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spk08: Thanks, operator. Good afternoon, and thank you for participating in today's call. Joining me from Sunindo are Bjorn Berghain, President and CEO, and Michael Watts, CFO. Earlier today, Sunindo released financial results for the quarter ended June 30, 2022. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include for-listen statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results, or performance are forward-looking statements. All forward-looking statements, including those related to our operating trends and future financial performance, the impact of COVID-19 on our business, expense management, expectations for hiring, growth in our organization, market opportunity, revenue guidance, commercial expansion, and product pipeline development are based upon our current estimates and various assumptions. These statements involve mature risks and certainties that could cause actual results or events to materially differ from from those implied by these forward-looking statements. Accordingly, you should not place under reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the risk factor section of our most recent annual report on Form 10-K filed with the Securities Exchange Commission on March 23, 2022 and available on EDGAR and in our other public reports filed periodically with the SEC. This conference call contains time-sensitive information and is accurate only as of the live broadcast on August 10, 2022. Tenendo disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. And with that, I will now turn the call over to Bjarn.
spk06: Hey, thanks, Matt. Good afternoon, everyone, and thank you for joining us. For today's call, I will provide opening comments and a business update, followed by Mike, who will provide additional detail regarding our quarterly results and updated 2022 guidance before opening the call to Q&A. Total revenue for the second quarter of 2022 was $10.5 million, representing growth of 32% over Q2 2021. Growth in the quarter was driven primarily by continued increased procedure utilization, increased general wave console sales, and strong TDO sales growth. When analyzing procedure instrument utilization trends, we realized sequential monthly growth throughout the quarter, with June being the strongest month in the company's history. While our growth is predicated on our ability to penetrate the root canal market and sell consoles to new users, The durability of patient volumes in dental offices is a positive sign that the end market is strong and there is demand for our technology. In the second quarter, we sold 45 General Wave consoles compared to 28 in the prior year period, which equates to 61% growth. As of June 30th, General Wave's ending install base was approximately 900 units, compared to approximately 730 units on June 30th, 2021. Before providing a business update, I wanted to briefly address the current macro environment and its impact on our business. As a reminder, on our last earnings call in May, we communicated temporary supply chain headwinds associated with procedure instrument packaging. Despite this disruption, all customer orders were met in the second quarter of 2022, and we successfully transitioned to a simpler pouch design in connection with the full commercial launch of CleanFlow. Although the supply chain environment has somewhat stabilized relative to earlier in the year, it remained challenging in the second quarter as operational inefficiencies impacted gross margin by roughly 300 basis points. As we sit here almost halfway through the third quarter, we expect to report a meaningful sequential increase in gross margin due to improved operating processes, an increasing percentage of procedure instruments converting to clean flow, and the company benefiting from our third mid-single-digit percentage procedure instrument price increase in the last 18 months. We continue to be diligent in our approach to our supply chain. And later in our prepared remarks, Mike will provide more detail on quarterly gross margin trends heading into the back half of 2022. Turning to the current economic environment, I want to highlight there are two core pieces of our business, one being utilization and the other being general mail console sales. As a business, we're starting to see strong utilization momentum within our current install base. particularly in Q2, where we set a company record selling 74,000 procedure instruments. That said, it is very important to point out that there is a seasonality component to procedures in Q3 due to summer vacation. Thus, we expect procedure instruments to modestly decline sequentially. Following the Q3 summer months, we expect utilization to increase in Q4. Regarding capital equipment, our pipeline remains very robust, but we are potentially operating in a softer economic environment, which will likely lead to longer conversion cycles and customers extending their decision to purchase. Given our robust and growing general wave pipeline, we're not concerned with this dynamic. As a reminder, the fourth quarter is typically our strongest capital equipment quarter, as a large number of dentists wait to purchase capital equipment, typically to maximize calendar year tax benefits. To summarize, we feel very good about our updated revenue guidance and expect procedure instrument revenue to remain healthy with slight headwinds to console sales due to longer conversion cycles. Now turning to quarterly business updates, starting with clean flow. On April 20th, we announced the full commercial launch of CleanSlow ahead of the American Association of Endodontists, or AAE, annual meeting in Phoenix. The timing of this announcement and launch was critical as AAE is our largest and most important industry conference of the year. AAE was a great event which allowed us to showcase our new procedure instrument to the entire market and allowed customers to perform or observe a procedure using an extracted tooth in our booth in what we call a test drive. Following AAE, initial adoption and orders of clean flow were in line with our expectations, with which we are extremely pleased. Early feedback from customers has also been positive, which gives us confidence as we transition away from our current generation procedure instruments. As we have previously communicated, it is our expectation that the full adoption of CleanFlow may take up to 24 months as we expand the commercial use in a responsible and considerate manner. Since we are still in the early months of CleanFlow's commercial launch and the current generation procedure instruments still account for the vast majority of our PI volumes, Scaling clean flow manufacturing and operations processes will only improve as we move throughout the year and into 2023. As a reminder, we specifically design clean flow with fewer components, which lowers material costs and allows for easier assembly, which we believe will drive increased production efficiencies at higher volumes. Turning to our commercial strategy. Our bifurcated sales team remains an important driver of growth as we penetrate our core market of approximately 17 million root canal procedures performed annually in North America, representing a market opportunity of approximately $1.9 billion. Since expanding the size of our consumable rep team in late 2021, we're beginning to see the positive benefits of separating account management and new capital sales. Our consumable rep team has been instrumental in the launch of CleanFlow, while simultaneously achieving record Q2 volumes with 74,000 procedure instruments sold. Along with the full commercial launch of CleanFlow, we expect to see increased utilization as the consumable rep team continues to focus on clinical education and training to improve practice efficiencies. In the second quarter, our consumable rep team hosted numerous in-person training events across the country. These events were designed to further integrate our team and provide our reps with additional tools to allow them to be partners with their endodontic customers. Lastly, with the recent launch of CleanFlow in April, we have been developing the organization to best emphasize the benefits of our new technologies. As account management responsibilities are absorbed by our consumable reps, we're also starting to see early signs of increased productivity and pipeline generation from our capital reps, who are now fully focused on selling capital equipment to new customers that have a strong pipeline of opportunities as we head into the back half of 2022. As a reminder, prior to the establishment of the consumable rep team, Capital reps spend roughly 50% of their time servicing existing accounts. Our plan is to maintain the size of our commercial team at its present level for the near term. The focus over the second half of 2022 and into 2023 will be continued execution of our field team and to further partner with our customers. Before I hand it over to Mike, I wanted to highlight that Gel-Wave was featured on the cover of the June edition of the Journal of Endodontics. The study evaluated the effectiveness of Gel-Wave in removing bacteria from infected root canals when compared to a common conventional approach. Based on the study results as expected, the Gel-Wave group was shown to be more effective This study provides further evidence that GeneralVev offers superior cleaning and disinfection of microscopic spaces independent of root canal complexity and tooth structure. In summary, we have a revolutionary technology backed by compelling clinical data and KOL support. Our focus continues to be investing in our commercial infrastructure to make GeneralVev the standard of care for root canal therapy. Additionally, we will continue to prioritize gross margin expansion and clinical practice efficiency with a full commercial launch of CleanFlow. With that, I will turn the call over to Michael Watts, Sunendo's Chief Financial Officer. Mike?
spk01: Thanks, Bjorn. As previously mentioned, Sunendo's total revenue for the second quarter of 2022 was $10.5 million, compared to $8 million for the second quarter of 2021, an increase of 32%. Growth in the quarter was primarily driven by increased procedure instrument sales, increased GeneralWave console sales, and strong PDO software sales growth. In the second quarter, GeneralWave console revenue was $2.7 million compared to $1.7 million in the second quarter of 2021. GeneralWave console average selling prices in the quarter were roughly $60,000, consistent with the first quarter of 2022. Turning to procedure instruments, PI revenue was $4.8 million compared to $3.7 million in the second quarter of 2021, an increase of 30%. PI revenue growth was primarily driven by General Way's increased install base, procedure instruments sold, and a roughly 8% increase in average selling prices compared to the prior year period. Procedure instruments sold in the quarter totaled approximately $74,000, representing growth of 20% compared to the prior year period. Total software revenue for the second quarter was $2.1 million compared to $1.8 million in the second quarter of 2021, an increase of 16%. The increase was primarily driven by new licenses and services, specifically to large group practices looking to standardize across their enterprise. Total other product-related revenue was $900,000 in the quarter. Gross margin for the second quarter of 2022 was 24% compared to 26% in the second quarter of 2021. The decrease in gross margin was driven primarily due to operational inefficiencies from disruption in the supply chain, which we estimate was an approximate 300 basis point headwind in the quarter. Total operating expenses in the second quarter of 2022 was $16.8 million, compared to $12 million in the same period of the prior year. The increase was driven primarily by higher personnel expenses relating to our commercial expansion, as well as higher general and administrative costs, primarily legal and accounting, associated with operating as a public company. Higher operating expenses were partially offset by lower R&D expenditures due to a reduction following the clean flow launch. Loss from operations was $14.3 million in the second quarter of 2022 compared to $9.9 million in the second quarter of 2021. On a sequential basis, operating losses improved from $14.6 million in the first quarter of 2022. Net loss was $15.1 million for the second quarter of 2022 compared to $11.1 million in the second quarter of 2021. Our cash and cash equivalents and short-term investments as of June 30th, 2022 was approximately $51.8 million, while our long-term borrowings totaled $30 million. As mentioned on our first quarter earnings call on April 6th, we expanded our available credit to include an additional $20 million subject to certain milestones. In late July, we accessed the first $10 million tranche. We believe this funding will provide the liquidity and capital resources needed to support and grow our current business in 2022 and beyond. Moving to our financial guidance. For 2022, we now expect annual revenue to be in the range of $40.5 to $42.5 million, representing year-over-year annual growth between 22% and 28%. When analyzing the third quarter, it is important to remember there is seasonality in procedure volumes in the summer months due largely to vacation schedules. As a result, we expect Q3 procedure and cement sold to decline sequentially in the low- to mid-single-digit percentage range from Q2 levels. Additionally, we expect general wave units sold in the third quarter to be up modestly compared to the prior year period. Moving down the income statement, we expect third quarter gross margins to be approximately 27% to 28%. As previously stated, when excluding the second quarter supply chain headwinds, gross margins would have been roughly 27%. As we move past these operational inefficiencies, we expect Q3 gross margins to be flat to up sequentially from this adjusted level due to a recently announced procedure instrument price increase and revenue mix benefit from incremental clean flow adoption. Lastly, we continue to expect Q4 gross margins to be in the low 30% range, driven by positive contributions from the PI price increase, adoption of clean flow, increased volumes, and improved operational efficiency. At this point, I'd like to open up the call for questions.
spk04: Thank you. If you would like to ask a question, please press star, followed by the number one on your telephone keypad. If you change your mind, please press star two. Please stand by whilst we order today's Q&A roaster. We have our first question on the phone lines from Michael Cerny of Bank of America. You may proceed with your question, Michael.
spk05: Good afternoon and congratulations on the strong results, impressive especially given this macro backdrop. I want to talk a little bit about the clean flow launch. Bjorn, not surprising to hear you say that you think the conversion could take 24 months or so. I think that's fairly similar to what you said in the past, but As you think about that conversion cycle, who have been the early adopters that are willing to jump right in, and who are the ones that either are more hesitant or maybe just not as much of an important strategic nature for you to get to in a quicker period of time?
spk06: Yeah, thank you, Michael, for that question. Yes, obviously, we're super excited about CleanFlow. We launched this about 4.5 months ago here in April. And just want to give a big shout out to the team that have executed very well on this project. We are, like we've talked about, we are gradually converting our install base of 900 customers to clean flow like you're alluding to, Michael. We have said that the conversion will take approximately 24 months, but we have not said that this is a linear conversion. So I think there could be, like we have I think also talked about in earlier calls, there could be opportunity to speed that up, to really obviously drive not just benefits to the doctor, but also benefits to us from a margin perspective. You know, I think there is, I would say that there's a lot of doctors that have raised their hands and said, hey, we want to be part of this. We want to get access to clean flow early. And the way we're doing it is that we're using our consumable sales rep to, in a very organized way, actually roll this out one customer at a time. So we do the software upgrade. We spend time with them. We do two or three procedures with them in the accounts. And then we do the conversion. Some we see convert immediately to 100% of their cases being done with clean flow. Others may need a little bit more time because, for example, they've been with us for a couple of years and are very familiar with our legacy procedure instrument are used to using that procedure instrument, and it may take them some time to get used to this new procedure instrument. But what we are hearing, though, from these different doctors, and I've talked to some of these doctors myself, is that feedback is good. This is an easier procedure. It saves time and helps improve the workflow. for these doctors. So very, very excited about the progression of this rollout.
spk05: Thanks. And maybe just tying to the gross margin, not surprising given all of the various different disruptions that you see globally to have any gross margin pressures. As you think about that guidance that you're providing us for 3Q, What needs to change relative to supply chain dynamics? Has it already changed? And what gives you the visibility into that being the right gross margin metric, given the admittedly acknowledgeable short-term disruptions?
spk01: Michael Watts Hey, Michael. It's Michael Watts. So, I'll address that question, and then Bjorn can add any additional commentary. So, what we see and what we saw in Q2 was really us recovering from disruption in what we had identified as a packaging constraint. And as that product started to come in, we had our teams working overtime and weekends to help us recover safety stocks and finish goods position and make sure that our customers are adequately supplied. So we look back in April, May, and June, we're very grateful that our teams were willing to work the overtime and weekend work. As we move into Q3, Now, we've been able to recover our inventory positions, largely unfinished goods, and move to a more normalized production process. And so, for example, in the first six weeks or so here, we've only had two weekends where we've had to work overtime at a very light level. So we think that additional labor and resources needs to recover the inventory position. We think that's behind us at this point, halfway through the quarter. The other area that we incurred additional expense was on expediting our product through certain processes like sterilization. And similarly in that process, so we had almost 90% of our orders in Q2 were expedited, which adds additional costs. As we're now six weeks into it and being able to predict just the cycles, we're able to now move back to a normalized process. process for that external service that will significantly reduce the cost. So now, six weeks into the quarter, we feel like most of the costs that we incurred additionally into Q2 are behind us. And then additionally on top of that, we have the price increase that we announced that's effective July 1st. That will help us. And then similarly on clean flow, clean flow, what we've talked about in the past is early on, We see that clean flow. It's a new product. As we begin to scale, we'll start to see further economies come from that production volumes as we move into Q3 and then into Q4. So we'll see further gains. So that's what gives us the confidence and conviction to schedule out further improvements in gross margin through Q3 and then into Q4.
spk06: And maybe just to perhaps to round out Mike's answer here is talking a little bit about the supply chain side of this. Obviously, we realize that supply chain is still an issue across the entire MedTech space, and every company out there in the MedTech space is having to deal with this. But I think what's different now is that we're able to manage the supply chain better. As an example of maintaining some higher inventory position on certain critical components, and we're also spending a lot of time calling into the supply chain to ensure that all the parts that are supposed to come into Sunendo will come into Sunendo at the correct time. So as a result, we see supply chain impacting us less going forward, and that just provides perhaps a little bit of context for Mike's response.
spk05: Understood. Thanks so much.
spk06: Thanks, Michael.
spk04: Thank you, Michael. We now have John Block of Stiefel. Please go ahead when you're ready.
spk07: Great. Thanks, guys. Hopefully you can hear me okay. Bjorn, maybe to start, I think you said the third price increase for you, effective July 1. I think you said the third price increase in the past 18 months. You know, is this most recent one at the expense of any, call it in 2023, or do you still see more opportunities to take additional price in 2023? And then maybe just talk about You know, the feedback from the customer base, I mean, we always thought you had certainly a lot of leverage there and opportunity, because I think you've said in the past half of your base is essentially passing it through to the consumer. But what are you hearing from the customer base, you know, in terms of those price increases that you push through more regularly over the past year and a half?
spk06: Yeah, thanks, John. Good question. Yeah, like you're saying, this is the third price increase in 18 months since And we feel good about these price increases. I know we've been aggressive taking price, but we also see a lot of value in the general wave procedure, and so do our customers. So I think if you talk to the customers out there, I think we haven't had negative feedback from these price increases. With regards to the customers passing the price increases through, I would say that similar to what you're saying, roughly about half of our customers are passing this through and are actually making a little bit of margin on their own for passing on the cost to their customers. Again, I think it speaks to the fact that there can be opportunity for us to continue to take price, but this is something that we're going to continue to evaluate. And we're still not prepared to talk about the timing and the potential for further price increases, but we do see a lot of value inherent in the general way procedures and do feel that there could be opportunities for that going forward.
spk07: Great. And Bjorn, if I could just sort of ask question 1B, I guess. The PI number was really good in the quarter and well above where we were at from our perspective. You mentioned the July 1 price increase. Do you feel like there was any pull forward into 2Q ahead of that? Maybe talk to us on how you're signaling the price increase to your install base, or do you feel like that was a very clean, consumable number that we saw in June? And then I'll ask a quicker follow-up.
spk06: Yeah, so John, you're spot on. Very nice utilization trends here. Obviously, in Q2, we feel less bolstered by clean flow. Record number of procedure instruments sold for us in a quarter. I think for us, I think it speaks to the underlying core of the business. We see, obviously, strong momentum here. You know, with regards to pull forward, could there be some of that potentially? But, you know, we feel that this is more that signals the strong kind of underlying core of the business. You know, I think the other thing we just have to recognize, right, there is a little bit of seasonality to utilization. One of the things that we're seeing and, you know, we typically see in Q3, right, is summer vacations for these doctors is having a you know, softening the utilization somewhat in Q3. But given the strong utilization that we see, have seen here in Q2, we expect obviously when the doctors come back from vacations and so forth, we expect to, you know, that utilization to continue into, you know, later part of Q3 and also into Q4.
spk01: Hey, John, it's Mike. If I could just add to that, Address your question on Q2, whether we think there's pull forward. So I don't know if all our investors are familiar that we have visibility to utilization at the console level. So what our customers are actually using. And we measure that very closely to what we're seeing for sales out and make sure that we don't exceed a position where people are building inventories. We're at one to one. So when we look back at Q2 results, our sales out and utilization was fairly close, nearly one to one. So we don't believe that at a macro level, people have built an inventory position up in anticipation of a price increase. And as Barron alluded to, yes, there's probably some customers out there that may have done that, but we think we have enough governance and controls around that to make sure that that doesn't happen.
spk07: That's great. That's very helpful. Maybe just the last question for me. And it's been a strong one H when you look at the guidance, you certainly have growth dialed in two H versus one H, but you also have that, you know, usually pretty big fourth quarter for capital. So, Bjorn, just your thoughts on, you know, call it conservatism versus what you're seeing from a trend perspective and keeping, I know you tighten the range, but essentially keeping the midpoint unchanged. And just all around capital environment and maybe giving yourself some wiggle room or anything else that you're seeing with the overall dental market to maybe call out for investors? Thanks, guys.
spk06: Yeah, thanks, John. So, yeah, so obviously on the utilization side, strong utilization trends. Like we talked about in our prepared remarks, we see strong demand on console. We also see a strong pipeline, but because of the, you know, softer economic environment, this is causing a slightly longer conversion cycle. But I just want to emphasize that the pipeline remains strong. And that's why we're maintaining the midpoint of the range and tightening it slightly to get it to 40.5 to 42.5. So we feel very good about that guide. Thank you, guys. Thanks, John.
spk04: Thank you, John. The next question comes from Jason Bednar of Piper Sandler. You may proceed with your question, Jason.
spk09: Hey, good afternoon. Congrats on the progress here, Bjorn and Mike. I guess I'll start on the gross margin side. It sounds like, you know, for third quarter, we're looking for, I think, a three to four point sequential increase, you know, off of where we finished in second quarter. Bjorn and Mike, are you able to break down How much is coming from the three buckets that you referenced? You know, the improved operational processes you have in place, maybe the mixed contribution from clean flow, and then the price increase that you just instituted on the PIs.
spk01: Yeah, thanks, Jason. So definitely feel good about Q3, and we're progressing, as I shared with Michael a moment ago, just about how we see where we're performing six weeks into the quarter. I'd say that as you bridge the 24% to 27%, 28%, we'll gain 200 basis points, essentially, in operational improvement, and then one to one and a half, or 150, rather, basis points in price, and then just some other operational efficiencies that we expect to get us to that 27%, 28%.
spk09: Okay, so just to follow up, it sounds like more operational in price and clean flow maybe still a little early to be contributing on the gross margin side. Maybe that comes a little bit more in the fourth quarter than in the 23?
spk01: That's a great point. I mean, clean flow today is still in – we're four and a half months out on clean flow, still producing at quantities that are relatively low compared to our legacy PIs. and then still have some processes that are scheduled to take place for additional cost reductions as we move into September and October. So we'll see more of margin gains come from clean flow in Q4 and moving into 2023 from clean flow as it becomes at full-scale production.
spk09: Okay. All right, great. That's actually a nice segue into my follow-up here, just on the clean flow rollout. I know it's early. It sounds like things are going really well there. Are there any early points you can draw on initial utilization of practices that are using or have bought general wind or using clean flow in the first couple or few months of use compared to what you would have seen with the prior PI? And I know that that's a tough question. getting really granular, but anything that you can see just in terms of utilization and uptake of the system, again, clean flow versus prior generation system or prior generation PI.
spk06: Jason, I think it's an excellent question, and we're keeping a lot of – we're doing a lot of analytics as they come in, specifically on that topic. We're not prepared to give numbers on this quite yet, but what we see in general, right, anecdotally, shows that this is a simpler procedure for doctors. It's easier. It takes less time. And the doctors that are now going all in on CleanSlow, really using this to really drive workflow in their practice. So directions from these doctors are positive. And I think the other thing to keep in mind, as we enter the second half here and as we are continuing to increase our total procedures to clean flow, we're concurrently also getting these consumable reps more up to speed and productive in the practice. So you have those two factors that we think over time can really obviously help us, you know, on driving utilization in the practice. So hopefully that gives a little bit of color.
spk09: Yeah, yeah, sure. No, I knew it was kind of early on that. Maybe one more quick one, just if you're able to comment, you know, really helpful on the monthly gating of of performance in the business, you know, April through June. Just wondering if you can extend the commentary, you know, out to what you've seen in July and the first part of August. I mean, are you seeing that seasonality show up in the business like you're talking about here or is that, you know, seasonality you're expecting here more in August and just trying to understand, you know, when that seasonality is starting to hit the business. Thank you.
spk06: I think there's two elements of seasonality that we're thinking about. It kind of goes back to the two key elements of the business. One is the seasonality around capital equipment. Second is the seasonality around consumables. On the capital equipment, like we've talked about earlier, Q3 is typically slightly softer than Q2 given the timing of the AAE conference. That increases Q2 slightly relative to Q3. But we expect a strong Q4 because of tax benefit and economic benefits for these doctors on the capital side. I think on the consumable side, we are seeing, and again, this goes back to what Mike was talking about, the fact that we can see some of these procedures live. We can see procedures live coming in to Sunendo. At the same time, we're obviously talking to doctors out in the field, and I think that a lot of these doctors are taking more vacations perhaps here in this year than they have done in years past because for many doctors, this is the first time they can go away on more significant vacations because of COVID. So as a result, that creates a little bit softness in utilization in Q3 because of these vacations. But then, obviously, we expect that to continue to be strong in Q4. And to your earlier part of the questions, as you move towards Q4 right now, you have the effect of the consumable reps helping utilization, but you also have the potential impact of clean flows as well, like you point out in your question, which is a good point.
spk01: I think, Jason, too, just to put it into context, July 4th falling on the Monday really When we talk directly to our customers, we know that many of them took that full week off, and it was a high vacation week for a lot of our customers. So we're seeing that in July. You know, it's still early in August. But, of course, we expect things to get back to normal in September and late August.
spk06: All right. Perfect. Thanks so much. Thanks, Jason.
spk04: Thank you. We now have Nathan Rich of Goldman Sachs. You may proceed with your question, Nathan.
spk02: Thanks, and good afternoon. Just a couple of clarification questions. On the appetite for practice CapEx, have you seen any signs of lengthening of conversion cycles at this point, or are you just kind of pointing to that as a potential risk, just given the environment that we're in and I guess if we do kind of get into the fourth quarter and, you know, it doesn't seem like the environment has changed much, are there incentives, whether it's, I guess, promotional or, you know, financing that you can put in place to potentially encourage practices to make a purchase?
spk06: Yeah, thanks, Nate. Good questions. Yeah, so, you know, like we talked about, we see strong demand for consults. We see strong pipelines, but to your point, there is a slight softening because of longer conversion cycle given the macro environment here. And I think there are, to your point, there are a couple of levers that we have on the business to work with that going forward. It could be financing options, to your point, And there could be some other different things that we have as well. But I think if you look at this from a doctor's perspective, some doctors may be thinking about this from an increased rates of inflation or increasing interest rate, which goes to your point, and also just general financial uncertainty in the overall markets. But we feel we have some levers on the business to counter that. And I think I just want to highlight also that You know, even given these dynamics, we're still maintaining the midpoint of our guidance range. And so we feel good about the business in the second half of the year.
spk01: Hey, Nathan, it's Michael Watt. So if I could just expand on Bjorn's conversation about the levers. So we also have in Q4 our Endicon conference. I tell them in San Diego every year we get a lot of – TDO users coming, but also non-TDO users. So that's a great opportunity for us to showcase the technology, help people understand how it can improve their practice, improve their practice economics. And that's also an area where we look at just not only giving them financial incentives, but giving the incentive to start now, to start becoming a general wave user, drive further improvements in their practice, and also improved clinical outcomes at that time. So endocrine is a big step for us. We also, of course, help practices when they're onboarding to adopt not only General Wave into their practice, but into their patient education programs. So there's information that's running on a loop when you walk into a General Wave office, which introduces a customer, and we can help expand that with the council. There's many things that we can do that are non-monetary. to help customers drive adoption of General Wave.
spk02: Great. And my second question is on gross margin. I guess, is your view of the long-term gross margin potential and really the path to get there change at all? Obviously, you've had to deal with some supply chain challenges this year. It also seems like you've been able to offset some of that with price. hopefully those supply chain challenges will continue to ease. I guess when we think about the path for gross margin going forward and where we're going to be exiting the year, I think you kind of said north of 30%. I guess, do you feel like you'll continue to kind of build on that? And I'd just be curious to get your view of whether the long-term potential has changed at all versus what you initially anticipated.
spk01: I'd say that, again, Nathan, it's Michael Watts. So I'd say that as we launch clean flow and what we've experienced in the first four and a half months, it's all met or exceeded our expectations for what clean flow is going to do to our supply chain. We talked about it being simpler to assemble. So, therefore, we think there will be efficiencies in our production process. The components are, you know, right now we're in early stages with our suppliers. to produce those components. So we think that at scale, some changes to their processes will also drive further material savings. So I think our conviction has been reinforced, if not further improved from what our previous expectations were.
spk06: Yeah, I would agree 100% with Mike here. And I'll also just add that because we are now able, we feel, to manage the supply chain side of this better, we feel that we will have less negative impact on margins because of any supply chain disruptions going forward. And I think the key here, like Mike is talking about, this is all about launching clean flow, drive conversions, and continue to increase the contribution margin of clean flow. And that's both for a very good business going forward and that we think will enable us to execute on the long-term margin targets that you're talking about.
spk02: Great. Congrats on the quarter.
spk06: Thanks, Nick.
spk04: Thank you. As a reminder, if you would like to ask any further questions, please press star followed by the number one on your telephone keypad. We now have a question from Erin Wright of Morgan Stanley. Please go ahead when you're ready, Erin.
spk03: Great, thanks. As we think about sales reps and the initial traction you're seeing with the bifurcation of the sales force, are you where you want to be from a sales rep count perspective and just generally from an OpEx perspective as well? Are there any anomalies that we should be thinking about in terms of the quarterly progression on that front for the year?
spk06: Hi, Aaron. Thanks for the question. Right now, we have 25 sales territories, and our focus right now is all about execution, training these different sales reps, supporting them, and improving productivity. That's where we want to be at this point in time in terms of number of sales reps. And we have not given any guide as to, you know, what our future projections are on adding sales reps. The only thing I would say is that, you know, we are going to be thoughtful about adding sales reps going forward to ensure that point one, we continue to drive top line revenues while at the same time being thoughtful about OPEX revenues. and conserving cash in this environment. So those are two key elements that go into our thinking as we expand the sales team.
spk01: And just to expand on your question on OpEx, Aaron, so when we look at OpEx for Q1 and Q2, we're largely in line for the first half of 2022. So as we go forward into Q3 and Q4, what we're seeing is just more variability around sales levels. So we don't expect to see OPEX jump up or jump down materially from where we trended.
spk03: Okay, perfect. Thanks. And a broader question related to kind of some other questions that people were asking, but in terms of labor constraints that maybe some of your customers are facing right now, do you think that that could be impacting conversion for you already too? And then also... On the flip side of that, does the value proposition of your technology in generating greater efficiencies for the process, is that resonating with customers or is it more of a barrier than a tailwind at this point?
spk06: We're obviously aware that some doctors across the dental space are facing some labor constraints. I think the beauty of the gel wave system is that it will actually streamline the practice and streamline and reduce the time of a procedure. So I think this gives us an opportunity to come into a practice to sell the simplicity. For example, now with clean flow, you can effectively do a root canal procedure just with one hand. You can hold the procedure instrument on the tooth while your assistant, for example, will go off and do something else. that gives you an opportunity to further, for example, do multiple procedures in parallel, et cetera. So I think in this environment, specifically around labor constraints, this is actually where we can help. We can help both on providing the general way procedures that drives workflow, but we can also help them on the, you know, the TDO integration, integrating software in their practice to help obviously make their practice workflow also more efficient. So I think in that environment, from that perspective, this will give us an opportunity actually to sell our products into these different practices.
spk03: Okay, great. Thank you.
spk00: Thanks, Erin.
spk04: Thank you, Erin. We have no further questions, so I'd like to hand it back to Bjorn for some closing remarks.
spk06: Well, thank you, Operator. We appreciate, again, everyone spending time with us today. Mike and I look forward to meeting many of you as we go forward, both at future investor conferences and also for individual meetings. Have a great day.
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