Sientra, Inc. (NASDAQ:SIEN) Q3 2023 Earnings Call Transcript

Sientra, Inc. (NASDAQ:SIEN) Q3 2023 Earnings Call Transcript November 9, 2023

Sientra, Inc. misses on earnings expectations. Reported EPS is $-1.31 EPS, expectations were $-0.48.

Operator: Good afternoon and welcome to the Sientra Third Quarter 2023 Financial Results Conference Call. My name is Dave. At this time, all participants are in a listen-only mode. After Sientra executives provide their business updates, we will open the floor for a question-and-answer session. Today’s conference call is being recorded. I’d like to turn the conference call over to your host, Oliver Bennett, Sientra’s Chief Legal Compliance and Corporate Development Officer. Mr. Bennett, you may begin.

Oliver Bennett: Welcome, and thank you for joining us on today’s call to discuss Sientra’s third quarter 2023 financial results. On our call today, we have Ron Menezes, Sientra’s President and Chief Executive Officer; Denise Dajles, Sientra’s Chief Technical Officer; and Andy Schmidt, Sientra’s Chief Financial Officer. Before I turn the call over to Ron, I must remind everyone that we will include forward-looking statements in our prepared remarks and in response to any questions you may ask. These forward-looking statements are based on management’s current assumptions and expectations of future events and trends. Our actual results may differ materially from those expressed in or implied by the forward-looking statements.

The company undertakes no obligation to update or review any estimate, projection, or forward-looking statements. 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 third quarter results.

Ron Menezes: Thank you, Oliver. The third quarter was a challenging quarter for Sientra as we experienced a much larger impact from seasonality during the summer months than we had in prior years. This impact was most pronounced in our augmentation business, which is more prone to seasonality and changes in consumer spending. Our reconstruction business, which is less vulnerable to these trends, was less impacted by seasonality this quarter. Importantly, those trends were not unique to Sientra with the breast implants. There has been a broad trend across aesthetic companies reporting lower-than-expected procedural volumes during the third quarter. This has been reflected in our discussions with surgeons. We have reported lower than average surgical cases during the third quarter driven by consumer and certainly over macro-economic trends, as well as an increase in physician, inpatient 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 seen an increase in other breast procedures, such as breast lifts. This highlights the importance of the Sientra’s strategy of having a diversified portfolio 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 in Q3 came from reconstruction. It supports a growth strategy of portfolio diversification, which we believe would 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 Viality and SimpliDerm as we’re in the initial stages of our control launches of those products. As a reminder, with the launch of those two new products, Sientra has more than doubled its total addressable market and set up the platform for growth. We’re now one of only two companies that offers the full suite of products for breast reconstruction procedures. Given the early stages of those launches, however, in macroeconomic uncertainty specific to aesthetics and economy more broadly, we felt it 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 and profitability goals, which are positioned as well when demand rebounds.

I’ll now turn the call over to Denise to review the impressive clinical data on a Viality fat transfer system that we presented last month at the plastic surgery, the meeting in Austin, Texas. Denise?

Denise Dajles: Thank you, Ron. Viality is setting a new standard in fat transfer. At Plastic Surgery, the meeting, we were pleased to present interim data from our ongoing fat retention study with up to 102 patients at the three, six, and 12-month time zones. This first-of-its-kind study is the largest ever multi-center 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, Viallity is achieving over 80% fat retention with a high degree of predictability. Importantly, this is across all patient types, all procedures, including fat with implants, fat alone, and autologous reconstruction at all time points. This is an incredible result, making this technology a game changer for fat transfer procedures that surgeons can now, for the first time, confidently relocate a patient’s fat, knowing that what they see on the operating table is what the end result would look like.

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This sets Viality apart from the other alternatives. We believe that this presents a unique opportunity for Sientra in 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 expander AlloX2Pro. As a reminder, this was the first tissue expander to be cleared as MRI-compatible in the United States and is the only dual-port MRI-compatible tissue expander. This next-generation expander adds to our comprehensive portfolio as we are the only company to offer the full suite of tissue expander options, including extremity expanders, single-port, dual-port, and now MRI-compatible breast expanders.

Our AlloX2Pro uses the revolutionary dual port AlloX2 design to allow access to the periprosthetic space and builds up on this platform with additional benefits supported by peer-reviewed publications. Once on the market next year, this will truly be the most innovative tissue expander available, since it includes dual ports, MRI conditional labeling, negligible interference with radiotherapy signing, and less-told disturbance, and four-time faster peeling. We look forward to updating you on this unique new technology as we prepare to launch it in 2024. And now I will turn the call over to Andy to review Sientra’s financial results for the quarter.

Andy Schmidt: 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 $19.5 million, as compared with $22.6 million for the prior year period, a decrease of 13.7%. Non-GAAP operating expense of $17.8 million, as compared to $21.7 million for a prior year period, an 18% reduction. Non-GAAP EBITDA was a $6.4 million loss as compared to an $8.6 million loss for the prior year period, representing a 25.6% improvement. Free cash flow usage was $3.6 million as compared to free cash flow usage, about $3.7 million for the prior year period.

Our revenue sector mix continues to favor the reconstruction space. However, our current period revenue does not reflect the full launch and expected revenue contribution from SimpliDerm and includes only a small contribution from Viality as we continue our controlled launch of Viality 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 fifth consecutive quarter of improved free cash flow performance. During the past five quarters, we saw free cash flow usage decrease from $56.5 million to $18.4 million from a year-over-year perspective. A $38.1 million improvement or 67%.

This trend has resolved 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&L view, our pro-forma gross margin for Q3 ‘23 was 58.4%, which compares to 57.9% for the same period last year. The current period’s performance includes Viality 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 the cost of running our distribution center, are fixed costs. GAAP gross margins of 51.3% is negatively affected by a non-cash depreciation and amortization charge of $1.4 million. This charge is primarily due to the inclusion of non-cash amortization of biology manufacturing know-how and developed technology in cost of sales.

This cost is fixed in nature, hence will not impact GAAP gross margins as significantly in future periods as Viality sales continue to increase. Total GAAP operating expense for Q3 ‘23 was $19.4 million, compared to $25.3 million in Q3 ‘22, a $5.9 million or 23.3% decrease. Total GAAP loss from continuing operations for Q3 ‘23 was $14.8 million, however, includes a $3.2 million non-cash charge for change in fair value of derivative liability and compares to a $14.9 million loss for the previous year period. Switching to key balance sheet items. Cash at September 30, 2023 was $15 million, a decrease of $3.6 million from the previous quarter. We continue to focus on working capital efficiencies. We see consistent, strong performance in our inventory management with ending inventories at September 30, 2023, up $39.3 million, down from year end December 31, 2022 of $42.7 million.

This performance includes building Viality inventories. Accounts receivable also is performing well. It’s September 30, 2023, our AR balance was $29.6 million, down from $36.9 million 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 a 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&L, change in fair value of derivative liability of $3.2 million. Regarding the balance sheet, you will see a $3.2 million charge to derivative liability as well as a reclassification of $58.8 million of long-term debt to short-term debt.

At this time, I’ll turn the call back to Ron.

Ron Menezes: Thank you, Andy. While Q3 revenue performance was disappointing, we’re pleased with the continued improvement on operating results in the quarter as it executed on our path to free cash flow positive performance. We’re also encouraged by the early trends in October, as well as their early feedback from our control launches of Viality and SimpliDerm. As the market for breast procedures normalizes and Viality and SimpliDerm reach full product launch, we believe that 2024 will be a critical inflection point for our company. I’ll now turn the call over to the operator for Q&A.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jonathan Block with Stifel. Please go ahead.

Jordan Bernstein: Great. Thanks. It’s Jordan on for Jon, actually. Thanks for taking my questions. I have two questions, I’ll ask them both up front. It’s 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 and that sustainability of that positivity into next year. Thanks.

Ron Menezes: I’ll start, I’ll start as I move over to Andy for the second part of the 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 nine 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 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 in acceleration the last two or three months on adoption by some of the hospitals. We’re also very encouraged by the reorder rates by those number of hospitals is at par with our tissue expanders and the implants. So once they adopt and then Viality, they’re already at the same rate, same percentage of our tissue expanders and implants.

We have a long ways to go. The majority of our hospitals are still way to go, and that’s going to be part of a 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, the first four or five months of this control launch. Andy?

Andy Schmidt: Sure. And so Jordan, in terms of our free cash flow performance, we have our expense structure in place and exactly where we want it. We’ve showed consistent improvement in our Q3 results are, 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 the, as we’ve commented to both myself and Ron, the seasonally challenged performance here in Q3 in terms of revenue. And again, looking forward to Q4, there’s uncertainty in the markets in terms of how long this seasonally challenged dynamic is going to 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 second 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 feel out here in Q4, is really the use by the company of third-party advisors in terms of working with our key lender, Deerfield, as we work through our covenant breach dynamic going into the first 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.

Jordan Bernstein: Thanks, appreciate all that color.

Operator: [Operator Instructions] Our next question comes from Anthony Vendetti with Maxim Group. Please go ahead.

Jeremy Pearlman: Hi, this is actually Jeremy on the line for Anthony. So also two questions from our end. The first one also on the Viality and SimpliDerm rollouts, based on the current macro environment, have you changed the strategy of that rollout at all? Or is it just business as usual and then maybe if the conditions continue and you have to change it in the future, you’ll adapt then?

Ron Menezes: Yes, so the impact of macroeconomic is really more on the augmentation side. What we saw in reconstruction in the summer is really the impact of, as I stated before, potentially leisure traveled by patients, delay in some of the surgeries and reconstruction, and also travel by surgeons. We have not seen any impact at all for both the Viality and SimpliDerm. It’s just the process of going to the hospital RFP process, the back committees, to the GPOs. So 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 a really nice pace for both products.

Andy Schmidt: And Jeremy, just to add, you know, we talked earlier in the year as we were looking forward to these launches suggesting that when 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.

Jeremy Pearlman: All right, okay, yeah, I was going to follow-up with that use [Indiscernible] still applied, because I know you mentioned that on earlier calls. Okay, and then just my other question, just back to the base, the core business augmentation, reconstruction. So I know that diversification is great. You haven’t seen really a fall off on reconstruction due to the headwinds, macro headwinds. Just if these, obviously we don’t have a crystal ball, but if these headwinds do continue, is there a way that your corporate strategy, your business strategy could shift and to focus more of your sales reps or maybe focus more on the reconstruction side to try and make up the difference?

Ron Menezes: Yes, we started that actually interesting enough in early ‘21, they’re 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% of 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 quarters, is that well over half of our revenues are coming from reconstruction. And the idea of adding fat grafting or Viality and adding an ADM with SimpliDerm is really to add more products. And as I stated before, there are only two companies in the market right now that have the full portfolio products for breast reconstruction.

We’re one of them and the other ones are not a big company. And that makes it really nice for us to have a portfolio strategy as we negotiate contracts with both hospitals, GPOs, and different institutions that prefer to deal with one vendor.

Jeremy Pearlman: Right, yes, I understand, Okay, great. Thank you for all that additional information, and I’ll hop back into the queue.

Operator: This concludes our question-and-answer session. I would like to turn the conference over to Ron Menezes for any closing remarks.

Ron Menezes: 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 start ‘24 extremely well. In the meantime, I hope everyone has an upcoming wonderful Thanksgiving. Thank you.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.