield in effect at the date of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the option’s expected term.
Expected Term—The expected term represents the period that the Company’s stock options are expected to be outstanding. The expected term of option grants that are considered to be “plain vanilla” are determined using the simplified method. The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the options. For other option grants not considered to be “plain vanilla,” the Company determined the expected term to be the contractual life of the options.
Forfeiture Rate—The Company recognizes forfeitures as they occur.
The Company’s 2022 Plan has a “clawback policy” based on which the Company may recover from a participant any compensation received from any stock right (whether or not settled) or cause a participant to forfeit any such stock right in the event that the Company’s clawback policy then in effect is triggered. The Company’s clawback policy is compliant with provisions of applicable law, including the requirements set forth in Listing Rule 5608 of the corporate governance rules of the Nasdaq Stock Market.
Restricted Stock Units
During October 2023 and February 2024, the Company granted
RSU activity for the three months ended March 31, 2024, was as follows:
Number of | Weighted-Average | ||||
Units |
| Exercise Price | |||
Unvested at December 31, 2023 | | $ | | ||
Granted |
| | | ||
Vested | — | — | |||
Forfeited | — | — | |||
Unvested balance at March 31, 2024 | | $ | | ||
The Company has recorded stock-based compensation expense for the three months ended March 31, 2024 related to the grants of stock option awards to employees and nonemployees in the condensed consolidated statement of operations as follows (in thousands):
Three months ended March 31 | |||||
2024 | 2023 | ||||
Cost of revenue | $ | ( | $ | — | |
Sales and marketing | | | |||
Research and development | | | |||
General and administrative | | | |||
$ | | $ | | ||
For the three months ended March 31, 2024, the Company recorded stock-based compensation expense related to the vested RSUs of $
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For the three months ended March 31, 2023, share-based compensation expense was
The Company did
2023 Employee Stock Purchase Plan
The Company’s Board of Directors previously adopted, and the Company's stockholders approved, the Company’s 2023 Employee Stock Purchase Plan (the “2023 ESPP”).
The 2023 ESPP is a broad-based plan that provides employees of the Company and its designated affiliates with the opportunity to become stockholders through periodic payroll deductions that are applied towards the purchase of shares of the Company’s Common Stock at a discount from the then-current market price. Subject to adjustment in the case of certain capitalization events, a total of
The Company estimates the fair value of ESPP grants on their grant date using the Black-Scholes option pricing model. The estimated fair value of ESPP grants is amortized on a straight-line basis over the requisite service period of the grants. The Company reviews, and when deemed appropriate, updates the assumptions used on a periodic basis. The Company utilizes its estimated volatility in the Black-Scholes option pricing model to determine the fair value of ESPP grants. ESPP compensation expense for the three months ended March 31, 2024 was
NOTE 13 — NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
The following table sets forth the computation of the basic and diluted net loss per share attributable to Common Stockholders for the three months ended March 31, 2024 and 2023 (in thousands, except shares and per share amounts):
Three months ended March 31 | ||||||
2024 | 2023 | |||||
Numerator: | ||||||
Net income (loss) attributable to common stockholders - Basic | $ | | $ | ( | ||
Interest expense and remeasurement of senior and subordinated convertible notes liability | ( | — | ||||
Net loss attributable to common stockholders - Diluted | $ | ( | $ | ( | ||
Denominator: | ||||||
Weighted-average common shares outstanding - Basic | | | ||||
Convertible Series A Preferred Stock | | — | ||||
Senior convertible notes | | — | ||||
Subordinated convertible notes | | — | ||||
Weighted-average common shares outstanding - Diluted | | | ||||
Net income (loss) per share - Basic | $ | | $ | ( | ||
Net loss per share - Diluted | $ | ( | $ | ( | ||
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Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. As of March 31, 2024 and 2023, earnout shares for
The potential shares of Common Stock that were excluded from the computation of diluted net loss per share attributable to Common Stockholders for the three ended March 31, 2024 and 2023 because including them would have been antidilutive are as follows:
Three months ended March 31 | ||||||
2024 | 2023 | |||||
Outstanding RSUs | | — | ||||
Warrants to purchase common stock | | | ||||
Options to purchase common stock | | — | ||||
Senior and Subordinated convertible notes | — | | ||||
| | |||||
NOTE 14 — SUBSEQUENT EVENTS
Voluntary Petition for Reorganization
On May 7, 2024, the Company voluntarily entered into a RSA with (i) certain of its existing affiliates and subsidiaries (as set forth in the RSA, and together with the Company, the “Company Parties”); and (ii) certain Sponsoring Noteholders.
As set forth in the RSA, the Company and the Sponsoring Noteholders have agreed to the principal terms of a voluntary restructuring of the Company (the “Restructuring”) and the filing of a pre-negotiated chapter 11 plan of reorganization (the “Plan”). Although the Company intends to pursue the Restructuring in accordance with the terms set forth in the RSA, there can be no assurance that the Company will be successful in completing the Restructuring, whether on the same or different terms than those provided in the RSA.
The Company will continue to manage their business and properties as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. On the Petition Date, the Company filed certain motions with the Court generally designed to facilitate the Company Parties’ Chapter 11 Cases. These motions seek authority from the Court for the Company to obtain debtor-in-possession financing and make payments upon, or otherwise honor, certain obligations that arose prior to the Petition Date, including obligations related to employee wages, salaries and benefits, taxes, and certain vendors and other providers of goods and services that were, and in some cases continue to be, essential to the Company businesses.
Delisting of our Common Stock from NASDAQ
As previously disclosed, the Company was notified by the Nasdaq Global Market (“Nasdaq”) that the Company was not in compliance with Nasdaq’s minimum market value of listed securities of $50,000,000, Nasdaq’s minimum market value of publicly held shares of $15,000,000, or Nasdaq’s minimum bid price requirement of $1.00, each of which was required for continued listing on Nasdaq. Due to such noncompliance, Nasdaq notified the Company that it would be subject to delisting. After the Company requested an appeal hearing, which stayed the delisting action, the Company continued to evaluate its options to remain listed on Nasdaq and ultimately determined to withdraw the hearing request. Thereafter, the Company received a letter from Nasdaq that trading of its common stock and warrants would be suspended at the open of business on April 18, 2024. On April 25, 2024, Nasdaq filed a Form 25 with the SEC notifying the SEC of Nasdaq’s determination to remove the Company’s securities from listing on Nasdaq. The delisting was effective 10 days after the filing of the Form 25.
Senior Secured Convertible Notes
On April 17, 2024, the Company issued and sold to certain existing ProSomnus investors $
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Senior Indenture, as supplemented. In connection with the issuance of the Additional Notes, the Company entered into agreements with certain of the holders of its other series of existing convertible notes to, among other things, consent to the issuance of such Additional Notes.
DIP Credit Agreement
Subject to the approval of the Court, the Company, as borrower, and certain of the Company’s direct and debtor-subsidiaries, as guarantors (together with the Company, the “DIP Loan Parties”), expect to enter into that certain senior subordinate secured debtor-in-possession term loan agreement (the “DIP Credit Agreement”) with the lenders from time to time party thereto (the “DIP Lenders”) and Wilmington Savings Fund Society, F.S.B., as administrative agent and collateral agent, on the terms and conditions set forth therein. Pursuant to the DIP Credit Agreement, the DIP Lenders have agreed, upon the terms and conditions set forth therein, including the approval of the Court, to make available to the Company a senior subordinate secured debtor-in-possession term loan credit facility in the aggregate principal amount of $
Borrowings under the DIP Credit Agreement will be due on
The DIP Credit Agreement includes customary negative covenants for debtor-in-possession loan agreements of this type, including covenants limiting the Company and its restricted subsidiaries’ ability to, among other things, incur additional indebtedness, create liens on assets, make investments, loans, advances or guarantees, engage in mergers, consolidations, sales of assets and acquisitions and pay dividends and distributions, in each case subject to customary exceptions for debtor-in-possession loan agreements of this type. The DIP Credit Agreement also includes customary representations and warranties, affirmative covenants and events of default. Certain restructuring-related events are also events of default, including, but not limited to, the dismissal by the Court of any of the Chapter 11 Cases, the conversion of any of the Chapter 11 Cases to a case under chapter 7 of the Code, the appointment of a trustee pursuant to chapter 11 of the Code, and certain other events related to the impairment of the DIP Lenders’ rights or liens granted under the DIP Credit Agreement.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note on Forward-Looking Statements
This report, including, without limitation, statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. These forward-looking statements can be identified by the use of forward-looking terminology, including the words “believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “may,” “will,” “potential,” “projects,” “predicts,” “continue,” or “should,” or, in each case, their negative or other variations or comparable terminology. There can be no assurance that actual results will not materially differ from expectations. Such statements include, but are not limited to:
● the outcome of ProSomnus’s Chapter 11 reorganization in the Bankruptcy Court;
●ProSomnus’s ability to meet customer, contractual, and vendor demands and provide related services;
●uncertainty of the projected financial information with respect to ProSomnus;
●ProSomnus’s ability to continue as a going concern;
●ProSomnus’s ability to expand its sales network and product lines;
●ProSomnus’s ability to maintain and grow its profit margin from sales of ProSomnus oral devices;
●ProSomnus’s ability to expand internationally;
●the roll-out of ProSomnus’s business and the timing of expected business milestones;
● | ProSomnus’s ability to formulate, implement and modify effective sales, marketing, and strategic initiatives to drive revenue growth; |
● | expectations concerning the effectiveness of OSA treatment using ProSomnus oral devices and the potential for patient relapse after completion of treatment; |
● | the understanding and adoption by dentists and other healthcare professionals of ProSomnus oral devices for mild-to-moderate OSA; |
●ProSomnus’s ability to attract and retain key personnel;
●the increased obligations related to being a public company;
●ProSomnus’s ability to comply with its debt covenants or successfully renegotiating such covenants;
●ProSomnus’s ability to obtain additional funding;
●ProSomnus’s plans and ability to regain compliance with the Nasdaq Listing Rules;
●the viability of ProSomnus’s intellectual property and intellectual property created in the future;
● | government regulations and ProSomnus’s ability to obtain applicable regulatory approvals and comply with government regulations, including under healthcare laws and the rules and regulations of the U.S. Food and Drug Administration; and |
●the outcome of any legal proceedings that may be instituted against ProSomnus.
The forward-looking statements contained in this report are based on our current expectations and beliefs concerning future developments and their potential effects on us. Future developments affecting us may not be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) and other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading “Risk Factors,” which are incorporated by reference herein. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable law. These risks and others described under “Risk Factors” may not be exhaustive.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and developments in the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this report. In addition, even if our results or operations, financial condition and liquidity, and developments in the industry in which we operate are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods.
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Recent Developments
Bankruptcy Filing and Going Concern
On May 7, 2024, the Company initiated a voluntary restructuring process under Chapter 11 of the U.S. Bankruptcy Code to reorganize and strengthen its capital structure going forward, improve financial flexibility and better position the Company for long-term success. In connection with this process, the Company has secured the support of its Sponsoring Noteholders under a plan that is designed to deliver an aggregate of approximately $20 million of new capital into the Company. Such Capital will support ongoing operations and the development of strategic initiatives including the Company’s next generation sensor device.
In connection with this restructuring, the Company intends to fully maintain ongoing operations, including the payment of the Company’s employees, customers, and vendors in the ordinary course of business during and after the restructuring. Importantly, the terms of this financial restructuring enable the Company to maintain normal business operations for customers and suppliers during and after this restructuring process. The Company expects customers to continue experiencing its rapid turnaround times, predictable on-time order fulfillment, and exceptional device quality and performance. ProSomnus expects to continue purchasing supplies from vendors commensurate with demand for our devices.
The Company’s Sponsoring Noteholders have agreed to the principal terms of a voluntary Restructuring and the filing of a voluntary, pre-negotiated chapter 11 plan of reorganization (the “Reorganization Plan”). The material terms of the Reorganization Plan are set forth in the Restructuring Support Agreement (“RSA”) and include, among other things: An aggregate of $20.0 million of potential capital to the Company, including through a $11.0 million of capital from the $13 million debtor-in-possession credit facility, that also includes $2.0 million of senior creditor roll-down, and a potential $9.0 million new-money equity capital raise, while also honoring existing amounts due to customers, critical vendors, equipment lenders and trade creditors. Confirmation of the Reorganization Plan is anticipated, but not guaranteed, to occur within 90 days of filing the Chapter 11 Cases with the Court involving certain of the Company Parties (the “Chapter 11 Cases”). See Note 14—Subsequent Events in our notes to consolidated financial statements elsewhere in this Quarterly Report on Form 10-Q for further discussion.
Our ability to continue as a going concern is principally dependent on our ability to successfully exit from the restructuring process.
Delisting of our Common Stock from NASDAQ
As previously disclosed, we were notified by the Nasdaq Global Market (“Nasdaq”) that we were not in compliance with Nasdaq’s minimum market value of listed securities, minimum market value of publicly held shares, or Nasdaq’s minimum bid price requirement of $1.00, each of which was required for continued listing on Nasdaq. Due to such noncompliance, trading of our common stock and warrants was suspended at the open of business on April 18, 2024 and Nasdaq filed a Form 25 with the Securities and Exchange Commission to delist our common stock and warrants from Nasdaq.
Overview
We are a medical technology company focused on the development, manufacturing and marketing of precision intraoral medical devices, a new option for treating and managing patients with mild to moderate Obstructive Sleep Apnea (“OSA”). Each ProSomnus precision intraoral device is personalized based on the anatomy and treatment plan for each patient. Our patented precision devices are engineered to create unique, consistent and predictable biomechanical advantages that lead to effective, comfortable, economical and patient preferred treatment outcomes for patients with OSA.
Our ProSomnus precision intraoral devices are classified by the U.S. Food and Drug Administration (the “FDA”) as Class II medical devices for the treatment of snoring and mild to moderate OSA. We received pre-market notification and FDA clearance pursuant to Section 510(k) of the Federal Food, Drug, and Cosmetic Act (“FDCA”) for our first intraoral device in July 2014 and our devices have been commercially available in the United States since August 2014. To date, over 250,000 ProSomnus precision devices have been prescribed for patients.
Sleep apnea is a serious and chronic respiratory disease that negatively impacts a patient’s sleep, health, and quality of life. OSA is the most common form of sleep apnea. OSA is a medical condition characterized by a cessation of breathing when the tongue, soft palate, and other related tissues in the back of the throat collapse and block the upper airway during sleep, temporarily decreasing the
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oxygen concentration in the blood. During an OSA episode, the diaphragm and chest muscles must work harder to overcome the obstruction and open the airway. These episodes disrupt the sleep cycle, reduce airflow to vital organs, stress the body, and create a negative feedback loop. If untreated, OSA increases the risk of high blood pressure, hypertension, heart failure, stroke, coronary artery disease and other life-threatening diseases. OSA is associated with a reduction in quality-of-life factors including a higher risk of motor vehicle and operator accidents, workplace errors, absenteeism and more.
Until ProSomnus, there have been few alternatives for OSA patients who refuse or fail CPAP. Historically, treatment alternatives to CPAP have consisted of surgical procedures or legacy dental products. Surgical procedures, such as hypoglossal nerve stimulation and maxillomandibular advancement, are invasive and can be, irreversible, expensive, and only suitable for a narrow range of patient types. Legacy dental products, historically, have been associated with inconsistent and unreliable performance. We believe that there is both an urgent clinical need and a strong market opportunity for a treatment alternative that is effective, non- surgical, convenient, and more economical.
ProSomnus therapy is covered by most private insurance payers, Medicare, and by a growing number of public health insurance programs offered in many countries around the world. In the United States an estimated 70% of treatments are paid for by private insurance, 25% are covered by Medicare and the remaining 5% are paid out of pocket by the patient.
Providers are typically reimbursed by private medical insurance in the range of approximately $2,000 to $3,500 per patient for intraoral appliance therapy and by Medicare in the range of approximately $1,250 to $1,800 per patient for intraoral appliance therapy. The average amount varies by insurance provider and Medicare jurisdiction. At these reimbursement levels, we believe that intraoral appliance therapy offers dentists an attractive ratio of revenue per chair time in comparison to other dental procedures.
We market and sell our precision intraoral devices to sleep medicine providers in the United States and in select countries around the world through a direct sales force. We currently have 36 direct sales representatives in the United States, Canada, and Europe. Our sales force focuses their education, promotional and sales efforts on dentists who have developed a specialty in dental sleep medicine, and the physicians who are actively treating OSA.
We generated revenue of $7.5 million and a net income of $3.4 million for the three months ended March 31, 2024, compared to revenue of $5.8 million and a net loss of $6.9 million for the three months ended March 31, 2023. Accumulated deficit as of March 31, 2024 was $231.5 million.
Macroeconomic Environment
Uncertainty surrounding macroeconomic and geopolitical factors in the U.S. and globally characterized by the supply chain environment, inflationary pressure, higher interest rates, instability in the global financial markets, labor shortages, significant disruptions in the commodities’ markets as a result of the military conflicts in Ukraine and the Middle East, and the introduction of or changes in tariffs or trade barriers may result in a recession, which could have a material adverse effect on our long-term business.
We maintain the majority of our cash in accounts with major U.S. financial institutions, and our deposits exceed insured limits. Market conditions could impact the viability of these institutions. To date, these market conditions and liquidity concerns have not impacted our results of operations. However, in the event of failure of any of the financial institutions where we maintain our cash, there can be no assurance that we would be able to access uninsured funds in a timely manner or at all. Any inability to access or delay in accessing these funds could adversely affect our business and financial position.
Recent Financing Transactions
Securities Purchase Agreement
On September 20, 2023, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”, and the transactions contemplated by the Securities Purchase Agreement, the “Financing Transaction”) with certain third-party and related party investors (the “Investors”), pursuant to which we issued (i) an aggregate of 10,426 shares of Series A Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”), for an aggregate purchase price of $10.4 million at a per share purchase price of $1,000, and (ii) (A) with respect to Investors that held the Existing Convertible Notes, new convertible notes on substantially similar terms to such Noteholder Investor’s Existing Convertible Notes other than that such new notes will be convertible into shares of the Company’s
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common stock, par value $0.0001 (“Common Stock”), at a conversion price of $1.00 per share subject to the terms and conditions of the applicable new indenture pursuant to which the applicable series of New Notes have been issued (the “New Notes”), in exchange for such Noteholder Investor’s portion of the principal amount outstanding of the Existing Notes (the “Exchanges”) pursuant to the Exchange Agreements and/or (B) warrants to purchase shares of Common Stock at an exercise price of $1.00 per share (such warrants, the “Transaction Warrants”).
The Investors include certain members of the our board of directors (“Board of Directors”) and certain of our executive officers, as well as affiliates and investment vehicles for such persons that held our Existing Convertible Notes. Convertible Noteholders representing approximately $3.4 million in principal amount of the Senior Convertible Notes and approximately $12.1 million in principal amount of the Subordinated Convertible Notes participated in the Financing Transaction.
The Financing Transaction closed on multiple dates: September 20, 2023, September 26, 2023, and October 20, 2023. The exchange of the Existing Convertible Notes, including the entrance into the indentures governing the New Notes, occurred on October 11, 2023.
As a result of the Financing Transaction, in September 2023, the Noteholder Investors effectively contributed an aggregate of $6.4 million of cash to the Company in exchange for 6,376 shares of Series A Preferred Stock, Transaction Warrants exercisable into an aggregate of 1,404,524 shares of Common Stock, and the repricing of the conversion feature of their Convertible Notes, while the other Investors contributed an aggregate of $3.2 million of cash to us in exchange for 3,150 shares of Series A Preferred Stock and Transaction Warrants exercisable into an aggregate of 3,150,000 shares of Common Stock.
Issuance of Convertible Notes
On April 17, 2024 we issued and sold to certain existing ProSomnus investors $2,000,000 aggregate principal amount of the Company’s Senior Secured Convertible Notes due December 6, 2025 (“Bridge Notes”). In connection with this financing we issued $661,773 in aggregate principal amount of Notes to investment funds of Spring Mountain Capital (where Jason Orchard, a member of our board of directors serves as a Managing Director).
On April 29, 2024, the Company issued and sold to certain existing ProSomnus investors an additional $2,000,000 aggregate principal amount of the Company’s Bridge Notes.
DIP Credit Agreement
Subject to the approval of the Court, the Company, as borrower, and certain of the Company’s direct and debtor-subsidiaries, as guarantors (together with the Company, the “DIP Loan Parties”), expect to enter into that certain senior subordinate secured debtor-in-possession term loan agreement (the “DIP Credit Agreement”) with the lenders from time to time party thereto (the “DIP Lenders”) and Wilmington Savings Fund Society, F.S.B., as administrative agent and collateral agent, on the terms and conditions set forth therein. Pursuant to the DIP Credit Agreement, the DIP Lenders have agreed, upon the terms and conditions set forth therein, including the approval of the Court, to make available to the Company a senior subordinate secured debtor-in-possession term loan credit facility in the aggregate principal amount of $13 million, as described above. Borrowings under the DIP Credit Agreement will be used to (a) fund the Chapter 11 Cases, (b) make certain other payments as more fully provided in the Court orders relating to the approval of the DIP Credit Agreement, and (c) provide working capital for the DIP Loan Parties during the pendency of the Chapter 11 Cases, all in accordance with an approved budget (subject to the permitted variances) and as otherwise provided therein. The obligations under the DIP Credit Agreement will be secured by liens on substantially all of the real and personal property of the DIP Loan Parties (the “DIP Liens”), subject to certain exceptions. The DIP Liens will be senior to the liens securing the Subordinated Notes obligations and junior to the liens securing the Senior Notes obligations.
Borrowings under the DIP Credit Agreement will be due on November 7, 2024, or the earliest to occur of certain specified termination events. The interest rate on borrowings under the DIP Credit Agreement will be the prime rate plus 9.00%.
The DIP Credit Agreement includes customary negative covenants for debtor-in-possession loan agreements of this type, including covenants limiting the Company and its restricted subsidiaries’ ability to, among other things, incur additional indebtedness, create liens on assets, make investments, loans, advances or guarantees, engage in mergers, consolidations, sales of assets and acquisitions and pay dividends and distributions, in each case subject to customary exceptions for debtor-in-possession loan agreements of this type. The DIP
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Credit Agreement also includes customary representations and warranties, affirmative covenants and events of default. Certain restructuring-related events are also events of default, including, but not limited to, the dismissal by the Court of any of the Chapter 11 Cases, the conversion of any of the Chapter 11 Cases to a case under chapter 7 of the Code, the appointment of a trustee pursuant to chapter 11 of the Code, and certain other events related to the impairment of the DIP Lenders’ rights or liens granted under the DIP Credit Agreement.
Factors Affecting Results of Operations
The following factors have been important to our business, and we expect them to impact our results of operations and financial condition in future periods:
| (a) | Maintenance of the North American and International direct sales organization and international expansion |
The core focus of our sales initiative is to maintain our direct sales organization in North America. With representatives located in high-value metropolitan areas, the direct sales organization will focus primarily on dentists and physicians who are practicing sleep medicine. The main purpose of this initiative is to increase case volume from these dentists and physicians by facilitating a referral relationship between dentists and physicians, helping them expand the dental sleep medicine aspect of their practices and educating them on the advantages of the ProSomnus intraoral devices. We also intend to further expand our sales to integrated health systems and hospital networks. We have initiated the marketing and sales of our ProSomnus intraoral devices in several European countries and intend to further expand our marketing efforts into additional international markets.
| (b) | Product line extensions and remote patient monitoring services |
We intend for product line extensions to focus on enabling ProSomnus to capture a larger share of treatments for patients with OSA, snoring and other related sleep-disordered breathing conditions. We expect that each product line extension will be designed to optimize ProSomnus products for a wider range of case types, treatment philosophies, and indications. We expect that each product line extension will utilize our unique manufacturing platform and potentially create additional opportunities for intellectual property.
We received FDA clearance for an intraoral device that enables remote patient monitoring services in November 2020. The sales of such remote patient monitoring services in connection with our intraoral devices could result in an additional recurring revenue stream that is reimbursable by insurance. Our remote patient monitoring services will be based on the incorporation of a sensor into the ProSomnus intraoral devices that provides continuous monitoring of physiological health data that physicians want and cannot typically obtain from CPAP or other intraoral appliance therapy devices. Our market research indicates that our remote patient monitoring services could be a significant driver of greater market acceptance and expansion and result in significant future revenues.
Description of Certain Components of Financial Data
Revenue
We derive primarily all of our revenue from the sale of our customized precision intraoral medical devices that clinicians use to treat patients diagnosed with Obstructive Sleep Apnea. Our revenue recognition policies are discussed in more detail in Note 2 to our condensed consolidated financial statements and notes thereto for the three months ended March 31, 2024 and 2023 included elsewhere in this quarterly report.
Cost of revenue
Cost of revenue consists primarily of materials and the costs related to the production of the intraoral device, including employee compensation, stock-based compensation, other employee-related expenses, inbound shipping and allocable manufacturing overhead costs. ProSomnus has a policy to classify initial recruiting and training costs of new manufacturing employees as part of research and development expenses in the condensed consolidated statements of operations.
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Research and development
Research and development expenses consist of production costs for prototypes, test and pre-production units, supplies, consulting, clinical studies and personnel costs, including salaries, bonuses and benefits. Most of our research and development expenses are related to developing new products and services. Consulting expenses are related to research and development activities as well as clinical and regulatory activities and certain third-party engineering costs. Research and development expenses are expensed as incurred. We expect to continue to make investments in product development. As a result, research and development expenses are expected to increase modestly in absolute dollars as the research and development efforts increase.
Sales and marketing
Sales and marketing costs primarily consist of salaries, bonuses, benefits and travel costs for employees engaged in sales and marketing activities, as well as website, advertising, conferences and other promotions. By design, sales and marketing costs are tied to sales performance and increase as sales and corresponding revenue increase.
General and administrative
General and administrative expenses primarily consist of labor, bonuses, benefits, general insurance, office expenses and outside services. Outside services consist of audit, tax, legal and other professional fees.
Other income (expense)
Other income (expense) primarily relates to interest expense as well as the change in fair value of our convertible debt, earnout liability, warrants classified as liabilities, and other financing costs.
The components of interest expense include interest expense incurred under our Convertible Notes, subordinated notes, subordinated loan and security agreements, unsecured subordinated promissory notes, equipment financing and capital lease obligations.
Provision for income taxes
The Company accounts for income taxes under an asset and liability approach. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax reporting purposes as well as net operating loss carryforwards and tax credit carryforwards. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed “more-likely-than-not” to be realized. Realization of deferred tax assets is dependent upon future pretax earnings, the reversal of temporary differences between book and tax bases of assets and liabilities, and the enacted tax rates in effect in future periods. The Company recorded a full valuation allowance as of March 31, 2024 and December 31 2023. Based on available evidence, we believe that it is more likely than not that we will be unable to utilize all our deferred tax assets in the future.
The Company evaluates the tax positions taken in the course of preparing its tax returns to determine whether tax positions are more-likely-than-not of being sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax expense in the current year. The amount recognized is subject to estimate and management judgment with respect to the likely outcome of each uncertain tax position. The amount that is ultimately sustained for an individual uncertain tax position or for all uncertain tax positions in the aggregate could differ from the amount that is initially recognized. Interest and penalties associated with unrecognized tax benefits, if any, are classified as income tax expense in the consolidated statements of operations.
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Results of Operations
Comparison of the three months ended March 31, 2024 and 2023 ($ in thousands):
Three Months Ended | ||||||||||||
March 31, | Change |
| ||||||||||
| 2024 |
| 2023 |
| $ |
| % |
| ||||
Revenue | $ | 7,458 | $ | 5,808 | $ | 1,650 | 28.4 | % | ||||
Operating expenses: |
|
|
|
|
|
|
| |||||
Cost of revenue |
| 3,833 |
| 2,756 |
| 1,077 | 39.1 | % | ||||
Sales and marketing |
| 1,976 |
| 2,824 |
| (848) | (30.0) | % | ||||
General and administrative |
| 2,485 |
| 3,353 |
| (868) | (25.9) | % | ||||
Research and development |
| 955 |
| 1,019 |
| (64) | (6.3) | % | ||||
Total operating expenses |
| 9,249 |
| 9,952 |
| (703) | (7.1) | % | ||||
Other income (expense) |
|
|
|
|
|
|
| |||||
Interest expense, net |
| (1,146) |
| (1,172) |
| 26 | 2.2 | % | ||||
Change in fair value of earnout liability | 490 | 1,500 | (1,010) | n/m | ||||||||
Change in fair value of debt | 5,885 | (1,827) | 7,712 | n/m | ||||||||
Change in fair value of warrant liability |
| 58 |
| (843) |
| 901 | n/m | |||||
Other expense, net | (55) | (406) | 351 | n/m | ||||||||
Total other income (expense), net |
| 5,232 |
| (2,748) |
| 7,980 | 290.4 | % | ||||
Net income (loss) | $ | 3,441 | $ | (6,892) | $ | 10,333 | 149.9 | % | ||||
(n/m = not meaningful)
Revenue increased by $1.7 million, or 28.4%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. This increase was primarily driven by increased adoption of the use of our precision devices, increased sales and marketing investments, and mix shift to the EVO Product, all of which contributed to increased unit volumes.
Revenue from the Company’s largest customer was 4.6% and 5.6% for the three months ended March 31, 2024 and 2023, respectively.
Total cost of revenue increased by $1.1 million, or 39.1%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The increase was primarily due to product costs associated with higher sales volume of our devices and an increase in the cost of materials and supplies.
Sales and marketing expenses decreased by $0.8 million, or 30.0%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. This decrease was primarily driven by a decrease of $0.3 million in personnel and consulting-related expenses, a decrease of $0.3 million in distribution and advertising expenses, a decrease of $0.1 million in travel and in-person events expenses, and a decrease of $0.1 million in sales and marketing events expenses.
General and administrative expenses decreased by $0.9 million, or 25.9%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. This decrease was primarily driven by a $0.3 million reallocation of expenses, which were previously allocated to general and administrative expenses, to their respective functional cost centers. Specifically, these expenses, including credit card fees, recruiting, software, utilities, rent, and depreciation, are now allocated to: sales and marketing, research and development and General and Administrative cost center. This reallocation reflects a more accurate attribution of costs to their respective functional areas. Additionally, there was a $1.1 million decrease in personnel costs and bonuses, and a $0.1 million decrease in investor relations expense, offset by a $0.1 million increase in professional services, a $0.4 million increase related to legal fees, and $0.1 million increase in stock-based compensation.
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Research and development expenses decreased by $0.1 million, or 6.3%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. This decrease was primarily driven by decrease in headcount-related personnel and consulting costs of $0.2 million and $0.1 million increase in other research and development related expenses.
Total other income, net increased by $8.0 million, or 290.4%, to $5.2 million, for the three months ended March 31, 2024, compared to total other expense of $2.7 million, for the three months ended March 31, 2023. The increase was primarily due to increase in fair value of debt and warrant liability of $7.7 million and $0.9 million, respectively, partially offset by decrease in fair value of earnout liability of $1.0 million, decrease in asset disposal costs of $0.1 million, decrease in impairment expenses of $0.2 million and decrease in interest expense of $0.1 million.
LIQUIDITY AND CAPITAL RESOURCES
Going Concern and Management’s Plans
Our liquidity needs are to fund our ongoing business initiatives. Historically, our sources of cash were primarily the issuance of equity securities and the incurrence of debt and our uses of cash were to fund our operating needs and to service our indebtedness. We expect to funds received under the Chapter 11 Cases, cash flows from operations and use our existing cash to fund our operations. We have incurred recurring losses from operations and recurring negative cash flows from operating activities. We expect operating losses and negative cash flows from operations to continue for the foreseeable future.
Our ability to continue as a going concern depends principally on our ability to successfully exit from the Chapter 11 restructuring. Our plans are subject to the Bankruptcy Court’s approval, implement a Chapter 11 Plan, emerge from the Chapter 11 proceedings and generate sufficient liquidity to meet our contractual obligations and operating needs. As a result of the risks and uncertainties related to, among other things, (i) our ability to obtain requisite support for a Chapter 11 Plan from various stakeholders, and (ii) the disruptive effects of the Chapter 11 proceedings on our business making it potentially more difficult to maintain business, financing and operational relationships. There can be no assurance that we will be able to successfully exit or do so on terms acceptable to the Company, on a timely basis or at all.
The following table summarizes our cash flows for the periods indicated:
Three Months Ended | |||||
March 31, | |||||
2024 |
| 2023 | |||
Net cash used in: |
|
|
| ||
Operating activities | $ | (2,522) | $ | (3,092) | |
Investing activities |
| (34) |
| (975) | |
Financing activities |
| (330) |
| (289) | |
Net change in cash | $ | (2,886) | $ | (4,356) | |
Net cash used in operating activities
For the three months ended March 31, 2024, net cash used in operating activities of $2.5 million was due primarily to a net income of $3.4 million, offset by changes in operating assets and liabilities of $1.2 million, and non-cash adjustments of $4.8 million. Changes in operating assets and liabilities were driven primarily by $1.1 million of accrued expenses and other current liabilities, and $0.5 million of accounts receivable, offset by $0.5 million of accounts payable and $0.3 million of prepaid expenses and other current assets. Non-cash items primarily consisted of depreciation and amortization of $0.2 million, stock-based compensation of $0.4 million, $6.4 million of change in fair value of earn-out liability, debt and warrants, $0.4 million in reduction of right-of-use assets, and $0.6 million non-cash interest expense.
For the three months ended March 31, 2023, net cash used in operating activities of $3.1 million was due primarily to a net loss of $6.9 million and changes in operating assets and liabilities of $0.3 million, offset by non-cash adjustments of $3.6 million. Changes in operating assets and liabilities were driven primarily by $0.2 million of prepaid expenses, and other current assets. Non-cash items primarily consisted of depreciation and amortization of $0.5 million, stock-based compensation of $0.2 million, $2.2 million of change
36
in fair value of earn-out liability, debt and warrants, $0.3 million in impairment of lease asset, $0.1 million loss of disposal of property and equipment and non-cash interest expense.
Net cash used in investing activities
For the three months ended March 31, 2024 and 2023, net cash used in investing activities of $0.03 million and $1.0 million, respectively, was entirely related to purchases of property and equipment.
Net cash used in financing activities
For the three months ended March 31, 2024 and 2023, net cash used in financing activities of $0.3 million was due to principal payments under finance lease and equipment financing obligations.
Contractual Obligations
Below is a summary of short-term and long-term anticipated cash requirements under contractual obligations existing as of March 31, 2024:
2024 |
| After 2024 |
| Total |
| ||||
Recorded contractual obligations: |
|
|
|
| |||||
Senior Convertible Notes | $ | 16,960 | $ | — | $ | 16,960 | |||
Subordinated Convertible Notes |
| 20,404 |
| — |
| 20,404 | |||
Other* |
| 1,957 |
| 10,454 |
| 12,411 | |||
Total | $ | 39,321 | $ | 10,454 | $ | 49,775 | |||
*(1) Represents finance and operating lease liabilities, equipment financing obligations
As of March 31, 2024, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our condensed consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Significant Judgments and Estimates
Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended December 31, 2023. For more information, please refer to our Annual Report on Form 10-K as well as “Note 2—Basis of Accounting and Significant Accounting Policies” to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Emerging Growth Company and Smaller Reporting Company Status
ProSomnus is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
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Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards.
The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such election to opt out is irrevocable. ProSomnus has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, ProSomnus, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of ProSomnus’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Additionally, we are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (i) the market value of our ordinary shares held by non-affiliates exceeds $250 million as of the prior June 30 or (ii) our annual revenue exceeded $100 million during such completed fiscal year and the market value of our ordinary shares held by non-affiliates exceeds $700 million as of the prior June 30.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk in the ordinary course of business. Market risk represents the risk of loss that may impact our results of operations or financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates. We do not hold, issue, or enter into any financial instruments for speculative or trading purposes.
Interest rate risk
Our unrestricted cash as of March 31, 2024 consisted of $3.5 million in bank accounts. We believe that we do not have any material exposure to changes in the fair value of these assets. We do not believe that a hypothetical 10% change in interest rates would have a material effect on our consolidated cash flows or operating results.
Our Subordinated Convertible Notes bear variable interest rate at Prime Rate plus an additional 9% per annum. As a result, as interest rates increase, our interest expense increases. The interest on our Subordinated Convertible Notes is paid-in-kind quarterly; therefore, increasing interest rates result in increases in the outstanding balance of the Subordinated Convertible Notes.
Effects of Inflation
Inflation generally affects us by increasing our cost of labor and research and development expenses. We do not believe inflation has had a material effect on our results of operations for the periods presented in this filing.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our CEO and CFO concluded that, as of March 31, 2024, due to the material weakness described in our Annual Report on Form 10-K for the year ended December 31, 2023, our internal controls and procedures were not effective.
Inherent Limitations on Effectiveness of Controls
Our management, including our CEO and our CFO, do not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of control effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended March 31, 2024, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
To the knowledge of our management, there is no litigation currently pending or contemplated against us, any of our officers or directors in their capacity as such or against any of our property.
Item 1A. Risk Factors
Except for the risk factors included below, there have been no material changes to the risk factors previously disclosed in “Part I - Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on March 27, 2024.
We are in the process of a Chapter 11 reorganization under the Bankruptcy Code, which may cause our securities to decrease in value and may render our Common Stock and other equity securities worthless.
As previously reported in our Current Report on Form 8-K filed with the SEC on May 8, 2024, on May 7, 2024, we commenced voluntary cases under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Chapter 11 proceedings are being jointly administered by the Bankruptcy Court under the lead case In re ProSomnus. Inc., Case No. 24-10972 (JTD). Our proposed post-bankruptcy capital structure will be set pursuant to the Reorganization Plan that requires Bankruptcy Court approval. If our proposed Reorganization Plan is approved by the Bankruptcy Court, there will be no recovery for holders of our existing equity interests. Consequently, the holders of our equity securities will receive no recovery in the Chapter 11 reorganization and our equity securities, including our Common Stock and our warrants, will be worthless.
Any trading in our securities during the pendency of our Chapter 11 reorganization is highly speculative and poses substantial risks to purchasers thereof, as the price of our securities may decrease in value or become worthless. Recoveries, if any, in the Chapter 11 reorganization for holders of our securities, including our Common Stock and warrants, will depend upon, among other things, our ability to consummate the Reorganization Plan with respect to the Chapter 11 reorganization and the value of our assets. Our future results are also dependent upon our successful implementation of the Reorganization Plan.
Our being subject to a long period of operations under the Bankruptcy Court’s protection could have a material adverse effect on our business, financial condition, results of operations and liquidity. So long as the proceedings related to the Chapter 11 reorganization continue, our senior management will be required to spend a significant amount of time and effort dealing with the reorganization instead of focusing exclusively on our business operations. A prolonged period of operating under the Bankruptcy Court’s protection also may make it more difficult to retain management and other key personnel necessary to the success and growth of our business. In addition, the longer the proceedings related to the Chapter 11 reorganization continue, the more likely it is that our clients, investors, strategic partners and service providers will lose confidence in our ability to reorganize our businesses successfully and seek to establish alternative advisory and/or other commercial relationships, as applicable. Furthermore, so long as the Chapter 11 reorganization continue, we will be required to incur substantial costs for professional fees and other expenses associated with the administration of the Chapter 11 reorganization.
During the Chapter 11 reorganization, we expect our financial results to be volatile as restructuring activities and expenses, contract terminations and rejections, and claims assessments significantly impact our consolidated financial statements. As a result, our historical financial performance is likely not indicative of our financial performance after the date of the filing of the Chapter 11 reorganization.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
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Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Item 6. Exhibits
See Exhibit Index.
41
EXHIBIT INDEX
Exhibit |
| Description |
3.1 | ||
3.2 | ||
3.3 | ||
10.1 | ||
31.1† | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2† | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1* | ||
32.2* | ||
101.INS† | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
101.SCH† | XBRL Taxonomy Extension Schema Document | |
101.CAL† | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF† | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB† | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE† | XBRL Taxonomy Extension Presentation Linkbase Document | |
104† | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) |
† | Filed herewith. |
* | Furnished herewith |
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized.
Date: May 20, 2024
PROSOMNUS, INC. | ||
By: | /s/ Brian Dow | |
Name: | Brian Dow | |
Title: | Chief Financial Officer | |
(Principal Financial Officer) | ||
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