ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 2022 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations are contained in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on April 18, 2023, or the Annual Report. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Sientra,” “the Company,” “we,” “us” and “our” refer to Sientra, Inc. and its consolidated subsidiaries.
Forward-Looking Statements
The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management, and the impact of global economic conditions and public health crises and epidemics, such as the COVID-19 pandemic, on our business and industry. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q, the risks set forth in Part I, Item 1A, in the Annual Report, and in our other filings with the SEC. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements.
Overview
Sientra, Inc. (“Sientra”, the “Company,” “we,” “our” or “us”) is a medical aesthetics company uniquely focused on becoming the leader of transformative treatments and technologies focused on progressing the art of plastic surgery. We were founded to provide greater choices to board certified plastic surgeons and patients in need of medical aesthetics products. We have developed a broad portfolio of products with technologically differentiated characteristics, supported by independent laboratory testing and strong clinical trial outcomes. We sell our breast implants and fat transfer system in the U.S. for augmentation procedures exclusively to board certified and board admissible plastic surgeons and tailor our customer service offerings to their specific needs, which we believe helps secure their loyalty and confidence. We sell our breast implants, breast tissue expanders, and fat transfer system for reconstruction procedures predominantly to hospitals and surgery centers, and our BIOCORNEUM scar management products to plastic surgeons, dermatologists and other specialties. We expanded outside of the United States, first in Japan following approval by the Japanese Pharmaceuticals and Medical Devices Agency, or "PDMA", in 2020, and subsequently, in the Kingdom of Saudi Arabia, or "KSA" following approval by the KSA Food and Drug Administrative in 2021, in Canada following Health Canada approval in 2022, and the United Arab Emirates, or "UAE", following approval by the UAE Ministry of Health and Prevention in 2022.
Following the sale of the miraDry business, we have one operating segment in continuing operations named Plastic Surgery, formerly known as Breast Products. Our Plastic Surgery segment focuses on sales of our breast implants, tissue expanders, fat transfer, and scar management. Additionally, we leverage distributor relationships to sell our breast implants outside of the U.S.
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Recent developments
Aziyo Biologics Partnership
During the quarter, the Company entered into an agreement with Aziyo Biologics, Inc. (“Aziyo”) to expand the distribution of Aziyo’s SimpliDerm product line. Under the agreement terms, Azyio will grant the Company certain non-exclusive rights in the United States to market, sell and distribute SimpliDerm for select use in reconstruction surgery.
Commercial Launch of Viality Fat Transfer System
On March 1, 2023, we announced that we began commercial shipping of our Viality with AuraClens fat transfer system, which we had previously acquired on December 31, 2021 from AuraGen Aesthetics LLC. We also announced the release of preliminary results from our on-going, multi-center, long-term volume retention clinical study with Viality.
COVID-19 Pandemic
The COVID-19 pandemic and its related macroeconomic effects significantly impacted our business and results of operations in past years. At the height of the pandemic and as an aesthetics company, the surgical procedures involving our breast products were susceptible to local and national government restrictions. The inability or limited ability to perform non-emergency procedures significantly harmed our revenues since the second quarter of 2020 and during the first quarter of 2022.
In addition, the global economy, including the financial and credit markets, has recently experienced extreme volatility and disruptions, including increases to inflation rates, rising interest rates, declines in consumer confidence, declines in economic growth, and uncertainty about economic stability. The severity and duration of the impact of these conditions on our business cannot be predicted.
The estimates used for, but not limited to, determining the collectability of accounts receivable, fair value of long-lived assets and goodwill, and sales returns liability required could be impacted by the factors described above. While the full impact and duration of the factors noted above is unknown at this time, the Company has made appropriate estimates based on the facts and circumstances available as of the reporting date. These estimates may change as new events occur and additional information is obtained.
Components of Operating Results
Net Sales
Our net sales primarily consist of sales of silicone gel breast implants, tissue expanders, Viality fat transfer, BIOCORNEUM, and sizers. Excluding Viality, BIOCORNEUM, international sales, and inventory held on consignment, we recognize revenue on breast implants and tissue expanders, net of sales discounts and estimated returns, as the customer has a standard six-month window to return purchased products. We recognize revenue on BIOCORNEUM scar management products, inventory held on consignment, and products sold to international customers at a point in time upon shipment or upon customer receipt of the product depending on shipping terms. We defer the value of our service warranty revenue and recognize it once all performance obligations have been met.
We expect that, in the future, our net sales will fluctuate on a quarterly basis due to a variety of factors, including seasonality of breast augmentation procedures, and macroeconomic conditions. We believe that aesthetic procedures are subject to seasonal fluctuation due to patients planning their procedures leading up to the summer season and in the period around the winter holiday season.
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Cost of Goods Sold and Gross Margin
Cost of goods sold consists primarily of raw material, labor, overhead, and variable manufacturing costs, reserve for returns, reserve for product assurance warranties, royalty costs, excess and obsolete inventory reserves, amortization of manufacturing know-how and developed technology intangible assets, and warehouse and other related costs.
With respect to our supplier contracts, all our products and raw materials are manufactured under contracts with fixed unit costs which can increase over time at specified amounts.
We provide an assurance and service warranty on our silicone gel breast implants. The estimated warranty costs are recorded at the time of sale. Costs related to our service warranty are recorded when expense is incurred related to meeting our performance obligations.
We expect our overall gross margin, which is calculated as net sales less cost of goods sold for a given period divided by net sales, to fluctuate in future periods primarily as a result of quantity of units sold, manufacturing price increases, the changing mix of products sold with different gross margins, warranty costs, overhead costs and targeted pricing programs.
Sales and Marketing Expenses
Our sales and marketing expenses primarily consist of salaries, bonuses, benefits, incentive compensation, stock-based compensation, consumer marketing, and travel for our sales, marketing and customer support personnel. Our sales and marketing expenses also include expenses for trade shows, our no‑charge customer shipping program and no-charge product evaluation units, as well as educational and promotional activities. We expect our sales and marketing expenses to fluctuate in future periods as a result of headcount and timing of our marketing programs.
Research and Development Expenses
Our research and development, or R&D, expenses primarily consist of clinical expenses, product development costs, regulatory expenses, consulting services, outside research activities, quality control and other costs associated with the development of our products and compliance with Good Clinical Practices, or GCP, requirements. R&D expenses also include related personnel and consultant compensation, stock‑based compensation expense, and amortization expense, related to acquired developed technology until the commencement of commercial operations. We expense R&D costs as they are incurred. We expect our R&D expenses to vary as different development projects are initiated, including improvements to our existing products, expansions of our existing product lines, new product acquisitions and our clinical studies.
General and Administrative Expenses
Our general and administrative, or G&A, expenses primarily consist of salaries, bonuses, benefits, incentive compensation and stock-based compensation for our executive, financial, legal, and administrative functions. Other G&A expenses include contingent consideration fair market value adjustments, bad debt expense, outside legal counsel and litigation expenses, independent auditors and other outside consultant expenses, as well as corporate insurance, facilities and information technologies expenses. We expect future G&A expenses to remain consistent with the current period, excluding variability due to contingent consideration fair market value adjustments, and expect to continue to incur G&A expenses in connection with operating as a public company.
Interest Income
Interest income primarily consists of interest earned on our cash and cash equivalents.
Interest Expense
Interest expense primarily consists of interest expense and amortization of issuance costs associated with our debt agreements.
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Change in Fair Value of Derivative Liability
Change in fair value of derivative reflects the non-cash change in the fair value of derivatives.
Income Taxes
Income tax expense consists of an estimate for income taxes based on the projected income tax expense for the period. We operate in several tax jurisdictions and are subject to taxes in each jurisdiction in which we conduct business. To date, we have incurred cumulative net losses and maintain a full valuation allowance on our net deferred tax assets due to the uncertainty surrounding realization of such assets.
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of our unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the revenues and expenses incurred during the reported periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about our financial condition and results of operations that are not readily apparent from other sources. Actual results may differ from these estimates. We discussed accounting policies and assumptions that involve a higher degree of judgment and complexity in Note 1 of the “Notes to Financial Statements” in our audited financial statements included in the Annual Report. There have been no material changes to our critical accounting policies and estimates from those disclosed in the Annual Report.
Recent Accounting Pronouncements
See Note 1 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for recently issued and adopted accounting pronouncements.
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Results of Operations
Comparison of the Three Months Ended March 31, 2023 and 2022
The following table sets forth our results of operations for the three months ended March 31, 2023 and 2022:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(In thousands) |
|
Statement of operations data |
|
|
|
|
|
|
Net sales |
|
$ |
22,557 |
|
|
$ |
21,398 |
|
Cost of goods sold |
|
|
10,410 |
|
|
|
8,553 |
|
Gross profit |
|
|
12,147 |
|
|
|
12,845 |
|
Operating expenses |
|
|
|
|
|
|
Sales and marketing |
|
|
10,152 |
|
|
|
15,588 |
|
Research and development |
|
|
2,708 |
|
|
|
3,144 |
|
General and administrative |
|
|
9,851 |
|
|
|
10,208 |
|
Total operating expenses |
|
|
22,711 |
|
|
|
28,940 |
|
Loss from operations |
|
|
(10,564 |
) |
|
|
(16,095 |
) |
Other (expense) income, net |
|
|
|
|
|
|
Interest income |
|
|
106 |
|
|
|
2 |
|
Interest expense |
|
|
(2,377 |
) |
|
|
(1,897 |
) |
Other (expense) income, net |
|
|
(57 |
) |
|
|
5 |
|
Total other (expense) income, net |
|
|
(2,328 |
) |
|
|
(1,890 |
) |
Loss from continuing operations before income taxes |
|
|
(12,892 |
) |
|
|
(17,985 |
) |
Income tax expense |
|
|
— |
|
|
|
— |
|
Loss from continuing operations |
|
|
(12,892 |
) |
|
|
(17,985 |
) |
Loss from discontinued operations, net of income taxes |
|
|
— |
|
|
|
(56 |
) |
Net loss |
|
$ |
(12,892 |
) |
|
$ |
(18,041 |
) |
Net Sales
Net sales increased approximately $1.2 million, or 5.4%, to $22.6 million for the three months ended March 31, 2023 as compared to $21.4 million for the three months ended March 31, 2022. The increase was primarily due to an increase in the volume of domestic sales of our gel implants and expanders, aided by revenue from our new product Viality as well as increased volume of international sales.
Cost of Goods Sold and Gross Margin
Cost of goods sold increased approximately $1.9 million, or 21.7%, to $10.4 million for the three months ended March 31, 2023 as compared to $8.6 million for the three months ended March 31, 2022. The increase was primarily due to the amortization of Viality-related manufacturing know-how intangible assets, which was recorded in research and development expenses in the prior period. Viality also contributed to current period expenses related to the start of product commercialization. The increase was also driven by an increase in the volume of domestic and international sales of gel implants and expanders. These increases were slightly offset by reductions in period distribution and production costs.
Gross margins for the three months ended March 31, 2023 and 2022 were approximately 53.9% and 60.0%, respectively. The decrease was primarily due to the aforementioned amortization of Viality-related manufacturing know-how intangible assets, coupled with expenses related to the start of Viality commercialization. The increases were slightly offset by reductions in period distribution and production costs.
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Sales and Marketing Expenses
Sales and marketing expenses decreased approximately $5.4 million, or 34.9%, to $10.2 million for the three months ended March 31, 2023 as compared to $15.6 million for the three months ended March 31, 2022. The decrease was primarily due to decreases in employee payroll related expenses, commission expense, travel and entertainment expenses, marketing initiatives, and shipping expenses.
Research and Development Expenses
R&D expenses decreased approximately $0.4 million, or 13.9%, to $2.7 million for the three months ended March 31, 2023 as compared to $3.1 million for the three months ended March 31, 2022. The decrease was primarily due to reduction in costs related to regulatory activities, and product development expense as Viality was launched commercially during the current period.
General and Administrative Expenses
G&A expenses decreased approximately $0.4 million, or 3.5%, to $9.9 million for the three months ended March 31, 2023 as compared to $10.2 million for the three months ended March 31, 2022. The decrease was primarily due to reductions in consulting expense, employee related expense, and decreases in stock compensation expense. These decreases were slightly offset by increased legal fees, primarily driven by expenses related to the DOJ grand jury and SEC subpoenas.
Other Expense (Income), net
Other (expense) income, net increased period over period, primarily due to interest expense and discount amortization related to our convertible notes.
Income Tax Expense
For the three months ended March 31, 2023 and 2022 there was no income tax expense.
Liquidity and Capital Resources
Since the Company’s inception, it has incurred recurring losses and cash outflows from operations and the Company anticipates that losses will continue in the near term. During the three months ended March 31, 2023, the Company incurred net losses of $12.9 million and used $6.7 million of cash from continuing operations. As of March 31, 2023, the Company had cash and cash equivalents of $19.4 million. As a result of these conditions substantial doubt exists about our ability to continue as a going concern for a period of at least one year from the date of issuance of these unaudited condensed consolidated financial statements. The unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
In an effort to alleviate these conditions, management is currently evaluating various cost-saving measures in order to reduce operating expenses and cash outflows. However, the Company will need to generate a significant increase in net sales to further improve profitability and cash inflows, which is dependent upon continued growth in our Plastic Surgery segment and the launch of new products and partnerships. Additionally, we are evaluating various funding alternatives to improve liquidity and may seek to raise additional equity or debt capital, refinance our debt obligations or obtain waivers, and/or scale back or freeze our organic growth plans to manage our liquidity and capital resources. As the Company seeks additional sources of financing, there can be no assurance that such financing would be available to the Company on favorable terms or at all. The Company’s ability to obtain additional financing in the equity capital markets is subject to several factors, including market and economic conditions, the Company’s performance and investor sentiment with respect to the Company and its industry.
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On October 25, 2022, we issued and sold 1,778,500 shares of our common stock and pre-funded warrants to purchase up to 2,221,499 shares of our common stock and warrants to purchase 3,999,999 shares of our common stock, at an offering price of $3.80 per share of common stock and warrant and $3.70 per pre-funded warrant and warrant, before underwriting discounts and commissions. The net proceeds to the Company were approximately $14.0 million, after deducting underwriting discounts and commissions and estimated expenses payable by the Company.
Debt financing
Refer to Note 7 to the unaudited condensed consolidated financial statements for a full description and updates to all of our long-term debt, revolving line of credit, and convertible notes.
Cash Flows
The following table shows a summary of our cash flows (used in) provided by operating, investing and financing activities from continuing operations, as well as from discontinued operations for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
2023 |
|
|
2022 |
|
|
Net cash (used in) provided by: |
|
|
|
|
|
|
|
Operating activities - continuing operations |
|
$ |
(6,268 |
) |
|
$ |
(17,859 |
) |
|
Investing activities - continuing operations |
|
|
(618 |
) |
|
|
(246 |
) |
|
Financing activities - continuing operations |
|
|
171 |
|
|
|
5,271 |
|
|
Net decrease in cash, cash equivalents and restricted cash from continuing operations |
|
|
(6,715 |
) |
|
|
(12,834 |
) |
|
Net cash used in discontinued operations |
|
|
— |
|
|
|
(56 |
) |
|
Net decrease in cash, cash equivalents and restricted cash |
|
$ |
(6,715 |
) |
|
$ |
(12,890 |
) |
|
Cash flows from operating activities of continuing operations
Net cash used in operating activities was $6.3 million during the three months ended March 31, 2023 as compared to $17.9 million during the three months ended March 31, 2022. The decrease in cash used in operating activities between the three months ended March 31, 2023 and 2022 was the result of the decrease in net loss from continuing operations, and favorable working capital improvements, primarily associated with the changes in accounts receivable, customer deposits and inventory, slightly offset by changes in accounts payable, accrued, and other liabilities, and sales return liability.
Cash flows from investing activities of continuing operations
Net cash used in investing activities was $0.6 million during the three months ended March 31, 2023 as compared to $0.2 million used during the three months ended March 31, 2022. The increase in cash used in investing activities was due to an increase in property and equipment purchases.
Cash flows from financing activities of continuing operations
Net cash provided by financing activities was $0.2 million during the three months ended March 31, 2023 as compared to $5.3 million during the three months ended March 31,2022. The decrease in cash provided by financing activities was primarily due the absence of borrowings under the Term Loan and Revolving Loan in the current period.
Cash flows from discontinued operations
Net cash used by discontinued operations was $0.1 million for the three months ended March 31, 2022 and is related to the cash provided by operating activities following the sale of the miraDry business.
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Our liquidity position and capital requirements are subject to a number of factors. For example, our cash inflow and outflow may be impacted by the following:
•the ability of our implant manufacturing facility in Franklin, Wisconsin to meet capacity to meet customer requirements and maintain unit costs that will drive gross margin;
•the ability of our third-party tissue expander manufacturing facility operated by SiMatrix to meet capacity to meet customer requirements;
•net sales generated and any other future products that we may develop and commercialize;
•the scope and duration of the COVID-19 pandemic and its effect on our operations;
•costs associated with expanding our sales force and marketing programs;
•cost associated with developing and commercializing our proposed products or technologies;
•expenses we incur in connection with potential litigation or governmental investigations;
•cost of obtaining and maintaining regulatory clearance or approval for our current or future products;
•cost of ongoing compliance with regulatory requirements, including compliance with Sarbanes-Oxley;
•anticipated or unanticipated capital expenditures; and
•unanticipated G&A expenses.
Our primary short-term capital needs, which are subject to change, include expenditures related to:
•support of our sales and marketing efforts related to our current and future products;
•new product acquisition and development efforts;
•facilities expansion needs; and
•investment in inventory required to meet customer demands.
Although we believe the foregoing items reflect our most likely uses of cash in the short-term, we cannot predict with certainty all of our particular short-term cash uses or the timing or amount of cash used. If cash generated from operations is insufficient to satisfy our working capital and capital expenditure requirements, we may be required to sell additional equity or debt securities or obtain credit facilities. Additional capital, if needed, may not be available on satisfactory terms, if at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants. For a discussion of other factors that may impact our future liquidity and capital funding requirements, see “Risk Factors — Risks Related to Our Financial Results” in our Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
During the periods presented we did not have, nor do we currently have, any off-balance sheet arrangements as defined under SEC rules.
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ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, or "CEO", and Chief Financial Officer, or "CFO", as appropriate, to allow timely decisions regarding required disclosure.
As of March 31, 2023, we carried out an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2023 as a result of the material weakness described in our Annual Report on Form 10-K and below.
The control environment was ineffective in holding individuals accountable for the operation of their internal control responsibilities. As a result, certain process-level controls related to the estimate of our warranty reserve, calculation of our deferred revenue associated with our service-based warranty, and inventory costs did not operate effectively. This deficiency did not result in an adjustment but still represented a material weakness in our internal control over financial reporting as of December 31, 2022 because there is a reasonable possibility that material misstatements to our consolidated financial statements would not be prevented or detected on a timely basis.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
Management’s Remediation Plan
As disclosed in our Annual Report, we have identified and begun to implement several actions designed to remediate the material weakness. Our remediation process includes, but is not limited to communicating expectations over performance of controls, monitoring for compliance with those expectations, and holding individuals accountable for their roles related to internal control over financial reporting.
Changes in Internal Control over Financial Reporting
Except as discussed above, there have been no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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