Sonendo: Rotten Tooth Evident (NYSE:SONX)

In November 2021 I had a look at Sonendo (NYSE:SONX) after the dental company has seen a public initial offering at the time. Shares traded 50% lower from the midpoint of the preliminary offering range, as investors (including myself) had huge doubts on the commercial success of the business.

Despite having obtained FDA clearance for its transformative root canal therapy, that did not translate into commercial traction. In fact, 2021 revenues were set to come in below 2019, being a huge red flag relatively soon after obtaining clearance despite pandemic induced headwinds.

A Recap

Sonendo has an aim to improve the quality of life for people by saving teeth through stopping the progression of tooth decay, all through its GentleWave system which aims to transform root canal therapy.

Through a sterilized and single-use instrument, the GentleWave system claims to succeed in its mission, despite the fact that each tooth is unique. Since commercialization in 2017 the company had grown to an installed system of 700 which have treated 600,000 patients since inception, as the millionth patient was actually treated late in 2022.

With no less than 17 million root canal procedures performed in North America each year, representing a $17 billion market opportunity, the potential was huge with many more earlier-stage tooth decay procedures being performed each year.

Underwriters and the company aimed to sell nearly 8 million shares at a preliminary midpoint of $16 per share, yet final pricing was set at just $12 per share. With 26 million shares outstanding, equity of the business is valued at $315 million at the offering price, a number which included a $60 million net cash position.

Revenues came in at $35 million on which a huge operating loss of $46 million was reported. Revenues fell to $23 million on the back of lower activity levels following the pandemic as losses actually narrowed modestly to $43 million.

Following a reopening of the economy, first quarter sales for 2021 rose by 80% to $15.4 million, trending at a run rate of $31 million. Losses narrowed to just below $20 million for the six-month period, still trending close to $40 million a year. With preliminary third quarter results revealing quarterly revenues of $7.8 million and operating losses of $11.3 million, there were no improvements seen.

Given the 8-9 times sales multiple, lack of operating momentum and steep losses, I saw no business getting involved with the shares. This was the case even as shares had fallen to $9 per share on the first day of trading, with operating asset valuations down to just $175 million.

Decaying

While Sonendo aims to prevent tooth decay, the reality is that shares have seen the most decay. After initially moving back to double-digit territory in 2021, shares have gradually fallen, having fallen to just below the $1 mark this summer, with shares now back to $2 per share.

In March 2022, the company posted fourth quarter revenues of $9.9 million, albeit accompanied by a large operating loss of $13.6 million. Shares traded in the mid-single digits already, no surprise as the company guided for 2022 sales at just $40-$43 million, indicating that huge losses should be expected.

From here it was all downhill as first quarter sales only came in at $9.0 million, accompanied by a $14.5 million operating loss. Second quarter sales rose to $10.5 million with operating loses improving modestly to $14.3 million.

Given the huge funding requirements the company raised $63 million in a private placement over the summer, with shares issued just below the dollar mark. Third quarter results revealed few reasons to become upbeat with sales trading flattish at $9.8 million and operating losses coming in flattish at $14.6 million. With the fourth quarter revenue guidance essentially seen at $11-13 million, there are few reasons to become upbeat.

Concluding Remark

With revenues trending around $40 million and operating losses trending around $60 million, the outlook remains very dismal even as the capital raise over the summer have resulted in a temporary net cash position.

Given all of this, mostly the lack of improvements on the top line and bottom line, I am leaning extremely cautious on the Sonendo shares here, essentially believing that shares remain uninvestable here.