Sonendo Inc

Good afternoon and welcome to Sanendo's second quarter earnings conference call. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session at the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Louisa Smith from the Gilmartin Group for a few introductory comments. Please go ahead.

Thanks, Operator. Good afternoon and thank you for participating in today's call. Joining me from Sunendo are Bjorn Berkheim, President and CEO, and Michael Watts, CFO. Earlier today, Sunendo released financial results for the quarter ended June 30th, 2023. 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 made on 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. 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 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 March 8, 2023, with the Securities and Exchange Commission and available on EDGAR and in 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 9th, 2023. Sunendo 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 Bjorn.

Bjorn Eriksson Thanks, Louisa. Good afternoon, everyone, and thank you for joining us today. For this call, I will start with some commentary about second quarter performance, business highlights, and forward-looking strategy before turning the call over to Mike to provide additional detail regarding financial results. We will finish with Q&A. During the second quarter, we continued to see increased adoption of our technology while also navigating a challenging market environment. Total revenue for the quarter was $11 million in the range of our expectations. While we acknowledge that revenue was to the low end of quarterly guidance, we remain confident in the strong foundation of the business, the uniqueness of the technology, and that we will ultimately capture long-term value. I'd like to spend some time discussing the second quarter results and specifically highlight some of the challenges we've experienced at the top and bottom lines. I'll then provide some detail regarding specific initiatives that we have already begun implementing for the remainder of the year, including top-line growth drivers, margin profile improvements, and balance sheet preservation. In the second quarter, the team delivered 5% year-over-year revenue growth. PI sales for the second quarter totaled $5.6 million, representing a 16% year-over-year increase. We're very pleased with the year-to-date performance of procedure instruments, and the positive benefits of our new pricing program. Clean flow adoption also improved, reaching over 60% penetration, and we are now projecting to be significantly ahead of our 2024 targeted timeline for full conversion. Turning to console placements, we experienced a decline in placements year-over-year and moderate sequential growth over Q1. There are several reasons as to why this was the case. many of which are dynamics we have communicated over the past year in prior calls and at investor conferences. But today, I'd like to address the headwinds in capital sales and what we're doing to drive console placements going forward. During the second quarter, we had several late stage opportunities where potential buyers chose to delay making a purchasing decision. They're not falling out of the sales pipeline, and we believe they will adopt General Wave later in the year. We attribute much of this delay to macroeconomic uncertainty and related increasing interest rates. As we have noted in previous calls, our pipeline and interest in General Wave remains strong. We're generating more new leads than in prior quarters and have more opportunities that we continue to nurture within our pipeline than at the same point last year. We're seeing constraints primarily on timing of capital expenditures at dentist offices and other financial considerations. The implication of these dynamics is an elongation of our sales cycle. When we look at the first half of the year, the vast majority of deals that we have signed continue to be with endodontists, with only a limited number of console sales attributed to dentists within the GP channel. There is significant runway of untapped customers in the GP segment, particularly in higher volume dental practices. We've noted previously that the GP rollout would be a measure strategy to ensure the high level of service Zonendo has become known for and provide us with the opportunity to address this new channel. An analysis of the funnel entering the second half shows a more equally weighted pipeline between GPs and endodontists. The majority of GPs do not know about the gel weight procedure and the value proposition it brings to their practice. But as we educate them through our sales team, We're encouraged by their enthusiasm. An example of this is our recent attendance at the Florida Dental Convention, where there was a lot of interest and discussion around how the technology works and how to integrate it into their practice. This gave us great exposure and is similar in experience to other GP-focused trade events. Therefore, we believe demand generation will be cultivated in the initial stages of our GP strategy will produce a higher proportion of sales within that segment in the future. Associated with the earliest GP accounts, we've gained some important learnings for our long-term strategy. The sales team is seeing three distinct segments where General Wave delivers a significant value proposition to their practices. The first segment consists of GPs that were already keeping procedures in-house. As a result of General Wave, They're now able to offer not only a better patient experience with reduced chair time, but also increased practice productivity and potential referrals from satisfied dental patients. The second segment are those GPs that see the potential for leveraging Gel-Wave to offer same-day endodontic workflows that include both the endodontic and restorative procedure and therefore increased revenue per chair. The third segment represents those GPs that had previously been referring outward canals and who are now able to keep them in-house to produce an additional revenue stream for the practice. In all these segments, our system allows these doctors to confidently treat their patients. One GP who recently adopted General Wave shared with our sales team that, and I quote, this machine gives the confidence to perform high-quality RCTs on most molars, which we previously didn't do. The disinfection of the root canal system is near perfect every single time." We're still in the early stages of what we believe to be a significant growth opportunities for GPs, and we remain confident that investing in the GP channel is the right strategy for the business at this stage. Consequently, we have reallocated resources to increase awareness and demand from new doctors specifically within the GP segment, while also moving investments into educational events and activities that have historically been important closing initiatives. We have several programs that allow doctors to get in-office access to General Wave that allows them to evaluate how the system works for their business model and how it fits into their practice workflow. Additionally, we're focusing investments to drive professional media specifically for this segment. Building out this GP channel strategy should prove valuable as we move through Q3 into Q4, which has historically been our largest quarter due to the increased purchasing trends that accompany doctors benefiting from tax incentives. In conjunction with our GP channel initiatives is our approach to the DSO, or dental service organization market. This includes both specialist DSOs and other GP DSOs. We're pleased to announce that we have recently hired a corporate account leader that has direct responsibility for the development and implementation of our DSO strategy and who comes with substantial experience within the DSO market. There are thousands of DSOs in the United States and Canada, and the new corporate account role is a reflection of our commitment to put more attention and focus on a critical market opportunity. While we're bullish about the opportunity to expand the GP channel and gain traction within the DSO market, we have not relented on the focus on endodontists. Endos remain an under-penetrated market with less than 20% of the over 5,000 endodontists in the United States and Canada utilizing the general wave system. It remains an important strategy for Synendo moving forward and one that we will continue to commit resources to. Moving to the bottom line, I'd like to focus some of our time to discuss margin expansion. The second quarter gross margins were negatively impacted by the result of specific accounting adjustments. Mike will discuss the details of those charges during his remarks, but I'd like to address our action plan to return higher margins as we exit 2023 and prepare for accelerating improvements in 2024. Regarding an improvement to margins on our procedure instruments, first, one of the charges we took in Q2 will accelerate our adoption of clean flow by exiting a supplier relationship and canceling a future order relating to the molar PI. Second, and this also relates to gross margins, on August 1st, we announced that the clean flow PI is now indicated for use on interior teeth. Until now, interior teeth required the use of a separate PI, the APM, to be used for the Gelamage system, requiring multiple manufacturing line and sourcing of alternative materials. These steps mark important milestones within our planned margin expansion and goal of one PI for all teeth at the start of 2024. Having one PI will greatly improve our ability to achieve economies of scale simplify the product portfolio, achieve supply chain consolidation, and ultimately results in higher contribution margins. Turning to consoles, as we discussed in our first quarter call, we have made the decision to bring G4 console assembly in-house. The assembly line is fully operational and we've already placed a number of internally assembled units with customers. In-house assembly not only allows us to focus on optimizing the manufacturing process, it also ensures closer supervision of the entire supply chain and oversight of quality control for units in the field. We anticipate that we will be able to accelerate cost reduction, leverage internal resources, and therefore margin improvements by making this change. And finally, I'd like to touch on our ongoing strategies for balance sheet preservation and expense management. In June and July, we implemented an approximate 10% reduction force and cut future expenditures to reduce our cash burn. We're continually reassessing our spending requirements, and we are prioritizing a tighter expense program in the near and long term. In summary, we're allocating resources to accelerate general wave adoption and have multiple initiatives to improve gross margin and reduce cash burn. I will now turn the call over to Michael Watts, Sunendo's Chief Financial Officer, and then return for some closing comments ahead of the questions and answer session. Mike?