Sonendo Inc

in higher volume practices. This has led to an entire mix of G4 systems relative to the G3 system and higher ASP. The general wave G4 launch is progressing well, and our sales team reports that the demand pipeline remains strong. To support the expected growth in G4, we're working to transform assembly from our third-party partner to our Laguna Hills facility. where we currently assemble the G3 console. We believe that this will give us more oversight in the initial launch stages of the G4 and enable greater control of our supply chain and manufacturing. Additionally, co-locating product development and console assembly will facilitate iterative improvements and efficiencies that we think will produce margin growth and product improvement benefits in the near term. This will allow us to accelerate responses to in-market feedback, as well as to ensure a timely delivery and installation while maintaining customer satisfaction with our product. As for procedure instrument sales, we saw sales for third quarter totaling $5.7 million, representing a 32% increase year-over-year. While we're encouraged by the significant jump in consumables, we believe that this figure will normalize somewhat in the second quarter as some customers purchased a surplus of inventory ahead of the price increase that was effective February 1st. We were pleased to see a considerable increase to our gross margin, improving sequentially from 27% in the fourth quarter of 2022 to 31% in Q1. The increase was driven by clean flow PI conversion rates among our customers, benefits to our new PI pricing program and operating efficiencies in our consumable production line. As we continue to scale the company toward a single procedure instrument, we'll be able to recognize further growth in our gross margin profile. We remain committed to improving this metric throughout 2023 and beyond. Mike will provide more color in his later comments. Relating to our focus on improving gross margins and operational improvements, we're thrilled to welcome John McGaw this month to the Sunendo team in his role as Vice President, Operations. John brings with him incredible experience in the med tech space with over 20 years of combined global manufacturing and supply chain operations at companies such as Abbott Vascular and Boston Scientific, including earlier time spent at American Medical Systems. John's strong leadership will be pivotal to growing gross margins, and he has a proven track record in supply chain optimization and install-based performance support. Last week, we had the privilege of hosting meetings at the American Association of Endodontists in Chicago and were encouraged by the excitement coming out of this leading industry conference. Attendees were able to have hands-on experience with both the G4 and CleanFlow products in our test drive stations. In our booth, customers were able to perform a gel-made procedure on an extracted tooth and connect the full benefits of the combined offering, many for the first time. We are always pleased with the reception we get at the AAE conference. It serves as an important reminder of our fundamental commercial strategy with our focus on endodontists who perform root canal therapy for the majority of their treatments. Based upon current market penetration, there is still significant runway to sell into the 5,000 endodontic practices in the United States and Canada. They represent key leaders in the specialty, and we will continue to invest in clinical training and education in support of these clinicians. At the same time, we also recognize the market opportunity that exists with the general practitioners who are performing approximately 75% of all root canals in the US and Canada. we've begun the initial stages of a measured rollout to GPs who perform a high volume of root canal treatment within their practice. This commercial strategy will expand further into the second half of this year as our sales team builds out the pipeline of early adopters. As we begin introducing General Wave to these clinicians, we're seeing positive reception to both the clinical outcomes and value propositions. As a part of our program in developing this professional network, we've begun hosting educational seminars with KOLs and establishing best practices among GPs to capitalize on the efficiency General Wave can bring to their practice. We look forward to ramping up our GP strategy throughout 2023 and are committed to maintaining a high level of service and support with both GPs and endodontists alike. Before we move into a more detailed look at our financial performance, I'd like to provide some commentary around the macroeconomic environment and the near-term implications we foresee for the business. Over the last several quarters, we've highlighted that macro pressures and the inflationary environment are creating uncertainty around our capital cycle. Practitioners are lengthening the time it takes to choose to invest in capital equipment as evidenced by council placements in the first quarter. And while this has been a historic cycle for Sunendo, wherein the first quarter lacks the preceding fourth quarter as a result of year-end tax incentives, we believe that given the current market environment, some of this hesitancy may extend into Q2. As you look at our customer base, we see that the purchasers are typically small business owners rather than large hospital systems or multi-site ambulatory surgery centers more common in other med tech specialties. Therefore, our customer's decision process is in many ways more personal than a large corporation, weighing a more consumer-based mindset than one might see with other med tech capital equipment businesses. However, we do expect some of these dynamics to lessen in the back half of the year, particularly as interest rates normalize and then the doctors and GPs are able to fully appreciate the efficiencies recognized by investing in our technology. Our sales team maintains a robust pipeline of high-quality leads, and despite some of the macro pressures the capital side is facing, I believe Sunender remains in a strong position to seize upon some significant growth opportunities before us. We have the benefit of leveraging several growth catalysts in the next 12 to 18 months and we anticipate that between clean flow adoption rates, expanding our presence to the general practitioner, and clean flow interior regulatory clearance, we're poised to capture further market share. I'll discuss each of these initiatives briefly before asking Mike to review our financial performance for the quarter. As we've highlighted before, clean flow PEI adoption is a pivotal strategy to improve our margin profile while boosting revenue. The use of a single procedure instrument across all cases allows for increased efficiency in the operatory, and further, our new pricing model incentivizes higher utilization. CleanFlow also incorporates fewer components and is significantly less costly to manufacture, which directly contributes to an improvement on the bottom line. We still anticipate full conversion from the legacy procedure instrument to CleanFlow by mid 2024. Our sales team remains committed to driving adoption, and in the first quarter, approximately 53% of all PI unit sales were clean flow, a sequential improvement over the fourth quarter of 2022, where that figure was 47%. As for the GP rollout, we believe this opportunity opens a significant addressable market for Sunendo, as there are over 50,000 dentists in the United States and Canada that do not refer out the majority of their original cases. We only need to capture a fraction of this market segment to considerably increase revenues over the next 24 to 36 months. By highlighting the efficacy and efficiency of the GELVAVE system within the GEP cohort, we believe the value proposition becomes highly evident. We've received outstanding feedback from the initial high-volume accounts that have started using GELVAVE and believe this trend will continue. As addressed earlier in my prepared remarks, we plan to implement a measured and strategic rollout to the GP space in order to maximize oversight and ensure the same level of quality and service that Sonendo is associated with in the endodontic space. And finally, we're very much looking forward to the commercialization of our CleanFo PI for anterior teeth in the middle of this year. The ability to perform a root canal on any tooth with a single procedure instrument is a meaningful development for doctors and has the ability to further increase the efficiency of their practice. Anterior teeth represent approximately 20 to 25% of root canal cases. And while we currently have a procedure instrument for anterior teeth, we believe that we'll be able to capture more of this part of the market through clean flow. With one single PI, our economies of scale will greatly improve and we'll be able to enjoy even further margin inflection. We'll provide further details on our commercial strategy for interior procedures on the future call. We're excited about the many growth opportunities ahead of us, and I'm proud of our team's hard work and dedication thus far. With that, I will turn the call over to Michael Watts, Sunendo's Chief Financial Officer, to discuss our quarterly performance numbers. Mike?

Thanks, Bjorn. As previously mentioned, Sunendo total revenue for the first quarter of 2023 was $10.7 million compared to $9 million for the first quarter of 2022, an increase of 19%. Growth in the quarter was primarily in our product segment, with growth of 20% driven by increased procedure instrument sales, as well as other product segment revenue. In the first quarter, general with console revenue was $2 million, compared to $2.1 million in the first quarter of 2022. We sold 38 consoles in the quarter, with nine being to customers who upgraded from existing G3 systems, resulting in a net increase of 29 to our install base. Average selling price for the General Wave console was roughly $66,000, unrelated to upgrades to G3 to G4, and with higher ASP attributable to the favorable G4 mix. We attribute the decline in console revenue, however modest, to the macroeconomic impact on the decision-making process as previously discussed and expect console revenue to grow for the full year 2023. Turning to procedure instruments, PI revenue is $5.7 million, compared to $4.3 million in the first quarter of 2022, an increase of approximately 32%. PI revenue growth was driven primarily by the general wave increase in stall base, procedure instruments sold, and an approximate 9 percent increase in average selling prices compared to the prior year period. Procedure instruments sold in the quarter totaled approximately 80,600. In the quarter, we did note that our sales out exceeded our utilization at the field level, attributable to our customers buying in at a lower price during the month of January. Our estimates are that approximately 6% to 8% of Q1 PI sales out will be reflected in lower demand during Q2 and Q3. Total other product-related revenue was $1 million in the quarter. Total software revenue for the first quarter was $2 million compared to $1.8 million in the first quarter of 2022, an increase of 12%. TDO continues to perform well and gave favorable traction in group practices. Gross margin for the first quarter of 2023 was 31% compared to 25% in the first quarter of 2022. This increase was driven by improvements in clean flow adoption rates, along with increased procedure instrument ASPs, as well as operating efficiencies gained as clean flow production increased, offset somewhat by higher initial unit cost of the G4 console. We are very pleased with this positive inflection, both year over year and sequentially in margins as we are seeing further efficiencies with our consumables production line in conversion to the clean flow instrument. Improving margins continues to be a focus for us in 2023. Total operating expenses in the first quarter of 2023 were $18.2 million compared to $16.8 million in the same period of the prior year. Increases were driven primarily by higher expenses relating to our commercial expansion and related revenues. and higher general and administrative costs related to stock-based compensation, recruiting, and legal expenses, offset partially by lower R&D spending. Loss from operations was $14.8 million in the first quarter of 2023 compared to $14.6 million in the first quarter of 2022. Net loss was $15.4 million for the first quarter of 2023 compared to $15.5 million in the first quarter of 2022. Our cash and cash equivalents and short-term investments as of March 31st, 2023, were approximately $74.9 million, while our long-term borrowings remained at $40 million. As noted in our earnings release during April of this year, subsequent to Q1 end, we received $3.2 million of the $4.4 million of the employee retention credit recognized in 2022. As for our 2023 financial guidance, We are maintaining our initial estimates of annual revenue between 48 and $51 million for the full year. And while it is not our practice to provide quarterly guidance in light of the dynamic macroeconomic environment, we believe it would be helpful to provide some parameters around the second quarter of 2023. For Q2, we're expecting revenue to range between 11 and $11.4 million, and for gross margin, to be in line with Q1 as we ramp up in-house production of our G4 console. These figures reflect our most recent analysis of the sales cycle environment and underlying economic concerns amongst our customers. At this point, I'd like to open up the call for questions.

Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If you would like to withdraw your question, please press star followed by 2. When preparing to ask a question, please ensure your device is unmuted and open. Our first question today comes from John Block from Stiefel. Your line is open.