Sonendo Inc

Good afternoon and welcome to Senando's third quarter earnings conference call. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. Joining me from Senando are Bjorn Berghain, President and CEO, and Michael Watts, CFO. Earlier today, Senando released financial results for the quarter ended September 30th, 2021. 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 forward-looking 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 relating 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 developments are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those implied by these forward-looking statements. Accordingly, you should not place undue 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 public filings with the Securities and Exchange Commission, including the final perspectives filed with the SEC pursuant to rule 424B4 on November 1st, 2021, in connection with our initial public offering. This conference call contains time-sensitive information and is accurate only as of the live broadcast on December 9th, 2021. Sanendo 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 would now like to turn the call over to Bjorn.

Thanks, Matt. Good afternoon and thank you for joining us. Before we begin, I would like to take a moment to acknowledge that this is our first earnings call since we completed our IPO and listed on NYSE in October. I would like to take this opportunity to say thank you to all those who participated in the offering, which raised approximately $84 million in net proceeds, and to those who have invested in the company since. I would like to again thank the entire Sunendo team, our board of directors, and most of all, our patients and the doctors who care for them. With all of your support, we are well positioned to take the next steps toward our mission of improving root canal therapy by enabling better patient outcomes and reducing post-op pain via our general-based system. Moving to our quarterly revenue results. Sanendo's revenue for the third quarter, 2021, was $7.9 million compared to $6.1 million for the third quarter of 2020, representing growth of 29%. Growth in the quarter was driven primarily by increased utilization among our current installed base and increased general-based console sales. As of September 30th, General Wave's ending install base was approximately 750 units. Mike will later provide more details on our quarterly financial results and additional detail regarding full year 2021 guidance. Before providing some background on the company, I wanted to address two topics that have had a broad scale impact across the medical device industry. First being COVID. We did not see a meaningful impact on patients delaying or deferring root canal procedures in the quarter. Based upon our estimates and what we are hearing anecdotally from our endodontist customers, patients' volumes are trending at or slightly above pre-COVID levels. While our growth is heavily 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 that there is demand for our technology. As a reminder, our customers are primarily endodontists who operate small businesses and hire staff who work normal business hours. While dental offices have been busy rescheduling cases that may have been delayed due to COVID surges in 2020 and 2021, they are not subject to the same level of clinical fatigue that has plagued the medical industry. With that said, we will continue to monitor the spread of the Omicron variant and any impact it may have on our customers. Second is the headwind associated with the global supply chain pressures and its impact on medical device companies. Based on how our supply chain is set up currently, the majority of our raw materials and inventory are from domestic suppliers. While we do not expect supply chain issues to have an impact on our ability to meet our revenue plans, we continue increasing inventory levels for certain components to mitigate any future risk. Now I would like to provide a brief introduction of our company to those who did not have a chance to hear our story during the IPO Roadshow. Sonendo is a commercial stage medical technology company focused on saving teeth from tooth decay, the most prevalent chronic disease globally. We are initially focused on root canal therapy, or RCT, representing an annual addressable market of approximately $1.9 billion for Synendo in the United States and Canada. We at Synendo developed a General Wave system, an innovative technology platform designed to treat tooth decay by cleaning and disinfecting the microscopic spaces within teeth. General Wave is the first and only FDA-approved system for root canal therapy that uses a sterilized single-use procedure instrument to automate and standardize the cleaning and disinfection of these root canals. GelWave's proprietary mechanism of action, which combines procedure fluid optimization, broad-spectrum acoustic energy, and advanced fluid dynamics, debrides and disinfects deep regions of the complex root canal system in a less invasive procedure that preserves tooth structure. The clinical benefit of the GelWave system when compared to conventional methods of root canal therapy include improved clinical outcomes, such as superior cleaning that is independent of root canal complexity and tooth anatomy, high and rapid rates of healing, and minimal to no post-operative pain. In addition, the Gelmave system can improve the workflow and economics of dental practices. Sonendo is also the parent company of TDO Software, the developer of a widely used endodontic practice management software solution. TDO's proprietary software is designed to simplify practice workflow while also offering a built-in communication solution with the General Wave system. I would now like to take a minute to highlight what separates Sunendo and the General Wave system from the rest of the dental industry. Through years of research and development, we have compiled over 30 peer-reviewed journal publications and two prospective multicenter clinical studies that put Sunendo on a different playing field. At a high level, the General Wave procedure has been clinically proven to provide strong clinical outcomes superior cleaning in a less invasive procedure, and enhanced procedure efficiency. We have developed a solution that addresses a key limitation of conventional root canal therapy, which is the extensive use of instrument and files. These methods remove excessive tooth material, which can lead to cracking and fractures over time. Consequently, conventional root canal procedures have a failure rate in the range of 15% to 32%. Furthermore, 30 to 70% of patients report post-op pain. By comparison, the Gelmage system enables superior cleaning and disinfection with a 97% success rate with minimal to no post-op pain. As a result of this, we see from our survey data that the vast majority of patients upon learning about Gelavave would rather be treated using Gelavave than conventional root canal therapy. As such, we believe there's a significant opportunity to leverage these dynamics to further support our commercial effort. As we talk more over the upcoming quarters, we will share further details on specific programs and initiatives designed to support our commercial expansion. In addition to providing superior clinical outcomes, General Live is designed to improve workflow efficiency. Given the lack of standardized protocols for conventional root canal treatments and the fact that tooth anatomy is extreme and complex, roughly half of all conventional procedures require multiple visits. Aside from the patient having to make a second appointment, multi-visit cases make it difficult for dentists to run an efficient and profitable practice. From a workflow perspective, general automation and standardized protocols result in faster procedure times and increase the number of single visit procedures. As doctors move from conventional methods to the general way procedure, we have seen single visit cases increase from 57% to 90%. The key takeaway here is that the general way procedure can enable doctors to save time, allow them to treat more patients, and increase practice revenue. In addition, conventional methods of RCT utilize techniques and devices that create aerosols during the procedure which has become an important issue for clinicians and patients during the COVID-19 pandemic due to the heightened sensitivity to the concerns associated with cross-contaminations via aerosols. Whereas the GEL-MAID procedure has virtually no aerosol emissions, something that we have seen be important for both doctors and patients. Transitioning to product development. With more than 700,000 GEL-MAID root canal procedures to date, We have learned a lot and have taken these learnings and incorporated them into our next generation clean flow procedure instruments. As a company, our goal is to not only provide superior clinical outcomes and positive patient experience, but to drive increased efficiencies at the practice level. With the launch of clean flow, we have improved the general way of procedure by removing certain steps, with the practitioner now only needing to open and prepare the tooth to allow the procedure instrument to be put in place. It is also important to point out that the CleanFlow Procedure Instrument will work off the existing consoles so there is no need for existing customers to buy a new machine. This will allow us to start shipping CleanFlow Procedure Instruments to our existing customers. Another reason why we're so excited about CleanFlow is that we've been working on enabling better contribution margins for our consumables. Given the simplicity of CleanFlow compared to the previous generation Procedure Instrument, there are fewer components which lowers material costs and allows for easier assembly, which we believe will drive increased efficiencies at higher volumes. While we're already approved to sell clean flow procedure instruments in the United States and Canada, we're currently selling these procedure instruments in small quantities in a more controlled market release. This will allow us to ensure that we understand how doctors utilize the procedure instrument in their practice to support a broader market release. Early feedback from key customers has been positive, and we expect the product to be fully commercialized and available to all customers over the course of 2022. Turning to our commercial strategy. In the United States and Canada, there are approximately 17 million root canal procedures performed annually, representing a market opportunity of approximately $1.9 billion. The GelMove system product offering consists of a GelMove console, a single-use procedure instrument and accessories, and an annual service contract. We believe our razor blade business model with capital equipment and recurring consumables enables an efficient commercial model. Our initial commercial strategy is focused on targeting the specialists in root canal therapy called endodontists. By our estimates, there are roughly 5,000 endodontists in the United States and Canada who perform approximately 4 million root canal procedures annually, or roughly 25% of all procedures. Given this extremely concentrated customer base, our commercial approach has been to bring together a team consisting of capital sales reps whose function is to drive new business through market penetration of the general wave system, while consumable reps who act as practice consultants and are focused on educating and training doctors to ensure successful onboarding and to drive increased utilization within the practice. Following the IPO, we are in the process of expanding our commercial organization to accelerate growth. As of December 1st, we have expanded our team of capital sales reps to 23, up from 16 as of June 30th. As we articulated during the roadshow and in our securities filing, our plan was to bifurcate our sales force to include consumable reps. I'm happy to report, as of today, we've hired 17 consumable reps. who will be an integral part of our growth and execution as we enter 2022. In summary, we have a revolutionary technology backed by compelling clinical data and KOL support. Following the IPO, our focus is to invest and expand our commercial infrastructure to penetrate the endodontist channel to make the general way of the standard of care for root canal therapy. Additionally, we will continue to prioritize cross-margin expansion and clinical at practice efficiency with the launch of CleanFlow in 2022. With that, I will turn the call over to Michael Watts, Sunendo's Chief Financial Officer.

Mike? Thanks, Dan. Sunendo's total revenue for the third quarter of 2021 was $7.9 million compared to $6.1 million for the third quarter of 2020, an increase of 29%. Growth in the quarter was driven primarily by increased utilization among our current install base and increased general wave console sales. In the third quarter, Genowave console revenue was $1.8 million compared to $1.2 million in the third quarter of 2020, representing an increase of 44%. We were pleased with the growth we realized in the quarter and continue to see a positive response to the value proposition and benefits of Genowave, enabling continued adoption of the technology. Turning to procedure instruments, PI revenue was $3.7 million compared to $2.8 million in the third quarter of 2020, an increase of 30%. PI revenue growth was driven primarily by increased monthly utilization, measured by procedure instruments sold per account, and increased install base as compared to the third quarter of 2020. As Bjorn mentioned previously, despite the increase in Delta variant infections, we did not see a meaningful impact on patients delaying or deferring root canal procedures in the quarter. While monthly utilization was down sequentially compared to the second quarter of 2021, it is important to point out that the third quarter is typically a seasonally slower quarter. and therefore in line with our expectations. Total software revenue for the third quarter was $1.7 million compared to $1.5 million in the third quarter of 2020, an increase of 17%. The increase was primarily driven by recurring revenue of the subscription base of our TDL software compared to the prior period. Gross margin for the third quarter of 2021 was 26% compared to 19.6% in the third quarter of 2020. The increase in gross margin was driven primarily by reduction in inventory charges relating to excess inventory versus the third quarter of 2020 and improved overhead absorption in 2021. Total operating expenses in the third quarter of 2021 were $13.1 million compared to $10.8 million in the same period of the prior year. The increase was driven by increased sales team hiring and other general and administrative costs, primarily legal and accounting. This was slightly offset by lowered research and development costs. The increase is also reflected in the fact that we've reduced our commercial footprint over the earlier period of 2020 in response to the pandemic, and so our 2021 spend profile reflects a return to pre-COVID commercial headcount and associated spending. Loss from operations was $11.1 million in the third quarter of 2021, compared to $9.5 million in the prior period. Net loss was $12.7 million for the third quarter of 2021 compared to $10.6 million in the third quarter of 2020. Our cash and cash equivalents as of September 30th, 2021 were $13.7 million, while our long-term borrowings totaled $30 million. We received approximately $84 million of net proceeds from our IPO, which closed on November 2nd. We believe this funding will provide the liquidity and capital resources needed to support and grow our current business. Moving to our financial guidance. We expect to end full year 2021 with revenues in the range of $32 to $32.5 million. Since the majority of our customers are small business owners, the fourth quarter is typically our strongest quarter as a large number of dentists wait to purchase capital equipment to maximize calendar year tax benefits. Additionally, by year end 2021, we expect our commercial routine to consist of approximately 24 sales reps and 17 consumable sales reps. which should put us in favorable position to execute a long-term strategic plan as we enter 2022. At this point, I'd like to open up the call for questions.