SIEN Sientra, Inc. - 10-K

Item 7. Management’s Discussion and Analysis o f 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 financial statements and related notes appearing elsewhere in this Annual Report on Form 10‑K. This discussion contains forward‑looking 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 forward‑looking 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 Forward‑Looking Statements” in this Annual Report.

Overview

We are 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 (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 (UAE) following approval by the UAE Ministry of Health and Prevention in 2022, see Recent developments below.

As discussed in Note 2 to the consolidated financial statements, we completed the sale of the miraDry business on June 10, 2021, and have reported this as discontinued operations. Therefore, we are reporting the historical results of miraDry and the results of operations, cash flows, and related assets and liabilities, as discontinued operations for all periods presented herein through the date of the sale of the miraDry business. Unless otherwise noted, the audited consolidated financial statements have all been revised to reflect continuing operations only. 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.

Recent developments

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.

Reverse Stock Split

On January 19, 2023, we effected a 1-for-10 reverse stock split (the “Reverse Stock Split”) of our issued and outstanding common stock, by the filing of a Certificate of Amendment with the Secretary of State of the State of Delaware pursuant to the Delaware General Corporation Law. The Reverse Stock Split became effective at 4:00 p.m. Eastern Time on January 19, 2023. Our common stock began trading on The Nasdaq Global Market on a split-adjusted basis on January 23, 2023. All information presented in this Annual Report has been retrospectively restated to give effect to our 1-for-10 reverse split of our outstanding common shares, and unless otherwise indicated, all such amounts and corresponding conversion price and/or exercise price data set forth in this Annual Report has been adjusted to give effect to such reverse stock split.

Debt Refinancing

On October 12, 2022, we entered into an agreement with a fund managed by Deerfield Partners, L.P. to refinance our existing term loan and convertible note debt. As a result of the financing, we have reduced our total debt load by approximately $10 million, to $73 million, while extending the maturity dates to March 2026 and beyond. Proceeds from the financing were used to retire our existing $21 million senior secured term loan facility in full, and for related financing expenses.

Pursuant to the Restated Agreement, the maturity date of the Original Note was extended until March 11, 2026, and the initial conversion price was reduced to $27.50. On the date of the Restated Agreement, we also issued and sold an additional senior secured convertible note in a principal amount of $23.0 million (the “2022 Note” and, together with the Original Note, the “Convertible Notes”). The 2022 Note matures on the fifth anniversary of the issuance date and is convertible into shares of our common stock, par value $0.01, at an initial conversion price of $10.0.

In connection with the Restated Agreement, on October 12, 2022, we entered into an Exchange Agreement with Deerfield pursuant to which Deerfield exchanged $10.0 million of principal under the Original Note for 296,774 shares of our common stock and a pre-funded warrant to purchase 1,054,395 shares of our common stock, reducing the outstanding principal amount of the Original Note to $50.0 million.

We used the proceeds from the New Note to repay in full the outstanding amounts under the Second Amended and Restated Credit and Security Agreement, and the Amended and Restated Credit and Security Agreement with MidCap Financial Trust and MidCap Funding IV Trust, respectively.

Equity Financing

On October 25, 2022, we issued and sold 1,778,500 shares of our common stock, 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.

United Arab Emirates Approval

On December 13, 2022, we received approval from the Ministry of Health and Prevention to market the company’s line of smooth surface, High-Strength Cohesive (HSC and HSC+) silicone gel breast implants in the UAE. Following this approval, we began commercialization in the UAE through our distribution partner, Rose Aljazera.

Saudi Arabia Approval

On September 20, 2022, we received approval from the Saudi Food & Drug Authority to market our Company’s line of smooth surface, High-Strength Cohesive silicone gel breast implants in the Kingdom of Saudi Arabia (KSA). Following this approval, we began commercialization in KSA through our distribution partner, Rose Aljazera.

Health Canada Approval

On March 23, 2022, we received approval from Health Canada to begin commercialization of our smooth round HSC and HSC+ silicone gel breast implants in Canada. Following this approval, we began commercialization in Canada with our distribution partner, Kai Aesthetics, Inc.

Low Profile Plus Implant Approval

On July 6, 2022, the FDA approved Sientra’s Low Plus Profile Projection Breast Implant for breast augmentation in women at least 22 years old, and for women of all ages undergoing breast reconstruction, making Sientra the first and only implant maker in the United States to offer 80cc and 110cc gel implants to Plastic Surgeons and their patients.

COVID-19 Pandemic

The COVID-19 pandemic and its related macroeconomic effects significantly impacted our business and results of operations in fiscal years 2020, 2021 and 2022. 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, 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. Hospitals across the U.S. have experienced periodic shortages of staff and postponement of certain non-emergency procedures due to the impact of COVID-19. 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 December 31, 2022. During the first quarter of 2022, the Omicron variant had a pronounced impact on hospital capacity, resources, and procedure volumes, especially in the United States.

While many states have lifted certain restrictions on non-emergency procedures, the pandemic continues to evolve and its impact on our business will depend on the spread of any variants, vaccination rates, and or the timing for a broad and sustained our ability to perform non-emergency procedures involving the Company’s products. We continue to monitor and assess new information related to the COVID-19 pandemic, the actions taken to contain or treat COVID-19, as well as the economic impact on local, regional, national and international customers and markets.

In addition to the impacts described above, 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.

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 and duration 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 cash‑pay basis. Many of our proprietary breast implants incorporate one or more technologies that differentiate us from our competitors, including High‑Strength 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 High‑Strength Cohesive silicone gel used in our implants. The microtexturing on Sientra’s implant shell is designed to reduce the incidence of malposition, rotation and capsular contracture.

Our breast implants were approved by the FDA in 2012, based on data we collected from our long‑term clinical trial of our breast implants in 1,788 women across 36 investigational sites in the United States, which included 3,506 implants (approximately 53% of which were smooth and 47% of which were textured). Our clinical trial is the largest prospective, long‑term safety and effectiveness pivotal study of breast implants in the United States and includes the largest magnetic resonance imaging, or MRI, cohort with 571 patients. The MRI cohort is a subset of study patients that underwent regular MRI screenings in addition to the other aspects of the clinical trial protocol prior to FDA approval. Post-approval, all patients in the long-term clinical trial are subject to serial MRI screenings as part of the clinical protocol. The clinical data we collected over a ten‑year follow‑up period demonstrated rupture rates, capsular contracture rates and reoperation rates that were comparable to or better than those of our competitors, at similar time points. In addition to our pivotal study, our clinical data is supported by our Continued Access Study of 2,497 women in the United States. We have also commissioned a number of bench studies run by independent laboratories that we believe further demonstrate the advantages of our breast implants over those of our competitors.

On August 9, 2016, we announced our collaboration with Vesta Intermediate Funding, Inc., or Vesta, a Lubrizol Lifesciences company, pursuant to which we worked with Vesta to establish a dedicated manufacturing facility for our breast implants. On March 14, 2017, we announced that we had executed a definitive manufacturing agreement with Vesta for the manufacture and supply of our breast implants and that we had submitted a site-change pre-market approval, or PMA, supplement to the FDA for the manufacturing of our PMA-approved breast implants by Vesta. Vesta began manufacturing our breast products in October 2017 in order to build our inventory pending FDA approval of the PMA supplement. On January 30, 2018, we announced that the FDA granted approval of the PMA supplement for our contract manufacturer, Vesta, to manufacture our silicone gel breast implants. In support of the move to the Vesta manufacturing facility, we also implemented new manufacturing process improvements which, in consultation with the FDA, required three (3) additional submissions. These submissions were approved by the FDA on January 10, 2018, January 19, 2018 and April 17, 2018. Further, on November 7, 2019, we entered into an Asset Purchase Agreement with Vesta pursuant to which we purchased certain assets and obtained a non-exclusive, royalty-free, perpetual, irrevocable, assignable, sublicensable, and worldwide license to certain intellectual property owned by Vesta, or the Vesta Acquisition. With this acquisition, we obtained full control of the Class 3 breast implant manufacturing operation previously owned and operated by Vesta, which we believe allows us to gain access to implement manufacturing efficiencies and improve our demand planning to ultimately reduce our manufacturing costs in the future.

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 December 31, 2021 we acquired substantially all of the assets relating to the Viality with AuraClens fat transfer system, which we believe will help us to grow our total addressable market in existing breast procedures while providing a platform for other aesthetic treatments outside of the breast. Developed by researchers at Harvard and Massachusetts General Hospital, Viality is the only fat transfer system with AuraClens™, a proprietary cleansing mechanism (lipoaspirate wash) to retain more-viable fat leading to more predictable results. Viality is also the only fat transfer system able to process 50-1,050 mL of lipoaspirate.

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

Net Sales

Our net sales primarily consist of sales of silicone gel breast implants, tissue expanders, BIOCORNEUM, and sizers. 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.

Cost of Goods Sold and Gross Margin

Cost of goods sold consists primarily of raw material, labor, and overhead costs of manufacturing, reserve for returns, reserve for product assurance warranties, royalty costs, excess and obsolete inventory reserves, amortization of manufacturing know-how 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 (Expense), net

Interest income (expense), net primarily consists of interest earned on our cash and cash equivalents and marketable securities.

Interest Expense

Interest expense primarily consists of interest expense, and amortization of issuance costs associated with our Credit Agreements.

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 year ended December 31, 2022. 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

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 the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the

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 May 2018 on all breast implants implanted in the United States or Puerto Rico on or after May 1, 2018. Platinum20 provides for financial assistance for revision surgeries and no-charge contralateral replacement implants upon the occurrence of certain qualifying events. Platinum20 has an assurance warranty component and a service warranty component. The assurance component is recorded as a warranty liability at the time of sale. The service warranty component is considered an additional performance obligation and revenue is deferred at the time of sale using the expected cost plus margin approach for the performance obligation. Inputs into the expected cost plus margin approach include historical incidence rates, estimated replacement costs, estimated financial assistance payouts and an estimated margin.

The liability for unsatisfied performance obligations under the service warranty as of December 31, 2022 were as follows (in thousands):

Year Ended December 31,

Balance as of December 31, 2021

Additions and adjustments

Revenue recognized

Balance as of December 31, 2022

Less short-term portion

Long-term portion

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.

Sales Return Liability

With the exception of the Company’s BIOCORNEUM scar management products, inventory held on consignment, and products sold to international customers, 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,

Beginning balance

Addition to reserve for sales activity

Actual returns

Change in estimate of sales returns

Ending balance

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 $5.3 million, $5.5 million and $2.9 million for the years ended December 31, 2022, 2021 and 2020, respectively. These costs are viewed as part of our marketing programs and are recorded as a component of sales and marketing expense in the consolidated statement of operations as an accounting policy election.

Warranty Reserve

We offer a product replacement and limited warranty program to our U.S and Canadian customers for our silicone gel breast implants, which we consider to be assurance-type warranties. For silicone get breast implant surgeries occurring prior to May 1, 2018, we provide lifetime replacement implants and up to $3,600 in financial assistance for revision surgeries, for covered rupture events that occur within ten years of the surgery date. We introduced our Platinum20 Limited Warranty Program in May 2018, covering OPUS silicone get breast implants implanted in the United States or Puerto Rico on or after May 1, 2018. We consider Platinum20 to have a service warranty component and an assurance warranty component. The service warranty component as an additional performance obligation and defer revenue at the time of sale based on the relative estimated selling price as detailed under Revenue Recognition above. The assurance component is recorded as a warranty liability at the time of sale and is related to the lifetime no-charge contralateral replacement implants and up to $5,000 in financial assistance for revision surgeries, for covered rupture events that occur within twenty years of the surgery date. As of December 31, 2022 and 2021, we held total warranty liabilities of $8.8 million and $2.5 million, respectively.

Stock‑Based Compensation

We recognize stock‑based compensation using a fair‑value based method for costs related to all employee share‑based 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.

The fair value of restricted stock unit awards at the date of grant is equal to the market price of our common stock on the grant date. We estimate the fair value of stock option awards to employees and directors using the Black‑Scholes option pricing model. The grant date fair value of a stock‑based award is recognized as an expense over the requisite service period of the award on a straight‑line basis. In addition, we use the Monte-Carlo simulation option-pricing model to determine the fair value of market-based awards, if any. 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 Black‑Scholes and Monte-Carlo models require inputs of subjective assumptions, including the risk‑free interest rate, expected dividend yield, expected volatility and expected term, among other inputs. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock‑based compensation expense could be materially different in the future.

We recorded total non‑cash stock‑based compensation expense of $7.9 million, $10.4 million and $8.2 million for the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, we had unrecognized compensation costs related to unvested stock options of $1.2 million. As of December 31, 2022, we had total unrecognized compensation costs of $8.7 million related to unvested restricted stock units, or RSUs. These costs are expected to be recognized over a weighted average period of 1.79 years.

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 ended December 31, 2022, 2021 and 2020 (in thousands):

December 31,

Cost of Goods Sold

Operating Expenses

Sales and marketing

Research and development

General and administrative

Total

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.

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 consolidated 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 December 31, 2022 compared to the year ended December 31, 2021. For a discussion of the year ended December 31, 2021 compared to the year ended December 31, 2020, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2020.

The following table sets forth our results of operations for the years ended December 31, 2022 and 2021:

Year Ended

December 31,

(In thousands)

Statement of operations data

Net sales

Cost of goods sold

Gross profit

Operating expenses

Sales and marketing

Research and development

General and administrative

Total operating expenses

Loss from operations

Other (expense) income, net

Interest income

Interest expense

(Loss) gain on extinguishment of debt

Change in fair value of derivative liability

Other income (expense), net

Total other (expense) income, net

Loss from continuing operations before income taxes

Income tax expense

Loss from continuing operations

Income from discontinued operations, net of income taxes

Net loss

Net Sales

Net sales increased $9.9 million, or 12.2%, to $90.6 million for the year ended December 31, 2022, as compared to $80.7 million for the year ended December 31, 2021. The increase was primarily due to an increase in the volume of domestic sales of gel implants and expanders, as well as increased international sales due to the approval of three new markets in 2022.

Cost of Goods Sold and Gross Margin

Cost of goods sold increased $12.6 million, or 34.7%, to $49.0 million for the year ended December 31, 2022, as compared to $36.3 million for the year ended December 31, 2021. The increase was primarily due to an increase in sales activity and significant increases in reserves for warranty and for excess inventory for textured gel implants acquired in connection with its acquisition of Vesta manufacturing operations.

The gross margins for the years ended December 31, 2022 and 2021 were 45.9% and 54.9%, respectively. The decrease was primarily due to an increase in reserves for excess inventory related to past acquisitions. Excluding the impact of the adjustment to inventory reserve, adjusted gross margin was 52.0% for the year ended December 31, 2022.

Sales and Marketing Expenses

Sales and marketing expenses increased $6.6 million, or 13.6%, to $55.0 million for the year ended December 31, 2022, as compared to $48.5 million for the year ended December 31, 2021. The increase was primarily due to increases in employee payroll and incentive compensation, travel and related expenses, shipping expenses associated with the increased volume of sales of products, and increased marketing initiatives.

Research and Development Expenses

Research and development expenses increased $3.6 million, or 34.5%, to $14.1 million for the year ended December 31, 2022, as compared to $10.5 million for the year ended December 31, 2021. The increase was primarily due to increases in product development expense related to our launches of LLP and Viality as well as regulatory expenses.

General and Administrative Expenses

G&A expenses increased $9.8 million, or 30.7%, to $41.5 million for the year ended December 31, 2022, as compared to $31.8 million for the year ended December 31, 2021. The increase was primarily due to increases in legal expenses, consulting fees, and expenses associated with our information technology systems subsequent to their implementation, including training and data conversion costs.

Other Income (Expense), net

Other (expense), net for the year ended December 31, 2022 includes a loss on extinguishment of $2.4 million and gain of $8.8 million due to decrease in fair value of its derivative liability associated with the Convertible Note and 2022 Note. Other income (expense) decreased overall as compared to the year ended December 31, 2021 primarily due to a gain on extinguishment from the forgiveness of the PPP Loan in the prior period, offset by an increase in the fair value of the derivative liability from an increase in the Company's stock price, prior to its reclassification to equity following the amendment in September 2021.

Income Tax Expense

Income tax expense for the year ended December 31, 2022 was $27,000 as compared to income tax expense of $21,000 for the year ended December 31, 2021.

Change in fair value of derivative liability

Change in fair value of derivative liability reflects the non-cash change in the fair value of our embedded derivatives attributed to our convertible notes.

Liquidity and Capital Resources

Since our inception, we have incurred significant net operating losses and cash outflows from operations and anticipate that our losses and cash outflows will continue in the near term. During the year ended December 31, 2022, we incurred net losses of $73.3 and used $34.9 million of cash in continuing operations. As of December 31, 2022, we had cash and cash equivalents of $26.1 million. These conditions raise substantial doubt about our ability to continue as a going concern for a period of at least one year from the date of this report. The 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 savings 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 launch of new product. 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. These audited financial statements do not include any adjustments relating to the carrying amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.

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 – recent developments

Refer to Note 7 to the 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 for the periods indicated:

Year Ended December 31,

Net cash (used in) provided by:

Operating activities - continuing operations

Investing activities - continuing operations

Financing activities - continuing operations

Net change in cash, cash equivalents and restricted cash from continuing operations

Net cash provided by discontinued operations

Net change in cash, cash equivalents and restricted cash

Cash flow from operating activities of continuing operations

Net cash used in operating activities was $34.9 million and $44.5 million during the years ended December 31, 2022 and 2021, respectively. The $9.6 million decrease in cash used in operating activities was primarily associated with

with an improvement with working capital, particularly inventory. Decrease in inventory is due to continued inventory initiatives to reduce inventory levels and align production with demand.

Cash flow from investing activities of continuing operations

Net cash used in investing activities was $3.6 million and $4.8 million during the years ended December 31, 2022 and 2021, respectively. The $1.2 million decrease in cash used in investing activities was due to cash paid for the asset acquisition in 2021 that did not reoccur in 2022.

Cash flow from financing activities of continuing operations

Net cash provided by financing activities was $12.8 million and $35.9 million for the years ended December 31, 2022 and 2021, respectively. The $23.1 million decrease in cash provided by financing activities was primarily due to a decrease in proceeds from issuance of common stock in the current year, partially offset by the current year deferred consideration payment related to our acquisition of AuraGen.

Cash flow from discontinued operations

Net cash provided by discontinued operations was $10.1 million for the year ended December 31, 2021 and is related to the cash provided by investing activities resulting from the proceeds of the sale of miraDry business.

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.”

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.

Item 7A. Quantitative and Qualita tive Disclosures about Market Risks

As of December 31, 2022, we had $26.1 million in cash and cash equivalents. We generally hold our cash in checking accounts and interest-bearing money market accounts. Our exposure to market risk related to interest rate sensitivity is affected by changes in the general level of U.S. interest rates. Due to the short-term maturities of our cash equivalents and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our cash equivalents. We have established guidelines regarding approved investments and maturities of investments, which are designed to maintain safety and liquidity.

Item 8. Financial Statemen ts and Supplementary Data

The financial statements required to be filed pursuant to this Item 8 are appended to this report beginning on page F‑1. An index of those financial statements is included in Part IV, Item 15 below.