SIENTRA, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Annual Report on Form 10K. This discussion contains forwardlooking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forwardlooking statements as a result of several factors, including those discussed in the section titled "Risk Factors" included under Part I, Item 1A and elsewhere in this Annual Report. See "Special Note Regarding ForwardLooking Statements" in this Annual Report.
Overview
We are a medical aesthetics company uniquely centered 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 in the US. 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. In 2020, we also began to
sell our breast implants in
As discussed in Recent developments below, we completed the sale of the miraDry
business on
Our Plastic Surgery segment focuses on sales of our breast implants, tissue
expanders and scar management products. We currently sell our products in the
Recent developments
Acquisition of certain assets from
On
Sale of the miraDry Business
On
Prior to entering into the Purchase Agreement, in
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Health Canada Approval
On
COVID-19 Pandemic
As an aesthetics company, surgical procedures involving our breast products are
susceptible to local and national government restrictions, such as social
distancing, vaccination requirements, "shelter in place" orders and business
closures, due to the economic and logistical impacts these measures have on
consumer demand as well as the practitioners' ability to administer such
procedures. The inability or limited ability to perform such non-emergency
procedures significantly harmed our revenues since the second quarter of 2020
and continued to harm our revenues during the year ended
Further, the spread of COVID-19 has caused us to modify our workforce practices, and we may take further actions that we determine are in the best interests of our employees or as required by governments. The continued spread of COVID-19, or another infectious disease, could also result in delays or disruptions in our supply chain or adversely affect our manufacturing facilities and personnel. Further, trade and/or national security protection policies may be adjusted as a result of the COVID-19 pandemic, such as actions by governments that limit, restrict or prevent the movement of certain goods into a country and/or region.
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 pandemic. While the full impact of COVID-19 is unknown at this time, we have 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.
Plastic Surgery Segment
Our primary products are silicone gel breast implants for use in breast
augmentation and breast reconstruction procedures, which we offer in
approximately 350 variations of shapes, sizes, fill volumes and textures. Our
breast implants are primarily used in elective procedures that are generally
performed on a cashpay basis. Many of our proprietary breast implants
incorporate one or more technologies that differentiate us from our competitors,
including HighStrength Cohesive silicone gel and shell microtexturing. Our
breast implants offer a desired balance between strength, shape retention and
softness due to the silicone shell and HighStrength Cohesive silicone gel used
in our implants. The microtexturing on
Our breast implants were approved by the FDA in 2012, based on data we collected
from our longterm clinical trial of our breast implants in 1,788 women across
36 investigational sites in
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On
In addition, we offer BIOCORNEUM, an advanced silicone scar treatment, directly
to physicians and the AlloX2, and Dermaspan lines of breast tissue expanders, as
well as the Softspan line of general tissue expanders. On
We sell our breast implants for augmentation procedures exclusively to Plastic Surgeons, who are thought leaders in the medical aesthetics industry. Our tissue expanders which are used in breast reconstruction procedures are predominantly sold to hospitals and surgery centers who determine the admission privileges of surgeons performing breast reconstruction procedures. We address the specific needs of Plastic Surgeons through continued product innovation, expansion of our product portfolio and enhanced customer service offerings and a twenty year limited warranty that provides patients with cash reimbursement for certain out of pocket costs related to revision surgeries in a covered event, a lifetime no charge implant replacement program for covered ruptures, and the industry's first policy of no charge replacement implants to patients who experience covered capsular contracture, double capsule and late-forming seroma events within twenty years of the initial implant procedure.
Components of Operating Results
Our net sales include sales of silicone gel breast implants, tissue expanders and BIOCORNEUM. 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 breast implants and tissue expanders. 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 the impact of the COVID-19 pandemic. 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.
Cost of Goods Sold and Gross Margin
Cost of goods sold consists primarily of raw material, labor, overhead, and variable manufacturing costs, reserve for product assurance warranties, royalty costs, excess and obsolete inventory reserves, 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.
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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 nocharge 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 cGCP, requirements. R&D expenses also include related personnel and consultant compensation and stockbased compensation expense. 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 consultants, corporate insurance, facilities and information technologies expenses. We expect future G&A expenses to remain consistent with the current period, and we also expect to continue to incur G&A expenses in connection with operating as a public company.
Other Income (Expense), net
Other income (expense), net primarily consists of interest income, interest expense, changes in the fair value of the embedded derivative liability, gain on extinguishment of the PPP Loan, and amortization of issuance costs associated with our Credit Agreements.
Income Taxes
Income tax expense consists of an estimate for income taxes based on the
projected income tax expense for the year ended
Critical Accounting Policies and Significant Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations
are based on our financial statements, which have been prepared in accordance
with accounting principles generally accepted in
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reported amounts of assets, liabilities, net sales and expenses and the disclosure of contingent assets and liabilities in our financial statements. 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.
While our significant accounting policies are more fully described in Note 1 to our financial statements, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
We generate revenue primarily through the sale and delivery of promised goods or services to customers. Sales prices are documented in the executed sales contract, purchase order or order acknowledgement prior to the transfer of control to the customer. Typical payment terms are 30 days.
Our revenue contracts may include multiple products or services, each of which is considered a separate performance obligation. Performance obligations typically include the delivery of promised products, such as breast implants, tissue expanders, and BIOCORNEUM, along with service-type warranties. Other deliverables are sometimes promised, but are ancillary and insignificant in the context of the contract as a whole. We allocate revenue to each performance obligation based on its relative standalone selling price. We determine standalone selling prices based on observable prices for all performance obligations with the exception of the service-type warranty under the Platinum20 Limited Warranty Program, or Platinum20.
We introduced our Platinum20 warranty program in
The liability for unsatisfied performance obligations under the service warranty
as of
Year Ended December 31,
2021
Balance as of December 31, 2020 $ 1,945
Additions and adjustments 1,863
Revenue recognized (571 )
Balance as of December 31, 2021 $ 3,237
Revenue for service warranties are recognized ratably over the term of the agreements. Specifically for Platinum20, the performance obligation is satisfied at the time that the benefits are provided and are expected to be satisfied over the following 3 to 24 month period for financial assistance and 20 years for product replacement.
For delivery of promised products, control transfers and revenue is recognized upon shipment, unless the contractual arrangement requires transfer of control when products reach their destination, for which revenue is recognized once the product arrives at its destination. A portion of our revenue is generated from the sale of consigned inventory of breast implants maintained at doctor, hospital, and clinic locations. For these products, revenue is recognized at the time we are notified by the customer that the product has been implanted, not when the consigned products are delivered to the customer's location.
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Sales Return Liability
With the exception of the Company's BIOCORNEUM scar management products, we allow for the return of products from customers within six months after the original sale, which is accounted for as variable consideration. A sales return liability is established based on estimated sales returns using relevant historical experience taking into consideration recent gross sales and notifications of pending returns, as adjusted for changes in recent industry events and trends. The estimated sales return is recorded as a reduction of revenue and as a sales return liability in the same period revenue is recognized. Actual sales returns in any future period are inherently uncertain and thus may differ from the estimates. If actual sales returns differ significantly from the estimates, an adjustment to revenue in the current or subsequent period would be recorded. The following table provides a rollforward of the sales return liability (in thousands):
Year Ended December 31,
2021 2020
Beginning balance $ 9,192 $ 8,116 Addition to reserve for sales activity 158,245 118,508 Actual returns
(152,773 ) (117,407 )
Change in estimate of sales returns (1,265 ) (25 )
Ending balance $ 13,399 $ 9,192 Practical Expedients and Policy Election
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.
We do not adjust accounts receivable for the effects of any significant financing components as customer payment terms are shorter than one year.
We have elected to account for shipping and handling activities performed after
a customer obtains control of the products as activities to fulfill the promise
to transfer the products to the customer. Shipping and handling activities are
largely provided to customers free of charge. The associated costs were
Goodwill Impairment Testing
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The fair value analysis of goodwill utilizes the income approach and market approach, which requires the use of estimates about a reporting unit's future revenues and free cash flows, market multiples, enterprise value, control risk premiums, discount rates, terminal value and enterprise value to determine the estimated fair value. Our future revenues and free cash flow assumptions are determined based upon actual results giving effect to management's expected changes in operating results in future years. Our market multiples, enterprise value, control risk premiums, discount rates and terminal value are based upon market participant assumptions using a defined peer group. Changes in these assumptions can materially affect these estimates. Thus, to the extent the market changes, discount rates increase significantly or we do not meet our projected performance, we could recognize impairments, and such impairments could be material.
In the current year, we performed a qualitative analysis for the Plastic Surgery
reporting unit on the annual goodwill impairment test on
Warranty Reserve
We offer a product replacement and limited warranty program for our silicone gel
breast implants, which we consider to be assurance-type warranties. For silicone
get breast implant surgeries occurring prior to
StockBased Compensation
We recognize stockbased compensation using a fairvalue based method for costs related to all employee sharebased payments, including stock options, restricted stock units, and the employee stock purchase plan. Stock-based compensation cost is measured at the date of grant based on the estimated fair value of the award.
We estimate the fair value of our stockbased awards to employees and directors using the BlackScholes option pricing model. The grant date fair value of a stockbased award is recognized as an expense over the requisite service period of the award on a straightline basis. In addition, we use the Monte-Carlo simulation option-pricing model to determine the fair value of market-based awards. The Monte-Carlo simulation option-pricing model uses the same input assumptions as the Black-Scholes model; however, it also further incorporates into the fair-value determination the possibility that the market condition may not be satisfied. Compensation costs related to these awards are recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided.
The BlackScholes and
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We recorded total noncash stockbased compensation expense of
The following table represents stock-based compensation expense included in cost of goods sold and operating expenses in the accompanying consolidated statement of operations for the years endedDecember 31, 2021 , 2020 and 2019 (in thousands): December 31, 2021 2020 2019 Cost of Goods Sold $ -$ 49 $ 59 Operating Expenses Sales and marketing 3,192 3,359 4,826
Research and development 1,535 989 1,853 General and administrative 5,663 3,824 5,857 Total
$ 10,390 $ 8,221 $ 12,595 Acquisitions
We evaluate acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met, the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether or not we have acquired inputs and processes that have the ability to create outputs which would meet the definition of a business.
Business combinations
We account for acquired business combinations using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at fair value, with limited exceptions. Valuations are generally completed for business acquisitions using a discounted cash flow analysis. The most significant estimates and assumptions inherent in a discounted cash flow analysis include the amount and timing of projected future cash flows, the discount rate used to measure the risks inherent in the future cash flows, the assessment of the asset's life cycle, and the competitive and other trends impacting the asset, including consideration of technical, legal, regulatory, economic and other factors. Each of these factors and assumptions can significantly affect the value of the intangible asset. The excess of the fair value of consideration transferred over the fair value of the net assets acquired is recorded as goodwill.
We believe the fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions. However, these assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. We will finalize these amounts as we obtain the information necessary to complete the measurement processes. Any changes resulting from facts and circumstances that existed as of the acquisition dates may result in adjustments to the provisional amounts recognized at the acquisition dates. We finalize these amounts no later than one year from the respective acquisition dates.
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Asset acquisitions
In an asset acquisition, the fair value of the consideration transferred, including transaction costs, is allocated to the assets acquired and liabilities assumed based on their relative fair values. No goodwill is recognized in an asset acquisition. Subsequent changes are recorded as adjustments to the carrying amount of the assets acquired.
When intangible assets are acquired, determining their useful life requires judgment, as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives. Useful life is the period over which the intangible asset is expected to contribute directly or indirectly to our future cash flows. We determine the useful lives of intangible assets based on a number of factors, such as legal, regulatory, or contractual provisions that may limit the useful life, and the effects of obsolescence, anticipated demand, existence or absence of competition, and other economic factors on useful life.
Deferred and liability-classified contingent consideration is initially recognized at fair value and then remeasured each reporting period, with changes in fair value recorded in general and administrative expense in a business combination. In an asset acquisition, changes in fair value are recorded as adjustments to the carrying amount of the assets acquired. We use the Monte-Carlo Simulation model to estimate the fair value of contingent consideration, which requires input assumptions about the likelihood of achieving specified milestone criteria, projections of future financial performance, and assumed discount rates. Changes in the fair value of the acquisition-related contingent consideration obligations result from several factors including changes in discount periods and rates, changes in the timing and amount of revenue estimates and changes in probability assumptions with respect to the likelihood of achieving specified milestone criteria. These estimates involve inherent uncertainties and the application of management's judgment. If factors change and different assumptions are used, our contingent consideration fair value expense could be materially different in the future. Equity-classified contingent consideration associated with a business combination is recorded at their fair values on the acquisition date and are not subsequently remeasured each reporting period unless the obligation becomes reclassified as a liability. The subsequent settlement of the obligation is accounted for within equity.
Recent Accounting Pronouncements
Please refer to Note 1 in the notes to our financial statements included in this Annual Report on Form 10-K for information on recent accounting pronouncements and the expected impact on our financial statements.
Results of Operations
In this section, we discuss the results of our operations for the year ended
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The following table sets forth our results of operations for the years endedDecember 31, 2021 and 2020: Year Ended December 31, 2021 2020 (In thousands) Statement of operations data Net sales$ 80,683 $ 54,997 Cost of goods sold 36,348 23,599 Gross profit 44,335 31,398 Operating expenses Sales and marketing 48,456 37,405 Research and development 10,456 8,704 General and administrative 31,773 32,310 Restructuring - 390 Total operating expenses 90,685 78,809 Loss from operations (46,350 ) (47,411 ) Other income (expense), net Interest income 4 205 Interest expense (8,254 ) (9,438 ) Change in fair value of derivative liability (14,460 ) (10,470 ) Other income (expense), net 6,562 35 Total other income (expense), net (16,148 ) (19,668 )
Loss from continuing operations before income taxes (62,498 ) (67,079 ) Income tax expense
21 33
Loss from continuing operations (62,519 ) (67,112 )
Income (loss) from discontinued operations, net of
income taxes 37 (22,835 )
Net loss $ (62,482 ) $ (89,947 )
Net Sales
Net sales increased
As of
Cost of Goods Sold and Gross Margin
Cost of goods sold increased
The gross margins for the years ended
Sales and Marketing Expenses
Sales and marketing expenses increased
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Research and Development Expenses
Research and development expenses increased
General and Administrative Expenses
G&A expenses decreased
Restructuring Expenses
There were no restructuring expenses for the year ended
Other Income (Expense), net
Other income (expense), net for the year ended
Income Tax (Benefit) Expense
Income tax expense for the year ended
Income (loss) from discontinued operations, net of income taxes
Income from discontinued operations for the year ended
Liquidity and Capital Resources
Since our inception, we have incurred significant net operating losses and anticipate that our losses will continue in the near term. We expect our operating expenses will increase in connection with the growth of our business and will need to generate significant net sales to achieve profitability. To date, we have funded our operations primarily with proceeds from the sales of preferred stock, borrowings under our term loans and convertible note, sales of our products, and the proceeds from the sale of our common stock in public offerings.
Sale of the miraDry business
On
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2021, among us and certain of our subsidiaries, Buyer, and, solely for purposes
of Section 8.14 of the Purchase Agreement, 1315
Debt financing
On
On
In
Due to the continued uncertainty relating to the COVID-19 pandemic, our revenues
may continue to be adversely impacted. If we are unable to achieve certain
revenue targets, we may breach certain financial covenants set forth in our
Credit Agreement with
See Note 7 to the consolidated financial statements for a full description of our long-term debt, revolving line of credit, convertible note, and PPP loan.
Equity financing
On
Further on
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As of
To fund our ongoing operating and capital needs, we may need to raise additional equity or debt capital. We believe we have sufficient capital resources to continue as a going concern through the next twelve months.
Cash Flows
The following table shows a summary of our cash flows (used in) provided by operating, investing and financing activities for the periods indicated:
Year Ended December 31,
2021 2020
Net cash (used in) provided by:
Operating activities - continuing operations $ (44,494 ) $ (46,226 )
Investing activities - continuing operations (4,805 ) (3,956 )
Financing activities - continuing operations 35,938 31,523
Net change in cash, cash equivalents and restricted cash from continuing operations
(13,361 ) (18,659 )
Net cash provided by (used in) discontinued operations 10,128 (13,992 )
Net change in cash, cash equivalents and restricted cash
Cash flow from operating activities of continuing operations
Net cash used in operating activities was
Cash flow from investing activities of continuing operations
Net cash used in investing activities was
Cash flow from financing activities of continuing operations
Net cash provided by financing activities was
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Cash flow from discontinued operations
Net cash provided by discontinued operations was
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
•
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."
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OffBalance Sheet Arrangements
During the periods presented we did not have, nor do we currently have, any
offbalance sheet arrangements as defined under
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