Sonendo Inc

Good afternoon and welcome to San Mendo's second quarter earnings conference call. At this time, all participants are in a 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 and would now, I would now like to turn the call over to Louisa Smith from the Gilmartin Group for a few introductory comments.

Thanks, operator. Good afternoon and thank you for participating in today's call. Joining me from Sunendo are Bjorn Berghain, President and CEO, and John Bostanczyk, CFO. Earlier today, Sunendo released financial results for the quarter ended June 30, 2024. A copy of the press release is available on the company's website. But 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, expense management, expectations for hiring, growth in our organization, market opportunity, revenue guidance, commercial expansion, and product pipeline development are based on 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 Factors section of our most recent quarterly report on Form 10-Q, filed today, August 7, 2024, with the Securities and Exchange Commission 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 7, 2024. 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. With that, I will turn the call over to Bjorn.

Thanks, Louisa. Good afternoon, everyone, and thank you for joining us today. I'm pleased to note that Sunendo had a very strong second quarter, and I'm very happy with the progress we made in just a short time since we initiated our reset strategy. Our team is diligently focused on executing against the commitments we've laid out, and I'm eager to share some additional areas of focus moving forward. During this call, I'll provide insight into some of the initiatives driving the improved performance, as well as the associated operating metrics. Then I'll introduce you to John Wojcicki, our newly appointed CFO, and he will review in more detail our second quarter results. Sonendo continues to revolutionize how tooth decay, the most prevalent chronic disease in the world, is treated. We are establishing general wave technology as the standard of care for root canal therapy by demonstrating strong clinical outcomes and superior cleaning via a less invasive and more efficient procedure as evidenced by nearly 1.5 million patients treated with general wave to date. However, with only 20% of endodontists in the United States and Canada currently performing the general wave procedure, the Sunendo team remains very excited about the significant growth potential ahead. In May, we announced a strategic reset that is intended to enable Sunendo to capitalize on that significant opportunity in a more focused and efficient manner. While we're still in the early stages of that journey, I'm really pleased with the results we've achieved so far. More importantly, I and the rest of the leadership team are so humbled and impressed by the energy, commitment, and engagement that the entire organization has demonstrated as we embraced on this new strategy together. Successfully navigating change of this magnitude is not easy, so I want to thank all of our employees and customers for their contributions, as well as their trust and confidence. We made good progress on each of the three pillars of our new strategic direction, commercial execution, gross margin expansion, and cash conservation. From a commercial execution standpoint, we have reengaged with our core Endodontics customer base and have realigned our direct sales team incentives to drive focus on increasing utilization of the General Maze system. We can measure our progress and define success in a number of ways. For example, One, we sold more console this quarter compared to the second quarter of 2023, generating 7% year-over-year growth in console sales, while also carrying over a healthy unit backlog for the second straight quarter. Example number two, of the 48 units we sold this quarter, 35 units were for customer upgrades from the legacy G3 system to the enhanced and even more reliable G4 General Wave system. We continue to consistently and significantly reduce unplanned service calls, or USC's, for both the G3 and G4, with the G3 USC rate decreasing from 1.7 in 2023 to less than 1 in the second quarter, and the G4 USC rate decreasing from 0.6 in 2023 to 0.4 in the second quarter. Executing the G4 upgrade program is a strategic priority for us in 2024, as we believe that improving the customer experience will re-energize our legacy customer base, which in turn should drive greater and more positive peer-to-peer influence. Those factors should enable us to expand our market share and procedural instrument utilization in the long term. Example number three, we're seeing progress within utilization And while PI sales for the quarter decreased 15% year over year, substantially all that was volume related and we believe that we have stabilized the underlying utilization rate as evidenced by a few key data points. First, PI utilization in the second quarter decreased by only 3.1% year over year, while the first half of 2024 it increased 3.5% sequentially compared to the second half of 2023. We believe that the second half of 2023 marked the low point for PI utilization. Second, we remain focused on driving customer utilization through forging closer relationships with our doctors and realigning our sales team's compensation incentives away from PI sales and towards utilization. This discipline focus led us to once again not offer any end of quarter sales discount programs, which helps maintain higher ASPs and they enabled us to work through a significant number of PI units sold in excess of utilization over the past two years. Year to date in 2024, our customers have utilized 22,500 more PIs than we sold, which compares to the 29,000 PIs we sold in 2022 and 2023 in excess of customer utilization. Based upon this progress, we expect PI shipment and sales to more closely align with customer utilization going forward and for PI sales and utilization to increase in the low single digits in the second half of this year. Example number four. We are excited by the recent hiring of Brian Ganey as Vice President of Sales. Brian brings to Sunendo a wealth of sales leadership experience in the dental market. One key focus area for Brian will be to help our consumable sales team drive even higher procedure instrument utilization rates with our existing customer base and ensure a seamless onboarding of new customers to enable and sustain higher PI utilization right from the start. By better educating our customers about the efficiency and ease of use of general-made procedure, we're helping them to provide better clinical outcomes for their patients while improving their own practice economics. Based upon this progress and our ongoing confidence in our commercial strategy, we are raising our revenue guidance for the full year 2024 to range between $31 to $32 million as compared to the prior guidance range of $29 to $31 million that we provided on our first quarter earnings call in May. As it relates to gross margin expansion, we have made substantial progress. GAAP gross margin for the second quarter of 2024 increased to 37.5% compared to 28.4% in the first quarter of 2024 and negative 5.5% for the prior year quarter. Adjusted gross margin for the second quarter of 2024 was 40.7% compared to 34.8% in the first quarter of 2024 and 28.7% for the prior year quarter. These results demonstrate just how well we were executing on multiple fronts for meaningfully reducing USC's and the related service and warranty costs incurred by our in-house service team. As I touched on earlier, to driving down the material and labor costs in the manufacturing of our consoles and handpieces through value-based engineering projects and collaborative strategic sourcing arrangements with our suppliers. As a result of these early successes, we're also increasing our expectations to now deliver adjusted gross margins in the 40 to 41% range for the second half of 2024, as compared to the high 30% range we discussed in our first quarter call. Moving forward, we remain confident that we will deliver on our prior commitments to reach the mid to upper 40s as we exit 2025, and then well into the 60% range longer term. Finally, for the last pillar of cash conservation, We continued to build upon the success of the first quarter by driving total year-over-year operating costs down in the second quarter by 7.1 million to 9.8 million, a 42% reduction compared to the prior year, and a 2.5 million sequential quarter reduction versus Q1 of this year. While most of our operating expense reductions have come from sales and marketing, where we're operating with more focus and efficiency, We have also meaningfully reduced R&D and G&A costs. Within R&D, we will continue to invest judiciously in product and software updates that will further Sunendo's mission to become the standard of care in root canal therapy and support doctors in driving efficiencies within their practices. For example, we're excited to announce that later this year, we expect to launch ProControl for our G4 console. This software upgrade will allow a clinician the flexibility to speed up and tailor treatment protocols to their patient's specific needs using our clean flow procedure instrument. These operating expense improvements combined with a significant expansion in adjusted gross margin grow a 6.4 million decrease or 53% improvement in year-over-year adjusted EBITDA loss to 5.7 million for the second quarter of 2024. This represents a $1.9 million sequential quarter improvement versus quarter one of this year. Based on our updated revenue guidance and expectations for adjusted gross margin, coupled with our continued focus on operating expense discipline, we anticipate further reducing our adjusted EBITDA loss in the second half of 2024. And for the full year, we now expect that the loss will be between $25 to $26 million. which reflects a 41 to 44% year over year reduction compared to an adjusted EBITDA loss of 44.4 million reported for the full year 2023. Simply put, we're doing more with less and we are working smarter and executing better. While we are encouraged by our year to date results, we know that there is far more to do and we will continue to relentlessly execute on the three pillars of our strategic reset. We remain confident that we can return to double-digit revenue growth in 2025, and we have full confidence in our commercial team and the commitment we have from the entire organization to work together to build a position of leadership in the market. Before I turn the call over to John to review financials, I also want to reiterate that management and the board are continuing to actively explore multiple financing options, including a combination of debt, equity, and non-dilutive sources, to strengthen our balance sheet. This is the number one priority for me and John. We will provide more details as those discussions progress. With that, I would like to now introduce to you John Bustanczyk, Sanando's recently appointed Chief Financial Officer to review the second quarter financial results in more detail. John comes to Sunendo with extensive experience in the medical device industry with over 20 years in financial and operational leadership roles at publicly traded companies, and I'm excited to have him on the team. John?