Last week, we were thrilled to congratulate our client ProSomnus, Inc. on their emergence from bankruptcy. Something you don’t see often in our line of work — all creditors were paid in full, including the unsecured creditors. We’re proud of our work with the company, its counsel Polsinelli, and lender’s counsels Lowenstein Sandler and Morris James.

The underlying business model of ProSomnus is sound. The Pleasanton, California based company makes a successful mouthguard-like device to treat sleep apnea — a chance for more than 200,000 satisfied patients to leave the CPAP device behind. Working closely with management and counsel we were able to show a compelling case to the court for the underlying business mechanics and the future viability of the company’s plan of reorganization. With sufficient capital and strong management, we expect ProSomnus to grow and succeed far into the future.

A few things stand out about ProSomnus’s case:

• Get in front of it: The company voluntarily filed for bankruptcy before operations were impacted by distress, moving quickly and aggressively. Too many companies wait too long, ignoring the warning signs. The ProSomnus board and management saw the writing on the wall and moved aggressively to restructure the company and maximize value. (You can read my recent piece about complacency creeping-in here.)
• You can’t save everything, but you can save a lot: Existing shareholders were wiped out in the restructuring as creditors took control of the equity in the business — but despite this transfer of shareholder value, the company’s aggressive action means that a powerful medical device stays on the market, continuing to serve hundreds of thousands of customers. Customers continue to report experiencing quick turnaround times and predictable on-time order fulfillment. Not only that, but the restructuring saved the jobs of more than 100 employees and preserved value for countless vendors and suppliers.
• It takes money, clarity, and relentless focus – and even then it’s risky. The turnaround plan required more capital. This is often the case, but spending your way out of bankruptcy is a challenging argument to make to investors and involves a great deal of risk. In the case of ProSomnus, there was sufficient confidence in the product-market fit that investors judged this a compelling opportunity. The fact that the bankruptcy court was willing to approve the plan is further evidence that the team’s work to put the turnaround together makes a lot of sense.
• Be careful of the cost of operating as a public company. Multiple estimates show that various disclosure and internal governance rules lead to a total compliance cost of 4.1% of the market capitalization for a median U.S. public firm. Without diligent management, that cost can spiral out of control. Part of the challenge facing ProSomnus was the increased cost of operating as a publicly traded company.

We’re proud we were invited to help ProSomnus achieve this major milestone. It is rare indeed when a company officially emerges from bankruptcy with all creditors paid in full — including unsecured creditors. At Gavin/Solmonese, we have extensive experience working with companies in all stages of turnaround and bankruptcy but broadly speaking the most important thing we’ve learned is that the earlier we’re able to engage with management, the better the results. At the first hint of trouble, give us a call — we’re standing by.