Sonendo, Inc. (OTCQX: SONX) is a commercial-stage medical technology company that has developed and is commercializing the GentleWave System, an innovative technology platform designed to treat tooth decay by cleaning and disinfecting the microscopic spaces within teeth without the need to remove tooth structure. The company's principal market is the United States and Canada.

Business Overview

Sonendo's GentleWave System represents a significant advancement in root canal therapy (RCT). The GentleWave System utilizes a proprietary mechanism of action that combines procedure fluid optimization, broad-spectrum acoustic energy, and advanced fluid dynamics to efficiently and effectively reach microscopic spaces within teeth and dissolve and remove tissue and bacteria with minimal or no removal of tooth structure. This approach transforms the patient and dental practitioner experience and addresses many of the limitations of conventional RCT.

In the United States and Canada, Sonendo's direct sales force markets and sells the GentleWave System to dental practitioners performing a high volume of root canals as part of their practice. The company's commercial strategy and sales model involves a focus on driving adoption of its GentleWave System by increasing its installed base of consoles and maximizing recurring procedure instrument (PI) revenue through increased utilization.

Financials

As of March 31, 2024, Sonendo had an installed base of approximately 1,142 GentleWave Systems. For the three months ended March 31, 2024, the company generated revenue of $7.0 million and incurred a net loss of $12.2 million from continuing operations, compared to revenue of $8.7 million and a net loss of $15.6 million for the three months ended March 31, 2023.

For the fiscal year ended December 31, 2023, Sonendo reported annual revenue of $43.9 million and a net loss of $60.9 million. The company's annual operating cash flow and free cash flow for the same period were -$46.1 million and -$47.0 million, respectively.

As of March 31, 2024, Sonendo had cash and cash equivalents and short-term investments of $33.6 million, an accumulated deficit of $436.8 million, and $23.2 million in principal outstanding under its term loan facility. The company expects to continue to incur net losses for the next several years as it invests in its sales and marketing organization, research and development, regulatory affairs, and clinical studies.

Risks and Challenges

Sonendo's ability to continue as a going concern depends on its ability to continue to commercialize its products, achieve and maintain profitable operations, as well as the adherence to conditions of its outstanding term loans. The company will require additional financing in order to fund its future expected negative cash flows.

Recent Developments

In the first quarter of 2024, Sonendo generated revenue of $7.0 million, exceeding its guidance of $6.0 million. The company's GAAP gross margin for the quarter was 28%, compared to 23% in the prior year period, primarily due to higher PI average selling price and lower unit cost. Non-GAAP gross margin increased from 23% to 30%, a more than 700 basis point improvement year-over-year. Non-GAAP operating loss decreased from $12.8 million to $7.5 million, a 41% reduction.

Sonendo is currently focused on three key initiatives as part of its 2024 strategic reset: commercial execution, cash conservation, and margin expansion. The company is adjusting its organization to the current realities of the market, moderating commercial investments in the near term to achieve financial strength in the long term, and prioritizing efforts that will generate a positive return on investment.

Specifically, Sonendo is shifting away from its previous strategy of targeting general practitioners and refocusing exclusively on endodontists, its core customer base, to reestablish touch points with existing and potential customers and drive growth in procedure volumes and PI sales. The company has also modified its sales compensation plan to reward reps for building partnerships with doctors and driving utilization, rather than just console placements.

In terms of cash conservation, Sonendo has discontinued programs that do not show a clear return on investment and eliminated expenses associated with completed projects. The company expects its non-GAAP operating loss for 2024 to be approximately $28 million, a 40% decrease or improvement over the prior year.

Regarding margin expansion, Sonendo has made significant improvements to the reliability of its GentleWave Console, reducing the average number of service calls per year from 2 to less than 0.5. The company is also prioritizing the upgrade of existing customers from the previous generation G3 console to the more reliable and efficient G4 console. Additionally, Sonendo is focusing on cost reduction initiatives, including strategic sourcing, material cost reductions, and value-based engineering projects, which are expected to drive the company's non-GAAP gross margin to the high 30% range by the end of 2024 and the mid- to upper 40% range by the end of 2025.

Outlook

Looking ahead, Sonendo is raising its full-year 2024 net revenue guidance to $29 million to $31 million, excluding revenue from its discontinued software business. The company expects to return to double-digit growth in 2025 as its strategic reset initiatives take hold.

Conclusion

Sonendo's innovative GentleWave System and its focus on revolutionizing root canal therapy present a significant opportunity in the dental market. However, the company faces challenges in achieving profitability and maintaining its liquidity position. Investors should closely monitor Sonendo's progress in executing its strategic reset, improving its financial performance, and securing additional financing to fund its future growth and operations.