Sonendo Inc

Good afternoon and welcome to the Sunendo Inc Q1 2022 earnings conference call. My name is Brica and I'll be today's event specialist. If you would like to ask a question at any point today, please press star followed by one on your telephone keypad. And with that, I would like to hand over to our host of today's call, Matt Rasko. Please go ahead when you're ready.

Thanks, operator. Good afternoon, and thank you for participating in today's call. Joining me from Sunendo are Bjorn Berghain, President and CEO, and Michael Watts, CFO. Earlier today, Sunendo released financial results for the quarter ended March 31st, 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 and 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 containing 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 development are based upon our current estimates and various assumptions. Any statements involving 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 factors section of our most recent annual report on Form 10-K filed with the Securities and 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 May 10, 2022. Senator 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 Bjarne.

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 first quarter of 2022 was $9 million, above our estimates provided during the Q4 2021 earnings call, representing growth of 22% over Q1 of 2021. Growth in the quarter was primarily driven by continued increased procedure utilization and increased general wave console sales. As a reminder, first quarter capital equipment sales are typically our lowest seasonally adjusted quarter following heightened calendar year and demand, which is influenced by various factors, including tax benefits. Overall, we're very pleased with our start to the year. As of March 31st, General Waves ending install base was approximately 850 units compared to approximately 710 units on March 31st, 2021, representing growth of 20%. Mike will later provide more details on our quarterly financial results and additional detail regarding full year 2022 guidance. Before providing a business update, I wanted to address two topics that have had a broad scale impact across the medical device industry. First being COVID. While we did see a slight temporary slowdown in patient volumes early in the quarter due to Omicron, this did not appear to materially impact performance. Based on our estimates and what we're hearing anecdotally from endodontists, patient volumes are currently trending at or near 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 there is demand for our technology. Second are the supply chain headwinds impacting the global economy. As a reminder, On our last earnings call in March, we communicated variability in the supply chain of certain raw materials, which caused us to incur additional costs in the fourth quarter of 2021 and first quarter of 2022. The impact has been limited to our procedure instruments, and despite this disruption, all customer orders were fulfilled in the first quarter of 2022. While our operations team has made considerable progress in navigating through this dynamic period, the supply chain environment has become incrementally more challenging. Although raw material supply variability is likely to continue for the remainder of the second quarter, we believe we have sufficient capacity to meet our revenue targets. In future quarters, we expect the risk to gradually mitigate as we recover safety stock positions as overall volumes transition to CleanFlow Procedure Instruments, which in most instances do not utilize the same raw materials and suppliers as our legacy Procedure Instruments. Now turning to quarterly business updates, starting with CleanFlow. On April 20th, we announced the full commercial launch of CleanFlow 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. While we have been working diligently through our limited market release, 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. As a company, we have built our reputation on providing superior clinical outcomes and delivering a positive patient experience. This was in full display at AAE as the Sunenda team re-informed the benefits of CleanFlow to not only existing but prospective customers. Specifically, with CleanFlow, 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. During educational and clinical demonstrations at AAE, CleanFlow's simplicity and ease of use resonated with the endodontic community, which gives us more confidence in not only the CleanFlow launch, but to also in our ability to drive increased utilization at the practice level. As a reminder, CleanFlow Procedure Instrument works with our existing consoles, so there is no need for existing customers to buy a new machine to access this latest technology. This will allow us to ship CleanFlow Procedure Instruments to new customers and seamlessly convert existing customers. Another reason why we're so excited about CleanFlow is that we have a clear pathway to improve our contribution margin for consumables. CleanFlow is a major component of our future higher gross margin expansion and pathway to profitability. Given the simpler design 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 production efficiencies at higher volumes. From an operations standpoint, we have expanded manufacturing capacity and have developed strong relationships with key suppliers who have ensured their ability to meet increasing demand. We continue to strive to manufacture the highest quality product for our customers. To ensure a successful rollout of CleanFlow, we have been working to optimize every step of the supply chain. From molds to final assembly and packaging process, all our efforts are focused on scaling processes to manufacture at higher volumes. Additionally, Our full market release will ensure our commercial and clinical education teams can provide a world-class onboarding experience for new customers. As a reminder, we will continue to manufacture and sell our current generation procedure instruments for current gentlemen customers with the goal of educating and converting them over time and allowing them to transition at their own pace. Conversely, our strategy will be to primarily train new customers using CleanFlow to ensure immediate adoption. Given this dynamic and the fact that we have an approximate 850 General Wave installed base, we expect the full adoption of CleanFlow may take up to 24 months as we expand the commercial use in a responsible and considerate manner. Turning to our commercial strategy, our barfricated 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. As of March 31st, we more than doubled the size of our commercial sales team when compared to June 30th, 2021. Over the past year, a key addition is the building of our consumable rep team. We believe this team will be an integral part of our growth and execution in 2022 and beyond. Given the number of capital and consumable reps we have hired, our plan is to maintain the size of our commercial team at this level for the near term as we focus on sales force effectiveness, initiatives, and sales execution before expanding further. In connection with the expansion of the number of consumable reps and bifurcation of our sales force, we're 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. As a reminder, prior to the establishment of the consumable rep team, capital reps spent roughly 50% of their time servicing existing accounts. Regarding procedure instrument trends, we continue to receive positive feedback from new accounts that have completed our updated training protocol as compared to legacy customers. While still early, we believe this is a positive indicator of increased utilization as these endodontists are becoming more comfortable not only with the technology but also being able to treat a broader range of root canal cases. As our sales force matures, specifically consumable reps, we believe their consistent training with new and existing customers will drive average utilization rates higher as they support the clinical workflow, practice workflow, and patient demand generation for our doctors. Lastly, in April, we announced an amendment to our credit agreement with Perceptive Credit Holdings, which provided Sunendo an additional $20 million of available credit by extending the borrowing deadlines for two tranches of $10 million to September 2022 and June 2023, respectively. In addition to our strong balance sheet consisting of 66 million of cash, this restructuring provides optionality, if needed, to further support the growth of our business. In summary, we have a revolutionary technology backed by compelling clinical data and KOL support. Our focus continues to be investing and expanding our commercial infrastructure to penetrate the endodontist channel to make GEL-Wave 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?