Sientra, Inc. Price & Performance (SIEN)

For a more detailed discussion of the company's risks and uncertainties, I would refer you to our SEC filings including our Form 10 K and Form 10 Q to be filed later this month available on the company's website. With that, I'll ask Ron to comment on our Q3 results. Thank you, Oliver. The Q3 was a challenging quarter for Sentra, as we experienced a much larger impact from seasonality during the summer months This impact was most pronounced in our augmentation business which is more prone to seasonality and changes in consumer spending. Our reconstruction business was less vulnerable to these trends, was less impacted by seasonality this quarter. Importantly, those trends were not unique to Sientra to breast implants. There has been a broad trend across aesthetic companies reporting lower than expected procedural volumes during the Q3 This house has been reflected in our discussions with surgeons. Have reported lower than average surgical cases during the Q3, driven by consumer uncertainty over macroeconomic [indiscernible] As well as an increase in position and patient leisure travel during the summer. We believe that those trends are cyclical in short term. And there remains a durable market for breast procedures. The American Society of Plastic Surgeons, for example, recently reported that breast augmentation procedure volumes had returned to pre pandemic levels.

While also seeing an increase in other breast procedures such as breast lifts. This highlights the importance of Sientra's strategy of having a diversified portfolio of products designed to meet the needs of plastic surgeons in both augmentation and reconstruction procedures. We're encouraged by the fact that over half of our total revenue from Q3 came from reconstruction. This supports our growth strategy portfolio diversification which we believe will give us a competitive edge by allowing surgeons, hospitals, and accounts to source all their breast procedures products from us. It is early Q4 but we're seeing some recovering seasonality so far. We're also encouraged by the customer response to Viallity, Simply Derm, as we are in initial stages of our control launches those products. As a reminder, with the launch of those 2 new products, Sientra has more than doubled total addressable market and set up the platform for growth. We're now one of only 2 companies that offers the full suite of products for breast reconstruction procedures. Given the early stages of those launches, however, the macroeconomic uncertainty specific to aesthetics, economy more broadly, we felt the prudent to withdraw guidance at this time. In the meantime, we'll continue to take steps to improve our cost structure and we're focusing on cash flow profitability goals, which will position us well when demand rebounds.

I'll now turn the call over to Denise, review the impressive clinical data or a Vialliative fat transfer, system that we presented last month at the plastic surgery meeting in Austin, Texas. [indiscernible] Thank you, Ron. Viality is setting a new standard in fat transfer. At classic surgery at the meeting, we were pleased to present interim data from ongoing fat retention study. Up to 102 patients at the three [indiscernible] This first of its kind study is the largest ever multicenter prospective study looking at retention after fat grafting to the breast. The results of our study are showing unparalleled fat retention. As we reported at the meeting, Viality is achieving over 80% FAD retention, with a high degree of predictability. Importantly, this is across all patient types, all procedures, including fat with implants, stat alone autologous reconstruction. At all time points.

This is an incredible result making this technology a game changer for fat transfer procedures as surgeons can now for the 1st time Knowing that what that [indiscernible] sorry, excuse me, knowing that what they see on the operating table is what the end result This sets Viality apart from the other alternatives. We believe that this presents a unique opportunity for Sientra the rapidly growing fat transfer market. Opening up procedure opportunities in augmentation and reconstruction, as it offers the first truly minimally invasive way for patients to confidentially increase their breast size even without the need for an implant.

We also saw great excitement at the meeting around our new MRI compatible Tissue extender, Alex 2 Pro. A reminder, this was the 1st tissue expander to be cleared as MRI compatible in the United States and is the only dual port MRI compatible [indiscernible] This next generation expander adds to our comprehensive portfolio, as we are the only company to offer the full suite of tissue extender options. Including extremity expanders, single port, dual port, a now MRI compatible breast expanders. Our Alex 2 Pro uses the revolutionary dual cord AALLAX2 design allow access to the periprosthetic space, and build up on these platforms with additional benefits supported by peer reviewed publications. Once on the market next year, this will truly be the most innovative T Shock standard available. Since it includes dual ports, MRI conditional labeling, negligible interference with radiotherapy planning, and less of disturbance. And 4 times faster fueling.

We look forward to updating you on new technology as we prepare to launch it in 2020.

And now, I will turn the call over to Andy to review Ciena's financial resources report.

Thanks, Denise. As Ron mentioned earlier, our Q3 2023 financial results included seasonally challenged revenue results, However, we continue to realize favorable year over year EBITDA and free cash flow results. Our key Q3 2023 financial results include revenue of $19,500,000 as compared with 22.6 decrease of 13.7%. Non GAAP operating expense of $17,800,000 as compared to $21,700,000 for prior year period an 18% reduction. Non GAAP EBITDA a $6,400,000 loss as compared to an $8,600,000 loss for the prior year period representing a 25.6% improvement. Free cash flow usage was $3,600,000 as compared to free cash flow usage of $3,700,000 for the prior year period. [indiscernible] revenue sector mix continues to favor the reconstruction space, However, our current period revenue does not reflect the full launch and and includes only a small contribution from Viality we continue our controlled launch of Violty to our hospital and cosmetic customers. Our free cash flow performance continues a favorable trend. As our operating expense discipline combined with efficient working capital management provide for strong results. This is the 5th consecutive quarter of improved free cash flow performance. During the past 5 quarters, we saw free cash flow usage decrease from $56,500,000 to $18,400,000 from a year over year perspective.

A $38,100,000 improvement or 67%.

This trend is to resolve the hard work we have been communicating to the Street over the past year and we expect continued favorable free cash flow results going forward. Completing the P and L view, our pro form a gross margin for Q3 'twenty three was 58.4%, which compares to 57.9% for the same period last year. The current period's performance includes Vialbe launch costs which will decrease as the launch matures. Additionally, our year over year decline in revenue has a negative effect on current period gross margins as certain expenses such as costs of running our distribution center are fixed costs. GAAP gross margins of 51.3% was negatively affected by a non cash depreciation and amortization amortization charge of $1,400,000. This charge is primarily due to the inclusion of noncash amortization of Viality manufacturing knowhow and develop technology and cost of sales. This cost is fixed in nature hence will not impact GAAP gross margins as significantly in future periods as Viode sales continue to increase. Total GAAP operating expense for Q3 'twenty three was $19,400,000 compared to $25,300,000 in Q3 'twenty two a $5,900,000 or 23.3% decrease. GAAP loss from continuing operations for Q3 'twenty three.

Was fourteen $14,800,000, however includes a $3,200,000 non cash charge for change in fair value of derivative liability and compares to a $14,900,000 loss for the previous year period Switching to key balance sheet items. Cash at September 30, 2023 was $15,000,000. A decrease of $3,600,000 from the previous quarter.

We continue to focus on working capital efficiencies. We see consistent strong performance in our inventory managed with ending inventories at September 30, 2023, up $39,300,000 down from year end December 31, 2022, but $42,700,000. This performance includes building Violty inventories. Accounts receivable also is performing well. At September 30, 2023, our AR balance was 29,600,000 down from $36,900,000 at year end 2022. Finally, we received amended finally, excuse me, we recently amended our agreement with our convertible debt provider Deerfield, to provide a temporary waiver of September 30, 2023 revenue covenant breach. The amendment, which has been filed under Form 8 K with the SEC, requires us to revalue our convertible loan facility. The effect was a non cash expense charge to the P and L, change in fair value of derivative liability of $3,200,000 Regarding the balance sheet, you will see a $3,200,000 charge to derivative liability as well as a reclassification of $58,800,000 of long term debt short term debt At this time, I'll turn the call back to Ron. Thank you, Andy. Q3 revenue performance was disappointing, we're pleased with the continued improvement in on operating results in the quarter as we execute on our path to free cash flow positive performance.

Whilst encouraged by the early trends in October, as well as their early feedback from our control launches of Viality and SimplyDARM. As the market for breast procedures normalizes, and violating SYMPAZYM reach full product launch, believe that 2024 will be a critical inflection point for our company I'll now turn the call over to the operator We will now begin the question and answer session. Our first question comes from Jonathan Block with Stifel. Please ahead. Great. Thanks, Jordan on for John, actually. Thanks for taking my questions. I have 2 questions, I'll ask them both upfront. I guess on the Viality front, Can you give us an update on the U. S. Hospital contracting process? How has that process been ongoing? And maybe what level of retention there's been with your current existing accounts And then I did hear you say some favorable free cash flow trends moving forward given some of the positive momentum you've had there. But is there any update on the specific goal of reaching free cash flow positivity by year end? And then maybe the confidence in that sustainability of that positivity into next year. Thanks.

Yeah, I'll start I'll start and then I'll move it over to Andy for the 2nd question. We, you know, started the control launch in the summer and we're seeing really nice adoption by some of the hospitals. It does take somewhere between 9 to 12 months to review, because it's not the right timing. For RFPs. So you want to make sure you're submitting the RFPs You'll also make sure it's happening with support from the right surgeons. So this takes a little longer than we had anticipated, But what I've seen an acceleration the last 2, 3 months on adoption by some of the hospitals. We're also very encouraged is by the reorder rates by those number of hospitals is at par with our Tissue expanders and the implants So once they adopt the NAND ViOLID, they're ordering at the same rate same percentage of our tissue extenders and implants. We have a long ways to go. The majority of our hospitals are still ready to go. That's going to be part of our full launch plan for next year is accelerating access to hospitals and continue to get more GPO access as well. So we're very encouraged by the beginning, 1st 4, 5 months of this control launch.

Kandi?

Sure. So Jordan, in terms of our free cash flow performance, we have our expense structure in place and exactly where we want We've showed consistent improvement in our Q3 results again a record for us in terms of non GAAP and actually GAAP operating expense. Now as we look forward as we said before, we're targeting year end free cash flow positive performance And the recent change that's going to affect that particular timing is as we commented to both myself and Ron. The seasonally challenged performance here in Q3 in terms of revenue. And again, looking forward to Q4, There is uncertainty in the markets in terms of how long this seasonally challenged dynamic is gonna continue throughout, not just our business, but the whole industry. And really when that rebounds back to expected results. So because of that, we're going to again, it's hard to really forecast free cash flow positive performance in Q4.

But we don't expect that to push out any number of quarters going forward. It's just the seasonal nature of what we're seeing in revenue right now. The 2nd other element that's one time in nature that we're looking at in Q4 that we don't have a perfect forecast on, but we'll see the results as we peel out here in Q4. It's really the use by the company of third party advisers in terms of working with our key lender, Deerfield, as we work through our, covenant breach dynamic going into, you know, 1st start here in Q1 of 2024. We don't think that's going to be significant over a period of time, but it is an additional expense that we're going to be monitoring here in Q4. Thanks.

Appreciate all that color. Our next question comes from Anthony Vendetti with Maxim Group. Please go ahead. Hi. This is actually Jeremy on the line for Anthony. So also 2 questions from our end. The first one also on the Vialto and the SimplexerM rollouts.

Based on the current macro environment, have you changed the strategy of that rollout of the at all? Or is it just business as usual and then, you know, maybe If the If the conditions continue and you have to change that, you know, in the future, you'll you'll adapt then. Yeah. So the impact of microeconomic is really more on the augmentation side. What we saw in the reconstruction in the summer is really the impact of, as I stated before, potentially leisure travel by patients, delay some of the surgeries and reconstruction and also travel by surgeons. We have not seen any impact at all for both Vialiti's Simply Derm. It's just that the process of going to the hospital are to be processed, the back chlamides, to the GPOs, So that's that's progressing extremely well for both brands. That's really falling right within our current strategy of a control launch for both brands. So we're seeing really nice pace for both products. And Jeremy, just to add, we talked earlier in the year as we're looking forward to these launches suggesting that you consider both launches, we would exit the year at 5% to 10% of our revenue coming from these new products.

We still feel confident with that performance. And so it's going quite well. And we look forward to this performance.

Right. Okay. Yeah, I was going to follow-up with that.

That stack still applied because I know you mentioned that on an earlier call.

And then just my other question just back to the base of the core business.

Augmentation reconstruction. So I know it's really that diversification great. You haven't seen really a fall off on reconstruction due to the headwinds, macro headwinds. Just if these obviously there's we don't have a crystal ball but if these headwinds do continue, is there a way that your your corporate strategy, your business strategy could shift and to focus more of your sales reps or maybe focus more on the [indiscernible] Yes. We started that actually interesting enough in early 2021. Really the shift into reconstruction, which is a weird time to do it because in 2021, the cosmetic breast augmentation market went absolutely crazy. And you saw that year, we grew almost 50% in revenues. Driven mostly by reconstruction. At that time, close to 60% of revenues came from the augmentation side. What we saw this past quarter in the last couple of quarters is that well over half of our revenues are coming from reconstruction. And the idea of adding fair grafting of Viilage and adding an ADM with Simply Derm is really to add more products. And as I stated before, there are only 2 companies in the market right now that have the full portfolio product for breast reconstruction.

We're one of them and the other one's another big company. And that makes it really nice for us to have a portfolio strategy as we negotiate contracts with both hospitals, TPOs and different institutions that prefer to deal with 1 vendor.

Right. Yes, I understand. Okay, great. Thank you for all that. Additional information, and I'll hop back in the queue. This concludes our question and answer session. I would like to turn the conference over to Ron Menezes for any closing remarks.

All right.

Well, thank you very much for everyone for joining us. We look forward for a great finish into 2023 and we look forward to Star 24 extremely well. In the meantime, I hope everyone has an upcoming wonderful Thanksgiving. Thank you.

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