Business Overview and History

Sonendo, Inc. (OTCQX: SONX) is a leading dental technology company that has developed and is commercializing the innovative GentleWave System to treat tooth decay, the most prevalent chronic disease globally. With a strong focus on innovation and a mission to save teeth, Sonendo has established itself as a prominent player in the endodontic space.

Sonendo was incorporated in June 2006 under the name Dentatek Corporation and later changed its name to Sonendo, Inc. in March 2011. The company is headquartered in Laguna Hills, California. The GentleWave System, Sonendo’s flagship product, was first cleared by the U.S. Food and Drug Administration (FDA) for sale in the United States in 2017. It is also approved by Health Canada for sale in Canada. The GentleWave System is an innovative technology platform designed to treat tooth decay by cleaning and disinfecting the microscopic spaces within teeth without the need for extensive removal of tooth structure.

Sonendo has invested significant resources in building a broad intellectual property portfolio that protects the GentleWave Procedure and its unique mechanism of action, as well as future capabilities under development. The company’s commercial strategy focuses on driving adoption of the GentleWave System by increasing its installed base of consoles and maximizing recurring revenue from the sale of single-use procedure instruments (PIs).

As of September 30, 2024, Sonendo maintained an active user base of more than 800 customers in the United States and Canada, where the company’s direct sales force markets and sells the GentleWave System to dental practitioners performing a high volume of root canals. The company has been working to expand its sales and clinician support teams to support its efforts in driving adoption and utilization of the GentleWave System.

Throughout its history, Sonendo has faced several challenges. The company has incurred significant operating losses and negative cash flows from operations since its inception. It has also struggled with manufacturing its products in large-scale commercial quantities and has faced issues with third-party suppliers, including contract manufacturers and single source suppliers. Additionally, Sonendo’s internal computer systems and those used by its contractors or consultants have experienced security breaches in the past.

Financial Performance

For the nine months ended September 30, 2024, Sonendo generated revenue of $23.40 million, representing a 9% decrease compared to the prior year period. This decrease was primarily driven by lower sales volumes of PIs and lower average selling prices for the GentleWave Consoles, partially offset by an increase in revenue from extended service contracts. The company incurred a net loss of $27.20 million from continuing operations for this period, an improvement compared to a net loss of $51.19 million in the prior year period.

In the third quarter of 2024, Sonendo reported total revenue of $8.0 million, with console revenue of $1.8 million and procedural instrument revenue of $5.1 million. The company’s GAAP gross margin and adjusted gross margin (non-GAAP) for the third quarter were 41.2% and 42.6%, respectively, driven by lower manufacturing and console warranty costs. The year-over-year revenue growth for Q3 2024 compared to Q3 2023 was -1.53%, primarily due to lower average selling prices for GentleWave consoles, partially offset by an increase in extended service contract revenue.

For the full fiscal year 2023, Sonendo reported revenue of $43.87 million, a net loss of $60.92 million, operating cash flow (OCF) of -$46.06 million, and free cash flow (FCF) of -$46.99 million.

Sonendo has been focused on improving its operational efficiency and reducing costs. In the third quarter of 2024, the company significantly reduced its GAAP operating loss to $7.5 million and its adjusted EBITDA (non-GAAP) loss to $5.1 million, representing a 57% and 54% improvement, respectively, compared to the prior-year period. The Q3 2024 OCF and FCF were both -$4.31 million.

Liquidity

As of September 30, 2024, Sonendo had cash, cash equivalents, and short-term investments of $17.30 million, with cash and cash equivalents accounting for $13.10 million. The company also had $17.80 million in principal outstanding under its term loan facility. Sonendo’s ability to secure additional financing to fund its operations and planned growth remains a key factor in its financial stability.

The company’s debt-to-equity ratio stood at 1.128 as of September 30, 2024. Sonendo has a $20.5 million term loan facility with Perceptive Credit Holdings III, LP. The Amended Perceptive Loan Agreement contains financial covenants that require the company to maintain a minimum aggregate balance of $3.0 million in cash in controlled accounts and satisfy certain minimum revenue thresholds.

Sonendo’s current ratio was 1.816 and its quick ratio was 1.216 as of September 30, 2024, indicating the company’s ability to meet its short-term obligations.

Strategic Reset and Outlook

In May 2024, Sonendo announced a strategic reset to enable the company to capitalize on the significant growth opportunity in the endodontic market in a more focused and efficient manner. The three pillars of this reset include:

Gross Margin Expansion: Sonendo has made substantial progress in improving its gross margins, driven by lower manufacturing costs, reduced service and warranty expenses, and value-based engineering initiatives. The company expects to deliver adjusted gross margins in the 40% to 41% range for the second half of 2024, up from the high 30% range previously mentioned.

Cash Conservation: Sonendo has been successful in driving down its total operating expenses, with a 42% year-over-year reduction in the second quarter of 2024. The company now expects its adjusted EBITDA loss for the full year 2024 to be between $25 million and $26 million, representing a 41% to 44% improvement compared to 2023.

Based on the progress made in the first nine months of 2024, Sonendo has raised its full-year 2024 revenue guidance to a range of $31 million to $32 million, up from the previous guidance of $29 million to $31 million provided in the Q1 2024 earnings call. The company remains confident in its ability to return to double-digit revenue growth in 2025.

Risks and Challenges

Sonendo’s success is dependent on its ability to continue driving adoption and utilization of the GentleWave System among dental practitioners. The company faces competition from other endodontic treatment solutions and may not be able to achieve or maintain the expected level of market acceptance for its products.

Furthermore, Sonendo’s financial performance is subject to the impact of the macroeconomic environment, including factors such as inflation and interest rates. The company’s ability to secure additional financing to fund its operations and planned growth is also a key risk factor.

Conclusion

Sonendo’s innovative GentleWave System and its focus on revolutionizing endodontic care have positioned the company as a key player in the dental technology industry. Despite facing challenges, the company’s strategic reset and operational improvements have shown promising results, and Sonendo remains optimistic about its ability to capitalize on the significant growth opportunities in the endodontic market. With its raised revenue guidance, expanded adjusted gross margin outlook, and reduced expected adjusted EBITDA loss, Sonendo demonstrates confidence in its ability to execute its strategic plan and improve its financial performance in the coming years.

Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.