Chit Chat Stocks - Vivos Therapeutics (VVOS) | Not So Deep Dive

Episode Date: July 25, 2021

Vivos Therapeutics develops and distributes alternative treatments for patients with sleep disorder breathing. The company markets and sells its Vivos system directly to licensed professionals. Listen closely as Brad, Brett, and Ryan go through the history, financials, and future prospects of Vivos Therapeutics. Enjoy the show! Our Sunday Deep Dives are sponsored by Potential Multibaggers. Multis are looking for stocks that have the potential to go up 10x in 10 years. Check-out the service here: https://seekingalpha.com/checkout?service_id=mp_1308 Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested in more of Brad’s work? Follow him on Twitter: https://twitter.com/StockMarketNerd?s=20 Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Contact us: [e-mail] Timestamps Company Background | (2:40) Industry | (8:24) Management & Ownership | (11:16) Valuation | (13:57) Earnings | (15:01) Balance Sheet | (17:29) Our Analysis | (19:04) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now please enjoy this episode. Welcome in. This is the Sunday Deep Dive episode on Chit Chat Money. I have Ryan Henderson here as always. We have Brad Freeman joining the show. We're going to be talking about Vivos

Therapeutics. Its market cap is actually under $100 million right now. So this could be the smallest company we've ever done a recommendation from brian ferroldi uh well sharpspring could have been smaller i can't really remember but either way brad have you heard of this company before and before we or before we decided to do it for this week i have not this is my first uh interaction with it's pretty pretty interesting product brian what about you yeah this was a brian ferroldi recommendation so i took a quick not recommendation this is something he said he was looking at, we were messaging. And so I decided to take a quick look at it. And that was a few weeks back, but now that's my earliest glance at it. All right. So we're going to flip

over the rock today, trying to go over the basics of this business. And I'm going to let Ryan introduce the company. But first we have to talk about our Sunday flagship sponsor, Potential Multibaggers. The aim of the Potential Multibaggers service is to find stocks that can go up 10X over the next 10 years or compound at 26% per year. It is from our Chris, friend Chris, excuse me, our Chris. Yeah, not our Chris, our friend Chris, who goes under the pseudonym at from growth to value or at from value on Twitter. Some of his picks in the past have been Cloudflare at $39 a share. Livongo is at $24 a share. Potential Multibeggars does deep research about the companies behind the ticker. So for example, for every pick, you get five different articles

together at about 20,000 words. So a lot deeper than something that we would do on the show. and then it's spread out over multiple weeks. So you can keep up. There's a reason you pay for it as a premium service to go along with your research. And if you want to become a multi, you can go to Seeking Alpha and look it up from growth to value. Google it, either potential multi beggars or from growth to value or go to at from value on Twitter. All right. That's going to do it for that. Brian, do you want to introduce Vivos Therapeutics? Yep. Vivos is a medical technology company that's focused on developing treatments for mild to moderate obstructive sleep apnea. So OSA, otherwise, basically they're trying to

help cure sleep apnea. And so a lot of people might not know the implications or the ramifications of sleep apnea. And this was kind of an eye opener to me, but there's a lot more, I think it's one in 15 adults based off a quick Google search that have sleep apnea. So this is essentially when it's a sleeping disorder where a person's breathing repeatedly starts and stops. So I've had family or friends that have done this before, and they go in, they take a sleep test, and it turns out they have sleep apnea, and it'll say, you stop breathing 41 times in an hour. And it's kind of an eye-opener to them.

And so apparently, this is a result of the under or overdeveloped upper and lower jaws because it can block the airway, can create the soft tissue to kind of block you from getting air in and being able to breathe properly. And so it can be pretty serious. People can die from it. But beyond that, it also can cause just interrupted sleep in general. You just get tired, real tired. Yeah, you can have chronic fatigue, or you can have headaches, even it can even lead to depression, heart disease. I mean, just you don't have sleep. So that's And the problem is a lot of it, from what I was reading in their SEC filings, a lot

of it is underreported. Like people don't even know they have it. Yeah. Apparently, I was listening to one of the members of their management team, and they said, not every person with sleep apnea snores, but everyone that snores has sleep apnea. I'm not necessarily sure if that's true, but snoring is a big symptom. And so beyond just health concerns, it can also, let's say you're like married, it can keep your wife or your husband up if you're snoring super loud or your sleep's constantly

being interrupted. So it can kind of mess up their sleep as well. And so it's really kind of a big underreported problem. And the traditional cure for this is kind of the CPAP machines. I'm blanking on what CPAP stands for, but it's the headgear that goes around your head at night and it pumps, I think, some kind of more fresh air into your nose or your airways. But this is a little different. It's meant to be basically like a retainer. It's just a little oral device that can shift your jaw a little bit so that you can have better airways. And then you're only supposed to use it for two years. And then it kind of gets at the root of the problem. You don't have to use it anymore after that, as opposed to a CPAP machine where you're kind of using that for

the rest of your life. And it's like a, it's like a nighttime retainer. I think the recommendation from what I've read was 12 to 14 hours of wiring in a day. So like evening and then take it off morning okay and they sell these through dentists if i'm not mistaken and part of it includes services revenue do you want to talk about that part uh i can i can pull it up so we got about this could change over time because they're only starting revenue and there was some covid i guess kind of stopped some of their appliance sales their hardware sales so it looks like they're at about 50 50 uh appliance sales right now and then services sales which is services. Some of that is what they call VIP stuff. And that is just basically training

dental offices to use and identify the OSA and then using these, oh gosh, what's it called? Vivos, using the Vivo system correctly. So all this stuff around that, and then appliance sales or product revenue is basically just selling the product itself. And then they have some other software services things that they're adding on top of that, but I'll save that for my future growth opportunity they talk about the vivos system i'm putting that in air quotes it's not just giving you a retainer that also requires monitoring your sleep so checking like doing the sleep study which is like braces it's just like braces yeah and then they take the imaging kind of map your jaw to see how they need to correct it uh one of the vivos doctors kind of they said

they choose an algorithm but it's basically the doctor saying this is how it needs to be corrected And then they build for it. And through the dentist network, they sell it to you. So that's kind of just the gist of the business. A little bit about the history. Vivos was originally founded in July of 2016 as Corrective Biotechnologies. Now, the history of the business is a little messy because there was some technically reverse acquisitions in order to create the company that exists today. And so it looks like Kirk Huntsman, who is the CEO, and Dr. Dave Singh, which who's the chief medical officer were the two founders and so dave singh is pretty well renowned in the industry it looks like he's written a book called pneumopedics and craniofacial

epigenetics um oh good enough it's like 200 bucks so i wasn't gonna it's like a it's a it's a textbook uh for uh dental colleges yeah it basically covers facial development um and so he's really i guess sort of the mastermind behind it and i believe his company was the one that was acquired. So they called it a reverse acquisition and recapitalization of biomodeling solutions, first Bevos, which were the two companies that kind of came together because I think they owned the patents in order to get them. He's been working on it as either a researcher at a university or something like that since I believe 2006, he might've done a PhD paper or something like that. Okay. And then they went public, I believe in December of 2020, but they followed

on with a second offering. Yeah. We'll get to that. I'm sure Brad, you might have that on the balance sheet, something like that. Yeah. But I'll hit industry and competition. So if we're looking at the sleep apnea market, it is quite large, but they are trying to expand it sort of, and they're kind of trying to build out their own niche. So it's unclear whether they're going to have to win market share versus the CPAP machines, or they're going to try to get people that are being unidentified already. Because one of their claims is that a lot of people who have osa are not being identified for and then going through the dentist's office it'll be a lot easier for them to get that to get that treated so what do

you mean by expand the sleep apnea market like like the people that they're addressable market specifically so the people that are not getting treated right now that have no idea that they have sleep apnea they're going to hopefully through the way they're doing it through the dental offices expand that, but it's unclear whether they're going to have to do that or compete entirely with the people that are getting, with the CPAP, you know, customers, or maybe a little bit of both. But it's estimated that about 10% of US adults have OSA and that should be treated. So there might be more that have like mild symptoms of OSA, but there's an estimated about eight to 11% of the population that really should get treatment for this thing. And that is about

43 million people in the US and Canada. And that's kind of how they identify their TAM. And then with an average selling price of $1,600, and that would be what they sell to the dentist and the dentist sell it at a higher price to, well, we'll call them customers, their patients, I guess. So that amounts to a $69 billion opportunity. Now, that's pretty high. If they ever got even to 3%, 4% of that, that would be an amazing feat for this company. But one big competitor that Ryan mentioned, and really the biggest competitor that holds the majority of the market in at least dollar spent is the CPAP machine. ResMed makes them. They do about $3 billion in sales a year. And there are other competitors. So I'm sure that the CPAP market

is much larger than just $3 billion. So there is an existing market there to treat the stuff people want to get treated. CPAP is currently a bit cheaper than Vivos. But one of their pitches is that it requires lifetime use to kind of get away what the real value proposition is here. Will customers like the CPAP machine? Will they want the Vivos system? And then there are also surgical procedures that are a bit expensive, but Vivos and CPAP are both probably better than the surgical ones if they solve the problem. And especially if Vivos isn't a permanent solution that you have to wear at night and it doesn't require a $10,000 or $20,000 surgical procedure, you know, you'd probably go with Vivos instead. Yeah. This kind of gets at the root of the

problem, but it also, I believe it's mostly covered by insurance. Like most insurance plans. They said they estimated about 50% on average will be covered. That's just on average. All right, Brad, you want to hit management and ownership? So moving on to management and ownership, the, or one of the co-founders and CEO is Kirk Huntsman, as we talked about, he's got some really interesting and relevant experience. He founded Dental One, which grew into a leading dental service organization in the nation. It was working across 15 states and 165 practices before they sold itself. So pretty big scale. The CEO, he was also the CEO of ReachOut in America, which was owned by Morgan Stanley or

one of their private equity portfolio companies. He's got lots of experience as a head executive as other companies as well, like OrthoVentures and just 21 Glassdoor ratings. So please don't take this seriously, but 100% approval. So that's off to a good start. We'll see where that goes from there. The CFO is Brad Aman. So he was the CFO of a cleared medical device company and the CFO of a medical imaging company. He was also the CFO of LifeVantage, and he saw it to the IPO. The CMO is Dr. Dave Tsai. I'm sorry if I mispronounced that, but he's the chief medical officer. He's also one of the co-founders. As Ryan mentioned, he is also the president currently. He serves on the board of examiners for the Royal College of Surgeons of England. So we talked about

that fancy textbook that he wrote, and clearly that college at least has a lot of respect for it. He's voted an outstanding professor from Harvard and the University of Michigan. So shout out to my alma mater. I mean, yeah, I mean, Harvard's whatever, but Michigan, I mean, that's the Harvard of the West, but it's not really. So let's not call it that. But he led the National Institute of Health, which was funding a research program into oral surgery and oral makeup. And he led that research program. And he was also the former CEO of Biomodeling Solutions. Sine and Huntsman together own 23% of the company. The remaining insiders only own 1% in additional ownership. The proxy statement did not mention any institutional holders. I looked

through it several times, but third parties like Koi Fin and Yahoo Finance have that sitting at 5%. Pretty low, but I mean, it just did go public. So you kind of expect that to ramp up as they prove themselves and as we move forward. But as Brett was mentioning to me before the show started, there are a few related party transactions to check out. I won't get into the nitty gritty details of that, but if you're interested in learning more about this company, just control off that when you go to their filings and read more? Yeah, for sure. I mean, it's hard to read those. So it's hard to even relay them back on a podcast. I would say just check those out yourself. Yeah. All right. I'll hit valuation. And one of the reasons that Brad mentioned that there's not

really much institutional ownership is because the market cap is really low. It's only at $93 million. So no one like Vanguard, BlackRock are going to spend their index funds right now. Might be a little different when you're listening. Ticker is VVOS. Enterprise value is technically a bit lower than this, but they are burning cash. So market cap is probably the best bet. They're going to burn all the cash they have. And they likely want to, you're going to want to budget, I guess, if that's the best way to describe it for more share dilution. Price to sales is seven. Price to gross profit is 8.7. So as Ryan will get into, margins are pretty good. They're unprofitable and they have about 2.5 million options outstanding, 2 million in warrants

outstanding. I would expect some dilution coming down the line. I think they have 22 million shares to have that going. Yeah. Brad, do you have anything? I was just going to mention the overall share count to give you an idea of how much dilution is coming, but you beat me to it. So thank you. Yeah. So you can easily expect 10%, maybe even 20% over the next few years here. Ryan, do you want to hit earnings? Yeah. I'll talk about the 2020, I guess, full year earnings, just because that kind of gives a better picture. So Vivos had 13.1 million in revenue in 2020, and that was growing 15% year over year. Gross margin is about 80%, but they are spending, I guess, a lot on operating expenses. So 16 million in general

and administrative expenses. They had roughly negative 6 million in operating cash flow. Operating expenses grew at 23% year over year in the first quarter. I mean, there isn't that much to talk about as far as earnings because there technically aren't any earnings. But this is a company that is, I mean, they are newly public. They obviously wanted this cash for a reason. They're using it to hopefully grow and invest into the business. They just, if I'm not mistaken, they just built out a big facility. Do you want to talk about that? Yeah. There's like six other things that they're doing, not on the side, but kind of to add on top of what the Vivo system is. One of them is a partnership for an OSA testing device that can

go into the uh kind of the home you can use wear on your finger the vivo score the score thing that is really just getting rolled out i'm not even sure if they have fda approval yet so that could be something that comes down the line they have these medical centers that they're trying to partner with to get you know doctors and the dental practices lined up um and they have some online therapy things for like jaw corrections that they're adding as well and then they have a software system that they're doing so what two things that you have to kind of ask yourself when looking at this company is one, how much was revenue depressed because of COVID? They kind of had to pause some of the build-outs because it takes a little bit of a lead time to get these

dentists on. And then two, you got to ask, and they mentioned this on the conference call, they were like, we had to raise all this money because there's so much demand for our products. So we need to spend all this money and we're going to get this return on that investment, all the money that Ryan mentioned that they're spending right now on operating expenses. You have to ask, are they going to get that return? That's kind of a bet you have to make without knowing whether it's certain of happening. But they also have to train. The dentists have to get certification in order to be able to diagnose this or prescribe

these drugs correctly. So that part kind of takes time. And they have to go through vivos, right, to get the certification? Yes, yes, yes. It's a bit complicated. They kind of have their own thing they're trying to build out. But yeah, something to read up on too. Brad, do you want to hit balance sheet?

Wrap up the first half? For sure. And before going into that, just context or adding more color on that 15% year over year growth number. You got to remember, and Brett and Ryan talked about it, but the pandemic shut down elective care and really like that's this company's niche. So when those procedures aren't happening, 15%, it doesn't sound like a barn burner when other companies are growing by five, 0% or more. But that's pretty admirable, I think, in light of what they had to deal with last year. But moving on to balance sheet and liquidity. So they have $14 million in cash on hand. As Ryan mentioned, they burned through $6 million in operating cash flow for 2020. They do have those options and warrants for maximum dilution of around 20%. They have $1.1 million in current debt and $105,000 in non-current debt. They also have some convertible notes outstanding, which all come with a 6% interest rate. So pretty considerable there. They have virtually zero interest expense. However, as a lot of these

convertible shares that they had outstanding were converted to equity in connection with the IPO. So, I mean, it's not an atrocious balance sheet, but unless they can magically turn on the free cash flow dial right now, they're probably going to be raising some money in the future with those options and warrants or through something else. Yeah. And they said that balance sheet there, i believe is before the race they did this spring so there should be some more cash coming in but they said it wouldn't last forever so you know they're gonna have to raise some more money maybe maybe in the future so yeah all right let's hit the ad break we'll get back and do more analysis on vivos therapeutics cox panoramic wi-fi includes advanced security to help protect

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need that moment of zen when you feel free in fp shop the summer 2022 collection at freepeople.com okay welcome back we have any anecdotal evidence here brad yeah nothing down uh i snore so apparently i have sleep apnea but other than that no no anecdotal evidence for me all right next time you go to the dentist you got to tell them to get on get on devos for their shareholders yeah and i'll also caveat that i know i heard the management whoever was for management say that but then i checked on the mayo clinic.org or whatever and it said not everyone that snores has it so they might just be talking their book yeah but i guess no anecdotal evidence there's probably not going to be i don't have any from vivos from the actual vivo system because they've

only ever treated 15 000 patients uh over the lifetime of the product but as far as the cpap machine i do have family members who i guess suffer from sleep apnea not anymore because of the cpap machine but well they suffer for it but it treats it yeah and they it's been i this is why it's called anecdotal evidence, but they very much like having the CPAP machine. It's not that obstructive. It just kind of goes over the nose. It is kind of a pain to have to get, you have to get filtered water to fill it, at least in this case, from what I was hearing. And then it kind of, it's basically full on headgear. So it can be somewhat obstructive. I would imagine that there is probably a lot of demand for just a one-time fix as opposed to

something you have to wear for the rest of your life. Yeah. That's the one, that's the thing you got to consider is the value proposition better for something that like CPAP might be a tiny bit cheaper, but you're stuck with it or Vivos where, and now we, there's not too much data on the effectiveness of it. They claim, you know, majority of people like it, but they've only done a few studies. So we'll see. But if Vivos can be in, it's a little bit more expensive and it's only in your mouth for 24 months, but then boom, your problem's solved. I mean, that seems like a better value proposition to me, but we'll see. We'll definitely see. All right. Future growth opportunities, Brad, what are your thoughts here? Yeah. And I'll let you guys hit on those other

six separate products that they're really trying to build out at this point in time. But for me, when you have a product that seems as impactful and as beneficial to so many consumers as this does. I mean, one out of 15 adults, as Ryan was saying, and it can be a really serious ailment. International expansion, I know with healthcare, it's always going to be more complicated. It's always going to be more difficult figuring out the appropriate regulatory clearances and approvals in various countries. But it really seems like there's going to be demand for this everywhere they try and go. So continuing to roll this out to countries internationally, I think they'll continue to find success. Yeah, I mean, it's a problem. It's a

problem everywhere i think maybe some cultures or some countries have higher rates versus other have lower but it's got to be everywhere so yeah ryan what do you mind's the vivo score so this is basically that sleep monitoring ring that we talked about uh someone would it's designed to be essentially a sleep test for you put it around your finger it is apparently fda cleared okay or like fda2 i guess there's different stages of clearances but uh and it's powered by sleep image and if i'm not once again there was another podcast where management goes on and talks about the tech behind it i'm not qualified to do that but it's essentially measuring your breathing patterns uh to see how many times your your breathing is stopping at night and

it says it has 98.9 accuracy it's much cheaper than an in-home sleep test and then they talk about i mean this is one of those they said they want to build out a bunch of adjacent products on top of the vivo system this is one of those if they can get a cost-effective sleep test that really does go around the ring now granted i usually question those things anytime there's like you know one of those rings that just solves everything yeah but this isn't like that it's just testing for a specific thing and then if they can solve that not solve it excuse me if they can basically tell you okay you have bad sleep apnea you have mild sleep apnea whatever studies that we have here recommend that you should spend this it's covered by your insurance your dentist will

tell you this that's kind of their whole pitch is where the dentists are what people trust or who people trust and if they have them they'll be able to be the marketing team for the vivo system and it's also internet connected so this gets basically uploaded right to the cloud and then i know they talk about the cloud it's in yeah they really flex that they can connect to the cloud all right difficult feet but they but it's designed so that you can look at it on the website or online. And so can your physician or whoever has prescribed this to you? Yeah. Yeah, for sure. Yeah. Mine is the billing intelligence services. Now this is probably the most promising thing I saw for their adjacent categories. It's called BIS. So BIS is a revenue

management software that goes along with selling the machines. And this is used by the dentist. It costs about $750 to $1,000 a month. And apparently you can help outsource an employee that you would need to take on to manage these things like the back office stuff, administrative work, stuff like that, revenue management, payment management, because there's, you know, with these dental things that can last 24 months, you have to, you know, pay some stuff up front. Sometimes it's covered by insurance, super complicated sometimes. So just for example, for every 1000 dentists that use this, it is around that would be around $10 million in annual sales. If you assume that on average, people would be spending $10,000 a year, likely high

margin revenue. Right now that's 200K revenue from this last quarter. So building that out, but I think it quadrupled from 2020. So I think this is a pretty promising add on for them. We'll see where it goes, but yeah, I like it a lot. All right. Highlights to lowlights, Brad. My highlight is really simple. The value proposition is really clear here. We talked about how the CPAP machine is not super convenient and not super, I guess it's intimidating almost for both the people using it and for spouses. Um, so, so transforming from, from that monstrosity of a product to something that looks more like a retainer and more like this, I think, um, it's, it's really easy to see how they're, how they're providing value within their core product. And that's not always the case with some of the companies that we, we, we cover. Um, but the low light for me is, um, not to use the

cliche of circle of competence, but I don't know how I don't have any experience with, with sleep apnea or anything like that. And I don't really know firsthand how much better this truly is than the other products on the market. And because I don't know, and because it's such a new idea, it seems like it's a little too early, even for me. And last week, we were talking about Matterport and how the risk reward could almost be far better a few years from now. And I feel the exact same way about this company. Really cool product, but I don't have enough expertise and I don't have enough um wisdom in the space to know this early on if they truly are doing something impactful i think they are but it's kind of a wait and see for me so so not a really negative low light but

but yeah that makes sense that makes sense that's one of my i guess concerns is the circle of competence like this sounds great and it's i mean they sell a really good story but everyone i know that has a cpap machine is old enough to the point where they're like yeah i don't mind wearing it for the rest of my life. It makes, you know, it makes life easier for me. Whereas would a two-year adjustment be that much of a step up? It's kind of hard for me to tell, but my highlights, I guess, is if, if the tech's legit, uh, and people don't like wearing the mask at night, I know some of the CPAP machines are pretty loud too, but there are also quieter ones. So you could probably just upgrade, but I would say people are aging. Everyone's aging every year. So there's going

be continued people every year that are going to be you know more your audience kind of regrows every year if i'm describing that correctly you know what i mean there's going to continue to be more potential customers that you know the cpap customers might just die off in 30 years if you get if you know what i'm saying yeah but i think cpap's still doing fine i mean there's only been 15 000 of these i guess the concern is that it sounds great but then it's not really they're not solving that much of a problem that they aren't that big of a step up for the cpap i'd argue that's if they're what they're claiming is true i'd argue that's not the case i'd argue it's a huge step up because it's permanent solution if they're right if if

what they say you know is correct it is a permanent solution and you only have to wear basically a retainer at night now it costs a bit more but i think that value proposition is a lot better but as someone that wears a retainer at night i would say i would prefer i would probably prefer to wear a seat pad machine it's less permanent for the rest for 50 years if i was 50 and deciding yeah i think i would well i mean i'm not doing that much at night what about you brent yeah and i i just i think this goes or ties into the highlight slash low light because for me it was the product looks amazing but low light i don't really know if it's amazing or not so so we'll So for me, I'm just going to, I'm kind of going to be looking for this really generic signal of revenue growth rebounding and margins continuing to expand to show me that they're not just spending absorbent amounts of money on growth to tell me that they are fixing a problem because I think they are, but I don't really know all that well. So it's going to, that's where the wait and see approach kind of comes from.

And that's kind of the catch point, too, because that's where it's like, oh, well, great. Now they've proven it and now you're too late as an investor. But it's like this just the product isn't proven yet. And then also, I mean, it's not not it's like it's going to be continually proven over the next few quarters and years because, I mean, it works. have multiple studies but it's just the total efficacy and whether consumers not patients like cpap over vivos i mean it's what it works i mean if it works how they only sold 15 000 over their lifetime there's a billion people well i mean they've only had revenue for a few years they've only just started selling it and it takes a long time to train these dentists so it's not

going to be like a like a social media company you know it takes a while to train people on this thing it's a slow process i'll get into my other low lights uh they have a chief evangelist that's usually that sounds like ehrlich bachman from silicon valley bit of a yellow flag there but it was billy robin the chief creative right uh maybe that was a joke but uh someone on this podcast they said they're the chief evangelist um and then in 2020 a group of shareholders accused the board of breaching their fiduciary duty and insider self-dealing they settled on this paid out 300 paid paid out three million dollars i believe in like 300 000 shares uh of common stock which have a lock up on them and then also this year the washington department of financial institutions

launched an investigation into the company about certain stock sales uh just there were some red flags with management i think three board of directors were removed like two years ago a lot of this stuff might be due to some of the acquisitions that lost first started the company but i guess it's nice to have the settlement behind them but now you're kind of waiting to see what happens with this investigation yeah i saw that too that was a bit interesting um there's a lawsuit from i forget who it is but there's a lawsuit from a group that's separate from that too so there's a lot of things in that regard um i'll hit my highlights i mean yes you guys may have had a different opinion but i think the text seems a

lot better than cpap for patients if they're correct um and i do love how they're attacking through the dentist office with this comprehensive product because if you get the dentist on board they're incentivized because they can make really strong margins with this thing and they're going to just buy a bunch from you it reminds me a lot of a line technology which uh that i mean they just have and the thing with those two is you can see the incredible mode that something like this can develop over time because if you're locked in with a dentist office no one's going to choose something else unless now there's a chance of a technology disruption in this industry and that's always that's always there but you know and it looks like markets are great too brad you

have something so kind of with a line they have that that b2c disruption from smile direct club do you see that yeah i don't really think it's hurting them very much but but do you see that as a threat here oh here uh hard to tell i'd say i i don't know um let's see low lights uh Follow-on offering after an IPO is a bit confusing. It seems okay. But when you do a follow-on right after the IPO, that's kind of like, all right, well, do you have your cards in order here? Like you guys said, need to confirm the technology actually works. It's going to take some time. It seems like they've proven a lot, but there's still some stuff to prove. Related party transactions. But otherwise, I thought surprising amount of low lights,

small amount of low lights for a microcap healthcare company. Usually it's like, man, this is a mess. And it's kind of like a Hail Mary. This is, it seems less of a Hail Mary, but it's still, you know, still a lot, still some low lights there. All right. Bold case, Brad, what do you think has to go? What do you think has to happen for the stock to perform well over the next few years? Yeah. And I agree with Ryan that, or I don't know if Ryan or Brad said this, but the older generation probably is already comfortable with their, older generations are probably more comfortable with CPAPs and less open to changing. So I think the bull case is that they can demonstrate that it is a clearly concretely better product than the CPAP machine.

And the younger generations like us grow up embracing this as CPAP 2.0, sort of like landline phone transitions to cell phone or blockbuster to Netflix, this kind of is embraced more and more by people who have less and less experience with the legacy product. And the value proposition that we all think is there is truly there and they can expand it globally and just be CPAP 2.0 and the ubiquitous brand that has come with that. Yeah. And I think you mentioned some comparisons there. I think the Invisalign versus braces is a great analogy here you can't just pattern match it and say align technology is one of the best stocks of all time and say that this is going to be like that but it feels like a situation where

if this align was clearly better than braces and then just over time they just chipped away at market share again not saying it's guaranteed but that that's a scenario that that's kind of bull scenario. Ryan? Yeah. Bull scenario is wide open. I mean, this is, if they become sort of the CPAP 2.0, if they can really have a permanent fix to sleep apnea, you don't need to do much math. It's going to be larger than a $90 million company. Then I guess, you know, but a lot of is yet to be seen so but obviously there is a huge market for this product yeah yeah no i don't think anyone's going to be in disagreement the potential upside but any company that's under 100 million dollar market gap is huge potential upside uh for me very simple very similar to you guys they just

win more dentist offices train them to identify osa and then get more patients on the vivo cycle what's interesting is i bet a lot of people that are younger do not identify they have osa and most people are going to the dentist on what's it six months one month or one year i feel like every year so if the dentists are able to easily identify whether they ask osa and they just have to ask people a simple question like all right are you sleeping well do you think are you tired all the time you fill out this thing put on a little score thing that could expand the market a lot it's a big if but if it works like it does then i mean the path to hundreds of millions of revenue is yeah it's clear it's there and if you're i mean let's see

see the the c-pat maker was what a hundred bagger this line has had if you're thinking like well it's one product how well can it do think about how well people spend a lot of money yeah they spend returns of them with the insurance aspect there is the ability to spend a lot of money at the dental office and the being i can imagine being tied on their time having this issue like you would pay big bucks to get it solved and that's why your spouse would pay big bucks to have it solved for you yeah family i mean families are the values are all right let's wrap thing well we have two seconds left barrick case brad what could go wrong here yeah so i'm gonna assume that the product is better than the CPAP. And in that case, the better case would be they invite these

legacy medical device makers with deeper pockets and larger R&D teams to come in and create a comparable product and erode margins and market share. We're seeing this. I own Butterfly, which is an ultrasound disruptor. And now General Electric is coming in with a new product that isn't quite as good, but it is more similar and solves some of the issues. And it does erode some value proposition that butterfly is creating so something like that um i think that's that's the clear bear case yeah the defensibility you with the patents they have you would think they have the defensibility but sometimes that is unclear i i'm not exactly sure about the history but with the line technology again i do think they had copycats and they sued them and won and that

That could be some sort of defensibility here, but yeah, that could be a bear case for Admin. What was the name of that Botox-ish company that we did? Avalos. It reminds me. They were pretty solid patents there, and then they figured out a way around it. I'm not saying it's going to happen. I don't really have any insight as to whether it's going to happen, but yeah, if the value proposition isn't as defensible as it currently is, that's an issue. Yeah, for sure.

For sure. Ryan? For me, it's that they are really selling more of a story than a product and that all the related party transactions and all sort of the financial concerns that management might be self-dealing come to fruition and are realized to be true. And then this Washington, this new investigation. I mean, I'm not sure who that is. It could be a small, I mean, that could just be a you know middle level employee that sold stock and just you know i mean that could have nothing to do with management but it could it also could have something to do with management yeah

you know when you start to see some of the stuff like a three million dollar settlement when shareholders sue you that kind of stuff can if it's happened once it could maybe happen again yeah and that might have been a settlement where they just wanted to settle and they didn't want want to fight it they don't want to waste the resources better settlement than evos they got gouged on that if you remember yeah yeah i guess if it takes if it takes too long to get the dentists on board too they're going to dilute the crap out of shareholders uh because they're going to run out of cash at this rate yeah that's true uh that kind of comes into mind um if the product isn't as good as the cpap in the patient's mind and it gets sold at a higher price you know

they're gonna lose out and everybody off the market share and the dentists aren't going to want to take them on if there's evidence that it's not worth the investment. I think it costs like $50,000 for a dental office to get on board with this thing. And they advertise a return on investment in 18 months. But if that's not true, you're not going to get many dentists want this thing. And then with that, you're not going to get much revenue and share dilution is going to impact you pretty badly. Pretty simple, pretty simple bear case. All right. More or less interested brad what are your thoughts with this company yeah more interested uh not super interested but more interested and gonna continue watching this over the next several quarters to

see uh how defensible this lead they have in in creating value in the in the sleep apnea field truly is but but taking a wait and see approach as i kind of mentioned before um and it's an interesting product cool company yeah it seems smart here ryan uh mine's kind of a counter intuitive answer but i am less interested but will actually keep watching it um i kind of have to prove to myself that this isn't out of my circle of competence because it can always every time i look at a medical device company i always think oh i can understand this it's way easier to understand than i thought but that's what you're designed to think reading you don't want to read 10k and think oh i'll never understand this so i mean obviously they're trying they want it to be

understandable i don't know the incentives from the dentist's point of view i don't know yeah but they also uh have to spend money to make that money and it's a risk they might not be willing to take they have to get certified they have to pay for that uh what if they don't think it's worth the reward then they won't yeah and they won't sign up but if they said that maybe but i mean they're signing up a lot of vips forget the exact number um yeah i mean it's gonna take some time i think they said you only have to sell like god what's the number like 20 to make you to get profitable and after that it's like i don't know 50 gross margins on these things selling them in the dental office so sounds enticing but again they have to get that right

all right what about you uh more interested i mean it's early but then we're gonna watch them you know over the next few quarters uh i mean they have a lot to prove it seems very very early but it's going on the watch list probably one of those that you kind of look at the headline numbers each quarter as something pops out to you all right maybe i'll research this this further uh but i like what brad was saying about how you know the it might be a better risk reward in three years just like matterport although the valuation is a little it's not as bad as it is as matterport if maybe if this was a SPAC do you guys think it would come out of like 40 times sales something like that if they SPAC it up and uh put some nice revenue numbers on some presentation

yeah i mean the reward's definitely high uh but there's no doubt you're taking more risk here yeah yeah you just gotta weigh that you gotta weigh that all right that's gonna do it for this episode but oh i'm forgetting brad we have stock for next week and it's your choice what do you got for us yeah we are going to pet land and we're doing chewy so uh it's always been on my radar since it went public and i've never really dug into it so excited to explore nice should be fun Should be very fun. All right. That's going to do it for this episode. Thank you all for listening. Remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch

Capital clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next week. Bye.