...If you could just grab a seat, and we're gonna get going. Okay, thanks so much. We're excited to be joined next by Sonendo, with Bjarne Bergheim, President and CEO. What we're gonna do is we're gonna sort of split it. Bjarne has a prepared presentation with updates to share on the Sonendo story, and then we'll leave, whatever it might be, you know, 15 minutes or so at the end to get into some Q&A that I'll spearhead, and if you have questions, fire away. So Bjarne, over to you.
Excellent. Thank you, Jon, and also thank you to the Stifel team for the invitation again. It's, it's good to be here. So many of you have seen the Sonendo overview before. And so we're, we're gonna do this a little bit different this time. I'm gonna give a brief overview of Sonendo, but I'm also gonna give an overview of what we call the reset strategy for Sonendo. So we grew really, really quickly from 2017 to 2021. Then in 2021, we put in place a new commercial team, a new commercial strategy that ended up costing us a lot of money.
So in 2022 and 2023, our sales and marketing costs, our general expenses across the company were high, significantly higher than before, and we did not quite see the growth that we wanted to have. So I wanna share with you just a quick recap of what Sonendo is all about, but then also exactly what we're doing on the reset strategy for the company. So we're all about saving teeth, restoring health. What that means is that we're going after tooth decay. Tooth decay is the number one most prevalent chronic disease in the world, and effectively, it's two things. It's cavities and root canals. And right now, our primary focus is root canals, but effectively, the technology we have also allows us to go after cavities as well.
So that's, that's next, but currently, the focus is 100%, root canals. So here's a quick overview of, of the company. Paradigm-shifting platform technology for tooth decay, specifically now focusing on, on root canals. That in and of itself is a large opportunity. We estimate the opportunity to be about $1.9 billion in, in North America, just for the root canal opportunity. Currently we're focused on endodontist, the specialist, and we have roughly about a 20% penetration into the specialist, specialist field. The, at this point in time, we're well on our way. We have just completed our 1.4 millionth procedure. We have roughly about, eleven hundred consoles out there, so we're making meaningful progress.
With regards to the reset strategy, I think there's if you look at what and we talked a little bit about this in our Q1 call, is that there are three pillars that we're we really wanna focus on. One is commercial execution. We wanna show the world that we can execute better on on the commercial side, and and so we'll we'll give you an update on where we are on that side. Specifically now, the key big change that we're making is that we're putting our focus back on the endodontist, the specialist. We're also very focused on cash conservation. And we have made a lot of changes, both in Q4 of 2023 and also Q1 of this year.
We reported in Q1 that we reduced our operating non-GAAP operating loss by about 41%. So a lot of accomplishments, but more work to be done. We're also making meaningful changes on the margin side, and we have a clear pathway to get north of 60% or north of 65% on the margin side. So here's an overview of the market. It's roughly about the $1.9 billion opportunity across North America. The specialists, endodontists, do roughly about 25% of this market, and that's where we're initially focused. The reason for that is that we can, first of all, they're specialists and the authority of the space, but we can also access those 5,000 endodontists with fewer sales reps, so in a much more efficient way.
So what are the limitations of conventional root canal procedures? First of all, more than anything else, from a clinical side, about 15%-32% of these cases fail. So there's a huge opportunity to improve outcomes. What we've shown on our side is that we're able to reduce failure rates to less than 3%. And if you look at the traditional root canal procedure, it's a very antiquated procedure. Doctors will use files, drills, burs, to try to scrape the interior of the tooth. But obviously, the problem is that files can only touch roughly about half of the interior surface of these canals. So there's a lot of rotted tissue and bacteria left, which is what drives the poor outcomes. From a clinical workflow perspective, the challenge here is that there's a lack of standardized protocols.
Some doctors can spend an hour on a procedure; some doctors can spend five hours on a procedure. What, what we're doing with GentleWave is that we're making this procedure much more predictable. You can, within the eight-minute procedure, that the GentleWave procedure takes, you can quickly and with certainty clean this, in fact, the entire root canal system. The net result of that is that a doctor can take a 90-minute procedure, and on a consistent basis, drive that procedure down towards 30 minutes or less. So here's just a quick video that shows exactly what, what this is all about. We're placing a procedure instrument on the tooth. The procedure instrument automatically will clean and disinfect, dissolve the tissues within the root canals, and automatically clean throughout the entire three-dimensional root canal system, all the way down to the tip of the tooth.
And not only are we cleaning the main canals, but we're also cleaning into these porous structures that you find within teeth. And that's part of the secret sauce. It's part of the secret sauce why we're able to significantly improve outcomes and care in root canal therapy. But it's also part of the secret sauce, what we're going to do in the future, because if we can clean within these small structures on the root canal side, we can also clean within the small structure that's required for cavities in the future. And the way to think about the root canal is that the root canal infection is just an advanced form of cavity. So as you look inside now, teeth cleaned with traditional practice, you can see this on the left here.
This rotten tissue and bacteria is you know, the tissue effectively left in a traditional root canal procedure, that traditional could not remove, and that's why we have the high failure rates in, in traditional root canal procedures. Whereas on the, on the right-hand side here, we see a GentleWave clean tooth, cleaned from top to bottom. Not only have we cleaned the main root canals, but we've also cleaned into these, small pore structures, the tubular structures within the teeth. So we remove all the bacteria, all the tissue, and hence, the significantly better outcomes. Now then, so as I said, we grew very rapidly from 2017 to 2021, then did one mistake, and that was and we, we were all holding hands as, as a company.
We put in place a new commercial structure, a new commercial plan in 2021, to continue to attempt to drive even faster growth. The net result was that we spent more money, and we didn't see the growth. So that's why the board and I have spent a lot of time on creating this reset strategy for the company, where we're really looking at this from three pillars: commercial execution, cash conservation, and gross margin expansion. We need to be able to show to the world, like we did before, that we can be much more efficient in the way we sell, and we also need to be able to show that we can have a clear path to profitability in the company. So the commercial execution side, we'll go into some of the details of some of the things that we're changing.
We're now refocusing, going back and focusing on the specialists. We made a pivot in 2022 to focus on the GPs, now we're going back to the specialists. We're only 20% penetrated here. There's a lot more room to grow, and that's what, that's what we're gonna do. We're also incentivizing our sales force to go after high-volume accounts. We don't want to add on consoles that show little to no utilization. We want doctors that are doing this for a high number of procedures. Instead of concentrating on a lot of different things, we're focusing on a few select commercial programs going forward. Cash conservation is big for us now, and we've shown that we've been able to reduce costs across the organization to the tune of 40%.
And it's a different time, on one side, there's a lot of projects we have completed that we no longer need to focus on, but there's also a discipline within the organization that we're bringing, not just on the commercial side, but across the entire company, of doing more with less. Gross margin side, we have made significant progress on the reliability of our console platform. In fact, the consoles that we have right now are probably some of the more reliable, capital equipment platforms that you would find across med tech. So we've really made meaningful progress here. This helps us, obviously, from a service perspective, less cost for us to service these units, and it helps us in a lot of different areas, peer-to-peer perspective, but obviously also from a gross margin perspective.
We're also focusing the team now on a few specific margin projects, and we shared in our last call some of our margin metrics that we're going to focus on going forward. So just a deep dive on some of the things we're doing on commercial execution. Focused on our core customers, the endodontist. We divested one of our the software business that we had, which means that now the organization can be very, very acutely focused on the GentleWave opportunity, which is the large opportunity for us going forward. We're also working closely with our doctors around our value proposition of efficacy, efficiency, economy. What we're seeing is that when doctors go all the way in with us on GentleWave, they're able to significantly drive efficiency with these procedures.
And if I look across all the different doctors I've visited, and talked to, that do root canal procedures, the fastest doctors have one thing in common, and that is that they do their procedures with GentleWave. And we need to teach the doctors this, such that we can drive utilization and drive more adherence to the GentleWave procedure going forward. Another thing we did in Q1 is we developed a healthy backlog, which is important to us. And that's the first time as a public company that we've had a backlog, which means that we signed more consoles than we revenue recognized and shipped. That means that we have a certain number of consoles that give us effectively much more predictability in predicting console revenues going forward. Utilization is going to be key for us going forward.
We're incentivizing our reps to find high-volume accounts, and we're also doing exceptional onboarding in new accounts. What we're finding is that the accounts that have been onboarded well, those cohorts do exceptionally well from a utilization perspective going forward, and that's gonna be key for us as we move forward. Doing a lot also on the commercial program side, where we are focused on a few select programs. As opposed to just boiling the ocean, we're focusing the team in on a few select programs. Cash conservation and gross margin, a lot of things happening here, but just a quick summary of some of the key things. Console reliability has been significantly improved, which means that we have to pay less on servicing these consoles, which obviously helps us on the margin side.
We've also completed a lot of key projects across the organization. We now have one new console platform. We have a new procedure instrument. That means that from an operations perspective, we have one console, one procedure instrument, and we can do a lot there to really focus the team in on improving margins. Because we have completed a lot of these projects, we can significantly reduce costs across the entire organization, but we can also take some of these key resources and really focus them in on continued margin improvement projects, going forward. And one of the things that we have said is that, by the end of this year, we expect gross margins to be in the upper 30s%.
We expect margins next year to be in the mid- to upper-40s%, and then eventually, we want to get to north of 65%, margins for the business, and we think we have a clear pathway to get there. So as part of this reset strategy, one of the things we wanted to do is share with everyone more details, such that everyone can be part of seeing exactly what progress that we're making across the business. So in our last call, we disclosed a lot more metrics about the business going forward. Disclosed metrics like cash, we have significantly reduced our operating loss this year to the tune of 40%, and that's not a temporary thing, that's something that's going to continue.
We've put in place meaningfully different ways of doing things across the business that will allow us to operate the business on less spend. Margin side, like I mentioned, upper 30s by the end of this year, and we're gonna continue that progress into next year. The contribution margin for the procedure instrument is in the lower 60s at this stage, but will be, we expect, in the low- to mid-70s by the end of 2025. Also, on the revenue side, we expect to return to high growth in 2025. So here are some of the highlights of the last quarter. Maybe the key things to point out here is that the full year guidance that we increased our full year guidance, and now it sits at $29 billion-$31 billion.
So that's a brief overview of where we are, and then we can go back and do some Q&A.
Perfect. Thank you. Thanks, Bjarne. I'll start with the questions, and, you know, before we get into sort of Sonendo-specific ones, obviously you've got the console, you've got the consumables, so there's a capital equipment component. Maybe if you want to talk to the audience about the ASP, roughly, for your console. And then, how's that capital equipment environment? You know, we had Dentsply Sirona up here earlier. They've got some higher end equipment, ASP stuff, and still talking about interest rates, and maybe talk us through on how that market is evolving, improving, deteriorating. We'd love to get your thoughts there.
I think it's fair to say that the capital equipment market is stable. Obviously, we would have preferred a lower interest environment. It would be easier to sell capital equipment in a lower interest environment. But what we're seeing right now is a stable market, and I think what we're seeing on our side is that the doctors that we're working with are figuring out how to function in this environment, if you will. And we, on our side, are also figuring out how to work in this new environment. It's the new normal, and all the planning and everything that we're doing is in anticipation of this new normal.
At a $50,000 box, I, I think approximately-
Yep
... you know, I think some of our work shows that, like, $30,000, $35,000 is the cutoff. North of $30,000 or $35K, they're typically going ahead and financing, right? So they're subject to the interest rates. You know, one, is that accurate? Would love your thoughts there. When you say you're learning how to function in this environment, I guess a lot of people thought rates were gonna come down quicker than they have. What does that mean? What specific selling programs have you put in place to try to operate in this more difficult environment?
Yeah, so first of all, what we are seeing is that, you know, the majority of doctors are choosing to finance. Financing varies from roughly about 12 months to about five years, roughly. We have a third-party financing arm that we're using, such that we can help the doctors get these console financed, and we book the revenue, and then obviously we, you know... So then the relationship between the financing side is directly with the third party. On our side, what we're doing is that we are focusing on a few select commercial programs that are important for us, that we found to be very useful to drive console placements.
Instead of boiling the ocean, like I talked about, we want to focus on a few programs. The number one most effective program that we have is professional education or clinical education, where we can bring doctors together on a Saturday, or you know, and have an endodontist talk to other endodontists about this opportunity and what it does for their practice. That's probably the number one most important thing that we have. We have others as well, but that, I would say that's the most important thing.
Okay. And then one more, I mean, before we get into some more, specific parts of the business. Several months ago, the company announced and talked about some DSO agreements, sort of corporate agreements. And I think about in the world of dental, you know, it's sort of like a huge validation of the technology, right? I mean, these corporates are scrutinizing returns. They're not gonna commit capital unless they're sort of convinced and can make economic sense of it. I'll use the term, I think these were like largely hunting licenses. Can you bring us up to date on, you know, on those agreements and the traction that you've seen from them over the past handful of months?
Yeah. I think you actually mentioned... The right word is exactly like you said, hunting license or a fishing license. You have to have that in order to sell into them. So by having that agreement in place, that means our sales reps can now knock on the door on these different doctors and, you know, convince them to buy a unit, and then, there, there's an agreement that's put in place that will guide that transaction. So I don't think anyone should think that, okay, by having these agreements in place, all of a sudden, we're gonna get a, you know, an order for a couple hundred consoles. That's not the way this works. It's a gradual transition.
I think over time, I think people will start to realize more and more what the benefits are for the practice from a efficiency standpoint. Like I mentioned, the fastest doctor that I've spoken to across the country, they have one thing in common, and that's the fact that they're using GentleWave. I think, that's, you know, that's what people will eventually see, and I think we'll also see that, you know, in the DSOs. We do have one early DSO as an example, that has decided that, hey, going forward, all the, all the practices that we're bringing on will only be using GentleWave. That would be a requirement as we go forward. I think as people learn more about the clinical benefits and the efficiency benefits, I think we'll see more of that.
Okay. I want to get more into the business and some specific questions. The reset that you alluded to, the company's focus is gonna be on endos-
Yep.
not GPs. For me, the key always seems to go back to increasing high-margin consumable utilization.
Yeah.
So maybe talk to us, you know, the average endo is doing how many RCTs per month? Where are you from a utilization at those practices, and then the keys to driving that number higher because of the favorable contribution margin that you talked about with CleanFlow?
Yeah, so I think the average endo, and the numbers vary here a little bit. Our numbers is that they're doing roughly 65-70 procedures per month. You know, our average, GentleWave customer is doing on the order of 30, so we estimate that we have ballpark 40% share of practice. So I think there's a couple different things that we're doing to continue to drive utilization going forward. Focusing on the endos is obvious—the obvious one, right?
Mm-hmm.
Because those, that gives us access to higher volume accounts. The second is that we found to be very helpful in a couple different levels, is upgrading doctors to G4. We're seeing that by making that upgrade, more reliable console, and that obviously drives peer to peer, but also can help us on utilization, which is beneficial. And I think going forward, we also have the clinical education side that can be very helpful. We do see two types of customers out there. We see one customer that's using the GentleWave as an adjunct, meaning that they'll do a traditional root canal procedure, but they'll just add on, bolt on a GentleWave clean at the end. We are seeing another group of customers that are substantially doing all their procedures with GentleWave, where they're doing the Gentle...
I would call it the GentleWave procedure, which is significantly, obviously, reducing the time of the practice. And, you know, we need to teach doctors how to do that, so that's an opportunity for us, as we go forward, to have our KOLs talk about that, have us talk about that through webinars. And there's a couple different things that we're working on there that we will- as we go forward, we'll talk more about some of the plans that we have. Another thing that we have coming up is we did get the ADA code to change with some of the language around one particular code, that the ADA, I think, will publish more information about that in the July timeframe.
It will go into effect early next year, on Jan uary 1, 2025. That we don't have all the details and all the metrics, but we estimate that the increased additional dollar amount that a doctor can charge with is two, you know, to the tune of $40-$60. That's the additional reimbursement that they will get.
That was between $ 40 and $ 60, what was it?
$ 40- $ 60.
$ 40- $ 60.
Sorry. Yeah, $40-$60.
So they're paying roughly $75, give or take, for the consumable today. Come January 1, 2025, if this holds, they'll be getting back, you know, north of 50% of the roughly $75 consumable.
Which is more roughly than the incremental cost increase of moving to GentleWave. So we think that will be a meaningful change in terms of. So that's one of the things that we're gonna teach them. So element of teaching them how to do a GentleWave procedure, how to profile GentleWave in their local communities, and also, how they can click on this code. I think it could be very helpful.
... Maybe just a couple more. You know, one of the things that I, I've always struggled with is, you're an endo, you're paying $50,000 or so for the system.
Yep.
You bring this in, you're seeing the benefits, the outcomes, the workflow. Why are you sitting at 40% conversion? You talked to maybe two different classes. What percent of your total install base, you know, is over 50%, and what are the limiting factors that's preventing that greater conversion rate?
Yeah. Yeah, so, the way I'm going to characterize it is there's, like I said, two types, right? Some that are using this as an adjunct, some that are all in, and the net, average is the $440.
The adjunct is just what, in the more difficult cases, they're gonna go ahead and do the additional step of cleaning?
That's-
So that might pertain to suddenly the adjunct where they're bolting on, 'cause, oh, it's A, and these 10% or 15% or 20% of my difficult RCTs, I'm also gonna run a GentleWave in the background.
That's correct, because they know that the failure rate is very high. In some of these cases, right, some of these most difficult cases, the failure rate is 50%, 60%, 70%, and they know that. So by using GentleWave, they know that they can significantly improve the outcomes.
Okay. I'm gonna jump around. I'm gonna go to balance sheet. You know, the company's pivoted, you prioritize sort of limiting the cash burn, but the balance sheet still needs to be strengthened, in my opinion. What are some of the options in front of the company? You know, you can talk to-- you alluded to the asset sale of TDO. What about other opportunities in terms of distribution agreements, right? Now that you've sort of pivoted away from the fragmented GP market, are there opportunities to lean on distributors there in the U.S.? And anything OUS in terms of international markets where it might make more sense to partner-
Yeah
... potentially get something upfront in return?
The number one focus that we have right now is to show clear progress on the reset strategy. Because I think if you look at the market cap of Sonendo right now, and if you look at the opportunity going forward, if we can show some more data points that shows that we have changed the trajectory of the company, I think that's going to be important. I think that's gonna be important for investors to see that we can get back to the growth elements that we had before. We can significantly improve margin, significantly manage cash in a different way. So that's priority number one. But like we've talked about, so we're gonna keep all the options on the table for obviously to strengthen the balance sheet.
We are looking at the potential of, for example, refinancing the debt. We are looking at some options around non-dilutive financing that you mentioned. At the end of the day, we're gonna do what's right for shareholders. We think we have a very large opportunity, that, and we think there's a dislocation, drilling in value. So we're gonna prioritize execution, and then we're gonna look at the different options that we have going forward.
Okay. You mentioned a good backlog coming out of Q1.
Yeah.
You have the G4 box, you've got a big install base that could arguably upgrade to G4. How do we think about an upgrade G3 to G4 versus a new placement? And obviously, I ask that from the perspective of, you know, I used to use this term, I'm sure it wasn't the first one, not all boxes are created equal, right? And so a G4 going to a greenfield is a completely new consumable stream. You talked about why a G4 upgrade can help drive utilization, more reliable, easier to use, more efficient, but it's not the same as starting from zero. So how do we think about the vast majority of boxes in one queue were still upgrades, right? So is that backlog upgrades, or do we expect a greater mix of new systems as we work our way throughout 2024?
Yeah. So obviously, we moved away from the endodontists, and we pivoted to the GPs. We're now really refocusing our efforts on the endos. So as we refocus that efforts at using these upgrades is an, you know, important step for us to really energize the base of customers that we have, that are so excited about the opportunities around GentleWave going forward. So you'll see more upgrades, you know, in the early part of the year, and we'll start weaning off that as we get later into the year. Because I think that those upgrades will also help drive the peer-to-peer. And I think, quite honestly, right now, I don't think doctors realize and understand quite the benefits that exists with G4, the reliability side, the fact that they can drive more procedures, more do these procedures more efficiently.
It's just, it's really moving from black and white television to 4K, like I just like to say.
Maybe last one for me. I, you know, sometimes I struggle with if this is the right venue to bring something like this up, but insider buying, right? In the last month or so, we've seen notable insider buying. You've had three different individuals collectively buying over 1 million combined shares, and so I think it's the opportunity. Maybe, you know, you've got the floor of what are these individuals seeing, that maybe the investment community's missing? It's not one individual, it's a little bit more broad-based across the organization. If you can address that, that'd be helpful.
I think they're seeing an interesting opportunity, and, you know, Let me, let me put it this way. So if I in 2020, before COVID, for example, if I walked in and talked to an investor and said, "Hey, we have a, just in the root canal market, $1.9 billion opportunity here in the U.S., with an opportunity to probably 10x that when we get cavities online. We have by far the best technology, in this market, with exceptionally strong IP, so very significantly ring-fenced. So exciting opportunity going forward. We're gonna do about $30 million this year, and are you interested in participating? And by the way, my pre-money is less than $10 million." I think that's the opportunity.
Okay. Good way to conclude. Bjarne, thank you very much. Appreciate it.
Thank you.