Q3 2023 Sientra Inc Earnings Call
Good afternoon, and welcome to the CN Trust third quarter 2023 financial results Conference call. My name is Dave at this time all participants are in a listen only mode. After C C Entre executive provide.
Provide the business update we will open the floor for a question and answer session. Today's conference call is being recorded I would like to turn the conference call over to your host Oliver Bennett.
She was chief legal compliance and corporate development Officer, Mr. Bennett you may begin.
Welcome.
Thank you for joining us on today's call to discuss <unk> third quarter 2023 financial results.
On our call today, we have Ron <unk>, President and Chief Executive Officer, and he stylus.
Stylus technology.
Technology Officer, Andy Schmidt 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.
Response to any questions you might ask these forward looking statements are based on management's current assumptions and expectations of future events and trends.
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 more detailed discussion.
All 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.
I'll ask Rob to comment on our third quarter results.
Thank you Oliver.
Third quarter was a challenging quarter for Sandra as we experienced a much larger impact from seasonality during the summer months than we've had in prior years.
This impact was most pronounced in augmentation business, which is more prone to seasonality and changes in consumer spending.
Our reconstruction business is less vulnerable to this trends was less impacted by seasonality this quarter.
Importantly, those trends were not unique to Sandra to breastfeed place.
There has been a broad trend across the set of companies reporting lower than expected procedural volumes.
Third quarter.
Cause health, that's being reflected in our discussions with surgeons, we have reported lower than average surgical cases.
Third quarter, driven by consumer uncertainty over microeconomic trends as well as an increase in physician and patient leisure travel during the summer.
We believe that those trends are cyclical and short term.
And that remains a durable market for breast procedures.
The American Society of plastic Surgeons for example, recently reported the breast augmentation procedure volumes had returned to pre pandemic levels well also see an increase in the other breast procedures such as breathless.
This highlights the importance of interest strategy of having a diversified portfolio of products designed to meet the needs of plastic surgeons.
Mentation reconstruction procedures.
We're encouraged by the fact that over half of our total revenue in Q3 came from reconstruction.
This supports our growth strategy portfolio diversification, which we believe give us a competitive edge by allowing surgeons hospitals and accounts to source all of their breast procedures products from us.
It is early Q4, but we're seeing some recovery seasonality. So far we're also encouraged by the customer response to biology simply term. So we are in the initial stages of our controlled launches of those products.
As a reminder, with the launch of those two new products see nature 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 a full suite of products for breast reconstruction procedures.
Given the early stages of those launches however.
Macroeconomic uncertainty specific to Fedex and the 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 should position us well when demand rebounds.
I'll now turn the call over to Denise to Richard impressive clinical data or a biology that transfer system that we presented last month at the plastic surgery that meeting in Austin, Texas Denise.
Thank you Ron.
The reality is setting a new standard in bad times.
So I think surgery. The meeting we were pleased to present interim data from our ongoing fact retention site with up to 102 patients at the three six and 12 months.
Its first of its kind study is the largest ever multicenter prospective study looking at retention after fat grafting to the break.
The results of our studies are showing a parallel that retention.
We reported out of the meeting, but reality is achieving over 80% bad retention with a high degree of predictability importantly, this is across all patient types, all procedures, including fat with implant fat alone and autologous reconstruction at all time points.
This is an incredible result, making this technology a game changer for that traffic procedures that surgeons can now for the first time confidently relocate our patients back knowing about what that what they sorry, excuse me knowing that what they see on the operating table. It's about the end result will look like.
He says biology apart from the other alternatives.
We believe that this presents a unique opportunity for the intra and the rapidly growing fat transfer market opening after theater opportunity augmentation and reconstruction as it offers the first truly minimally invasive way for patients to confidentially increase their breath I, even without the need for any bank.
We also saw great excitement I've been meeting around our new MRI compatible T shirts standard Alexandra.
As a reminder, these are the first piece of expanded to be cleared up.
Patty both in the United States and he's the only do Onboarding MRI compatible T shirts matter.
These next generation expanded after a comprehensive portfolio, that's where the only company to offer the full suite of tissue expander option, including extremity Expanders single port to onboard and now MRI compatible Breadstick sandwiches.
Alex to tell you that the revolutionary Dork Board I worked to design to allow access to their favorite steady space.
This platform with additional benefits supported by peer reviewed publications.
And then the market next year it will truly be the most innovative fixed under available since it includes two airports MRI conditional labeling and I'm glad you won't interferes with radiotherapy planning and therefore they start.
Four times faster appealing.
We look forward to updating you on these unique new technology as we prepared to launch it in 2020.
And now I will turn the call over to Andy to reduce the interest by national results of the quarter.
Thanks Denise.
As Rob 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.
Decrease of 13, 7%.
non-GAAP operating expense of $17 8 million as compared to $21 7 million for prior year period, an 18% reduction.
non-GAAP EBITDA was $6 $4 million loss as compared to an $8 $6 million for the prior year period, representing a 25, 6% increase in.
Free cash flow usage was $3 $6 million as compared to free cash flow usage of $3 7 million for the prior year period.
Our revenue sector mix continues to favor to reconstruction space. However, our current period revenue does not reflect the full launch and expected revenue contribution from simple Darren and includes only a small contribution from biology as we continue our controlled launch of biology to a 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 decreased from $56 $5 million to $18 $4 million from a year over year perspective.
$38 1 million dollar improvement or 67% this.
This trend is the result of 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 the LD 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 and certain expenses such as the cost of running our distribution center our fixed costs.
GAAP gross margins of 51, 3% was negatively affected by a noncash depreciation and amortization amortization charge of $1 4 million.
This charge is primarily due to the inclusion of noncash amortization of by already manufacturing Knowhow and developed technology and cost of sales.
This cost is fixed in nature, and so will not impact GAAP gross margins as significantly in future periods as <unk> sales continue to increase.
Total GAAP operating expense for Q3 twenty-three was $19 4 million compared to $25 3 million in Q3 22.
$5 9 million or 23, 3% decrease.
Total GAAP loss from continuing operations for Q3, 'twenty tree was Fortunately $14 $8 million. However includes a $3 $2 million noncash 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 32023 was $15 million, a decrease of $3 6 million from the previous quarter.
We continue to focus on working capital efficiencies you see consistent strong performance in their inventory management with inventories.
At September 32023 of $39 $3 million.
Down from year end December 31, 2020 to $42 $7 million.
Performance includes buildings viola inventories.
Accounts receivable also is performing well at September 32023, our AR balance was $29 6 million down from $36 9 million at year end 2022.
Finally, we received amended.
Excuse me, we recently amended our agreement with our convertible debt providers to provide a temporary waiver of our September 32023 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 noncash expense charged to the P&L change.
Change in fair value of derivative liability of $3 $2 million.
Turning to balance sheet, you will see a $3 $2 million charge to derivative liability as well as the reclassification of $58 $8 million of long term debt to short term debt.
At this time I will turn the call back to Ron Thank.
Thank you Andy.
Q3 revenue performance was disappointing we're pleased with the continued improvement on our operating results in the quarter is execute 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 controlled launches of biology and simply dorm.
Cause the market for breast procedures normalizes and violated simpler reach full product launch we believe that 'twenty 'twenty four will be a critical inflection point for our company.
I'll now turn the call over to the operator for Q&A.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star and then two.
Our first question comes from Jonathan Block with Stifel. Please go ahead.
Great. Thanks, It's Jordan on for John actually.
Thanks for taking my questions I have two questions I'll ask them both.
Front, that's on the biology front can.
Can you give us an update on the U S hospital contracting process.
How is that process has been ongoing and maybe what level of retention there was been with your current existing.
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 on the specific all reaching free cash flow positivity by year end.
And then maybe the confidence in the sustainability of that positivity into next year. Thanks.
Yeah, I'll start those started they'll move it over to Andy for the second question.
We started the controlled launch into summer and we have seen.
Really nice adoption by some of the hospital. It does takes 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 is happening.
With support from the right surgeons.
So this takes a little longer than we had anticipated, but what I've seen an acceleration in the last two or three months on the adoption by some of the hospitals, who are also very encouraged by the reorder rates, but those number of hospitals is at par with our tissue expanders and even plants once they adopt and then biology.
They're already at the same rate the percentage of our tissue Expanders and implants.
We have a long way to go the majority of our hospitals are still way to go and that's going to be part of a full launch planned for next year is accelerating access to hospitals and continue to get more G. P. O access as well. So we're very encouraged by the beginning of the first of all it for five months of this controlled launch.
Sure So Jordan in terms of our free cash flow performance.
We have our expense structure in place and exactly where we wanted we've showed consistent improvement in our Q3 results are again a record for us in terms of non.
non-GAAP and actually get operating expense.
Look forward as we said before we're targeting a year end free cash flow positive performance. The recent change its going to affect that particular timing is there is a tendency 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 going to continue to run not just our business, but the whole industry.
And really when it rebounds back to expected results. So because of that we're going to again, it's hard to.
They're really forecast free cash flow positive performance in Q4, but we don't expect that the 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 onetime 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 they Peel 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 worked 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 gonna be monitoring here in Q4.
Thanks, I appreciate all that color.
Again, if you have a question. Please press star and then one our next question comes from Anthony Vendetti with Maxim Group. Please go ahead.
Hi, This is actually Jeremy on the line for Anthony. It's also two questions from our end. The first one also on the virality and assemble government rollout.
You know 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 conditions continue and you have to change as you know in the future you'll you'll adapt N.
Yeah. So the impact of the macroeconomic is really more on the augmentation side. What are we saw reconstruction into somebody's really the impact of the stated before particularly with leisure travel by patients delay and sort of surgeries in reconstruction and also travelled by surgeons we have.
I did not see any any impact at all for bolt biology simply derm is just a it's a process of going through the hospital.
Process the Vac committees.
P. O's. So that's that's progressing extremely well for both brands, but it's really for the falling right within our current strategy of a control launch for both brands. So we're seeing a really nice pace for both products.
Jeremy just to add 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.
Okay. Yeah, that's what I was going to follow up with that that does that still apply because I know you mentioned on an earlier call. It. Okay. And then just my other question just back to the base core business augmentation and reconstruction. So I know, it's really that diversification is great you haven't seen really a fall off or on.
Reconstruction due to the headwinds macro headwinds just if these you know obviously, there's we don't have a crystal ball, but if these headwinds do continue is there a way that your you know your corporate strategy of your business strategy could shift and focus more of your sales reps or maybe focus more on the reconstruction side to try and make up the difference.
Yeah, we started actually interesting enough and early 'twenty, one, but they're really just the shift into reconstruction, which is a weird time to do it because in 2021 that cosmetic breast augmentation market went absolutely crazy and you saw that we grew almost 50% of revenues.
Driven mostly by reconstruction at that time close to 60% of revenues came from the augmentation side, what do we saw this past quarter in the last couple of quarters is it well over half of our revenues are coming for reconstruction and the idea of adding fat grafting of viability and adding an ATM with simply term, it's really to add more.
Products and as I stated before there are only two companies in the market right now to have the full portfolio of products for breast reconstruction.
One of them and the other ones that not a big company and that makes it really nice for us to have a portfolio strategy as we negotiate contracts with both hospitals G. P o's and in different institutions that prefer to deal with one vendor.
Right, Yeah, I understand okay, great. Thank you for all that additional information and I'll hop back in the queue.
Okay.
This concludes our question and answer session I would like to turn the conference over to Ron <unk> for any closing remarks.
Alright, well. Thank you very much for everyone for joining us we look forward for a great finish to 2023, and we look forward to start 24 extremely well in the meantime, I hope everyone has a upcoming wonderful Thanksgiving. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.