Sonendo Inc

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.

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?

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.