Sientra, Inc. - Quarter Report: 2017 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2017

OR

For the transition period from              to             

Commission file number: 001-36709

SIENTRA, INC.

(Exact Name of Registrant as Specified in its Charter)

(805) 562-3500

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,  a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company”  and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ☒   

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of May 5, 2017, the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was 19,114,862.

SIENTRA, INC.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2017

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SIENTRA, INC.

Condensed Balance Sheets

(In thousands, except per share and share amounts)

(Unaudited)

See accompanying notes to condensed financial statements.

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SIENTRA, INC.

Condensed Statements of Operations

(In thousands, except per share and share amounts)

(Unaudited)

See accompanying notes to condensed financial statements.

2

SIENTRA, INC.

Condensed Statements of Cash Flows

(In thousands)

(Unaudited)

See accompanying notes to condensed financial statements.

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SIENTRA, INC.

Notes to the Condensed Financial Statements

(Unaudited)

Sientra, Inc., or the Company, was incorporated in the State of Delaware on August 29, 2003 under the name Juliet Medical, Inc. and subsequently changed its name to Sientra, Inc. in April 2007. The Company acquired substantially all the assets of Silimed, Inc. on April 4, 2007. The purpose of the acquisition was to acquire the rights to the silicone breast implant clinical trials, related product specifications and premarket approval, or PMA, assets. Following this acquisition, the Company focused on completing the clinical trials to gain Food and Drug Administration, or FDA, approval to offer its silicone gel breast implants in the United States.

In March 2012, Sientra announced it had received approval from the FDA for its portfolio of silicone gel breast implants, and in the second quarter of 2012 the Company began commercialization efforts to sell its products in the United States. The Company, based in Santa Barbara, California, is a medical aesthetics company that focuses on serving board-certified plastic surgeons and offers a portfolio of silicone shaped and round breast implants, scar management, tissue expanders, and body contouring products.

In November 2014, the Company completed an initial public offering, or IPO, and its common stock is listed on the Nasdaq Stock Exchange under the symbol “SIEN.”

There have been regulatory inquiries related to medical devices manufactured by Silimed Indústria de Implantes Ltda. (formerly, Silimed-Silicone e Instrumental Medico-Cirugio e Hospitalar Ltda.), or Silimed, the Company’s former sole source contract manufacturer for its silicone gel breast implants.

On September 23, 2015, the Medicines and Healthcare Products Regulatory Agency, or MHRA, an executive agency of the United Kingdom, or U.K., announced the suspension of sales and implanting in the U.K. of all medical devices manufactured by Silimed following the suspension of the CE and ISO 13485 certifications of these products issued by TÜV SÜD, Silimed’s notified body under European Union, or EU, regulation. The suspension followed TÜV SÜD’s inspection at Silimed’s manufacturing facilities in Brazil, relating to the alleged presence of surface particles on Silimed breast products.

On October 2, 2015, the Brazilian regulatory agency ANVISA and the Department of the Secretary of State of the State of Rio de Janeiro announced the suspension of the manufacturing and shipment of all medical devices made by Silimed, including products manufactured for Sientra, while they reviewed the technical compliance related to current good manufacturing practices, or cGMP, of Silimed’s manufacturing facilities.

On October 9, 2015, the Company voluntarily placed a hold on the sale of all Sientra devices manufactured by Silimed and recommended that plastic surgeons discontinue implanting the devices until further notice. 

On January 27, 2016, after completing an analysis and risk assessment, ANVISA announced its authorization of Silimed to resume the commercialization and use of its previously manufactured products.  ANVISA concluded there was no evidence that the presence of surface particles on silicone implants represented risks which are additional to those inherent in the product.  

On March 1, 2016, after the completion of extensive independent, third-party testing and analyses of its devices manufactured by Silimed, the Company lifted the temporary hold on the sale of such devices and informed its Plastic Surgeons of the Company’s controlled market re-entry plan designed to optimize the Company’s inventory supply. The results of the Company’s testing indicated no significant safety concerns with the use of its products, including its breast implants, consistent with their approval status since 2012.  Additionally, the FDA reiterated prior

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statements of MHRA and ANVISA that no reports of adverse events and no risks to patient health had been identified in connection with implanting Silimed-manufactured products.

On July 11, 2016, after completing an inspection of Silimed’s facility, ANVISA announced the reinstatement of Silimed’s GMP certificate, valid for two years, and their ability to manufacture commercial products. The Silimed facility that was approved for manufacturing is a different facility from where Sientra breast implants were previously manufactured, which was damaged by a fire on October 22, 2015. The suspension of Silimed’s CE and ISO 13485 certifications by TÜV SÜD remains in place. The Company’s existing manufacturing contract with Silimed expired on its terms on April 1, 2017 and the Company did not renew the contract.

For more information on the status of the Company’s relationship with Silimed, see Note 12 – Commitments and Contingencies.  

The accompanying unaudited condensed financial statements in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and the rules and regulations of the U.S. Securities and Exchange Commission, or SEC.  Accordingly, they do not include certain footnotes and financial presentations normally required under accounting principles generally accepted in the United States of America for complete financial reporting. The interim financial information is unaudited, but reflects all normal adjustments and accruals which are, in the opinion of management, considered necessary to provide a fair presentation for the interim periods presented. The accompanying condensed financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 14, 2017, or the Annual Report. The results for the three months ended March 31, 2017 are not necessarily indicative of results to be expected for the year ending December 31, 2017, any other interim periods, or any future year or period.

The accompanying financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company’s manufacturing contract with Silimed, the Company’s former sole source, third-party manufacturer of silicone gel breast implants expired on its terms on April 1, 2017, and the Company did not renew that contract with Silimed.  Accordingly, the Company continues to evaluate the availability of alternative manufacturing sources, including with Vesta Intermediate Funding, Inc., or Vesta, a Lubrizol Lifesciences company, which is establishing manufacturing capacity for the Company and with which the Company recently executed a definitive manufacturing agreement for the long-term supply of the Company’s PMA-approved breast implants. The continuation of the Company as a going concern is dependent upon many factors including resolution of any outstanding disputes with Silimed (see Note 12—Commitments and Contingencies), the availability of alternative manufacturing sources, and continued sale of the Company’s products. Since inception, the Company has incurred net losses. At March 31, 2017, the Company had cash and cash equivalents of $58.8 million. The Company believes that it has the ability to continue as a going concern for at least 12 months from the date the Company’s financial statements are issued. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

The preparation of the condensed financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

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There have been no significant changes to the accounting policies during the three months ended March 31, 2017, as compared to the significant accounting policies described in the “Notes to Financial Statements” in the Annual Report.

Recently Adopted Accounting Standards

In July 2015, the FASB issued accounting standard update, or ASU, 2015-11, Inventory - Simplifying the Measurement of Inventory.  The standard simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The accounting standards update will not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method. The Company adopted ASU 2015-11 in the first quarter of 2017 on a prospective basis. The adoption of this ASU did not have a material impact on the Company’s financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718). The standard identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The Company adopted ASU 2016-09 in the first quarter of 2017 on a prospective basis. The Company has made an accounting policy election to account for forfeitures when they occur. The adoption of this ASU did not have a material impact on the Company’s financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment. The standard update eliminates Step 2 from the goodwill impairment test. The guidance requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. In addition, the guidance eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. The standard will be effective for the Company beginning in fiscal year 2020. Early adoption is permitted for interim and annual goodwill impairment tests performed after January 1, 2017. The Company adopted ASU 2017-04 in the first quarter of 2017 on a prospective basis. The adoption of this ASU did not have a material impact on the Company’s financial statements.

Recently Issued Accounting Standards

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers.  The standard was issued to provide a single framework that replaces existing industry and transaction specific GAAP with a five step analysis of transactions to determine when and how revenue is recognized. The accounting standard update will replace most existing revenue recognition guidance in GAAP when it becomes effective. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, to defer the effective date of ASU 2014-09 by one year.  Therefore, ASU 2014-09 will become effective for the Company beginning in fiscal year 2018. Early adoption would be permitted for the Company beginning in fiscal year 2017. The standard permits the use of either the retrospective or cumulative transition method.  In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. ASU 2016-20 is intended to clarify and suggest improvements to the application of current standards under Topic 606 and other Topics amended by ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The effective date of ASU 2016-20 is the same as the effective date for ASU 2014-09. In preparation for our adoption of the new standard in our fiscal year ending December 31, 2018, we are reviewing contracts and other forms of agreements with our customers and are evaluating the provisions contained therein in light of the five-step model specified by the new guidance. That five-step model includes: (1) determination of whether a contract—an agreement between two or more parties that creates legally enforceable rights and obligations—exists; (2)

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identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when (or as) the performance obligation is satisfied. We are also evaluating the impact of the new standard on certain common practices currently employed by us and by other medical device companies, such as allowance for sales returns, rebates and other pricing programs. We have not yet determined the impact of the new standard on our financial statements or whether we will adopt on a prospective or retrospective basis in the first quarter of our fiscal year ending December 31, 2018.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) - Clarifying the Definition of a Business. The standard adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses by providing a more specific definition of a business. The updated accounting standard will be effective for the Company beginning in fiscal year 2018. The Company will evaluate the impact of this ASU on future acquisitions.

On March 9, 2016, the Company entered into an assets purchase agreement with Enaltus LLC, or Enaltus, to acquire exclusive U.S. rights to BIOCORNEUM®, an advanced silicone scar treatment marketed exclusively to physicians. The acquisition of BIOCORNEUM® aligns with the Company’s business development objectives and adds a complementary product that serves the needs of its customers. In connection with the acquisition, the Company recorded $0.0 and $0.1 million of professional fees for the three months ended March 31, 2017 and 2016, respectively, which are included in general and administrative expense. The aggregate preliminary acquisition date fair value of the consideration transferred was estimated at $7.4 million, which consisted of the following (in thousands):

The deferred consideration and contingent consideration consist of future royalty payments to be paid on a quarterly basis to Enaltus on future BIOCORNEUM® sales for the 4.5 years beginning January 1, 2024. The Company has determined the fair value of the deferred consideration and contingent consideration at the acquisition date using a Monte Carlo simulation model. The fair value of the deferred consideration is based on the future minimum royalty payments using the risk-free U.S. Treasury yield curve discount rate. The minimum estimated future payments due under the deferred consideration are $0.5 million. The fair value of the contingent consideration is based on projected future BIOCORNEUM® sales and a risk adjusted discount rate. The terms of the agreement do not provide for a limitation on the maximum potential future payments. The inputs are significant inputs not observable in the market, which are referred to as Level 3 inputs and are further discussed in Note 5. The deferred consideration and contingent consideration components are classified as other long-term liability and are subject to the recognition of subsequent changes in fair value through general and administrative expense in the statement of operations.

The Company allocated the total consideration transferred to the tangible and identifiable intangible assets acquired based on their respective fair values on the acquisition date, with the remaining unallocated amount recorded as goodwill. The goodwill arising from the transaction is primarily attributable to expected operational synergies, and all of goodwill will be deductible for income tax purposes. The condensed financial statements for the three months ended March 31, 2016 include the results of operations of BIOCORNEUM® from the date of acquisition.

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The following table summarizes the allocation of the fair value of the consideration transferred by major class for the business combination completed on March 9, 2016 (in thousands):

A summary of the intangible assets acquired, estimated useful lives and amortization method is as follows (in thousands):

The Company retained an independent third-party appraiser to assist management in its valuation and the purchase price has been finalized. Pro forma results of operations have not been presented because the effect of the acquisition was not material to the Company's results of operations.

On November 2, 2016, the Company entered into an asset purchase agreement with Specialty Surgical Products, Inc., or SSP, to acquire certain assets, consisting of the Dermaspan™, Softspan™, and AlloX2® tissue expanders, from SSP. The acquisition adds a complete portfolio of premium, differentiated tissue expanders and aligns with the Company’s business development plans for growth in the breast reconstruction market. The Company did not record any professional fees for the three months ended March 31, 2017 and 2016 in connection with the acquisition. The aggregate preliminary acquisition date fair value of the consideration transferred was estimated at $6.0 million, which consisted of the following (in thousands):

The contingent consideration consists of future cash payments of a maximum of $2.0 million to be paid to SSP based upon the achievement of certain milestones of future net sales. The Company has determined the fair value of the contingent consideration at the acquisition date using a Monte-Carlo simulation model. The inputs include the estimated amount and timing of future net sales, and a risk-adjusted discount rate. The inputs are significant inputs not observable in the market, which are referred to as Level 3 inputs and are further discussed in Note 5. The contingent consideration components are classified as other long-term liabilities and are subject to the recognition of subsequent changes in fair value through general and administrative expense in the statement of operations.

The Company allocated the total consideration transferred to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values on the acquisition date, with the remaining unallocated amount recorded as goodwill. The goodwill arising from the transaction is primarily attributable to expected operational synergies, and all of goodwill will be deductible for income tax purposes. The financial statements for the three months ended March 31, 2017 include the results of operations of the Dermaspan™, Softspan™, and AlloX2® tissue expanders.

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The following table summarizes the allocation of the fair value of the consideration transferred by major class for the business combination completed on November 2, 2016 (in thousands):

A summary of the intangible assets acquired, estimated useful lives and amortization method is as follows (in thousands):

The Company retained an independent third-party appraiser to assist management in its valuation; however, the purchase price allocation has not been finalized. The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the fair values of certain tangible assets and liabilities acquired, the valuation of intangible assets acquired, and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair value of the net assets acquired at the acquisition date during the measurement period. The preliminary allocation of the purchase price is based on the best estimates of management and is subject to revision based on the final valuations and estimates of useful lives.

Pro forma results of operations have not been presented because the effect of the acquisition was not material to the Company's results of operations.  

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and customer deposits are reasonable estimates of their fair value because of the short maturity of these items. The fair value of the common stock warrant liability, deferred consideration and contingent consideration is discussed in Note 5.  As of March 31, 2017, the Company had no outstanding long-term debt.

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Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

The Company’s common stock warrant liabilities are carried at fair value determined according to the fair value hierarchy described above. The Company has utilized an option pricing valuation model to determine the fair value of its outstanding common stock warrant liabilities. The inputs to the model include fair value of the common stock related to the warrant, exercise price of the warrant, expected term, expected volatility, risk-free interest rate and dividend yield.  The warrants are valued using the fair value of common stock as of the measurement date. The Company historically has been a private company and lacks company-specific historical and implied volatility information of its stock. Therefore, it estimates its expected stock volatility based on the historical volatility of publicly traded peer companies for a term equal to the remaining contractual term of the warrants. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual term of the warrants. The Company has estimated a 0% dividend yield based on the expected dividend yield and the fact that the Company has never paid or declared dividends. As several significant inputs are not observable, the overall fair value measurement of the warrants is classified as Level 3.

The Company assessed the fair value of the deferred consideration and contingent consideration for future royalty payments related to the acquisition of BIOCORNEUM® and the contingent consideration for future milestone payments for the acquisition of the tissue expander portfolio from SSP using the Monte-Carlo simulation model. Significant assumptions used in the measurement include future net sales for a defined term and the risk-adjusted discount rate associated with the business. As the inputs are not observable, the overall, fair value measurement of the deferred consideration and contingent consideration is classified as Level 3.

The following tables present information about the Company’s liabilities that are measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016 and indicate the level of the fair value hierarchy utilized to determine such fair value (in thousands):

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The liability for common stock warrants is included in “accrued and other current liabilities” and the liability for the deferred consideration and contingent consideration is included in “warranty reserve and other long-term liabilities” in the balance sheet. The following table provides a rollforward of the aggregate fair values of the Company’s common stock warrants, deferred and contingent consideration for which fair value is determined by Level 3 inputs (in thousands):

The Company recognizes changes in the fair value of the warrants in “other income (expense), net” in the statement of operations and changes in deferred consideration and contingent consideration are recognized in “general and administrative” expense in the statement of operations.

The Company offers a limited warranty and a lifetime product replacement program for the Company’s silicone gel breast implants. Under the limited warranty, the Company will reimburse patients for certain out-of-pocket costs related to revision surgeries performed within ten years from the date of implantation in a covered event. Under the lifetime product replacement program, the Company provides no-charge replacement breast implants if a patient experiences a covered event. The programs are available to all patients implanted with the Company’s silicone breast implants after April 1, 2012 and are subject to the terms, conditions, claim procedures, limitations and exclusions. Timely completion of a device tracking and warranty enrollment form by the patient’s Plastic Surgeon is required to activate the programs and for the patient to be able to receive benefits under either program.

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The following table provides a rollforward of the accrued warranties (in thousands):

Basic net loss per share attributable to common stockholders is computed by dividing net loss by the weighted average number of common shares outstanding during each period. Diluted net loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares and dilutive potential common share equivalents then outstanding, to the extent they are dilutive. Potential common shares consist of shares issuable upon the exercise of stock options and warrants (using the treasury stock method). Dilutive net loss per share is the same as basic net loss per share for all periods presented because the effects of potentially dilutive items were anti-dilutive.

The Company excluded the following potentially dilutive securities, outstanding as of March 31, 2017 and 2016, from the computation of diluted net loss per share attributable to common stockholders for the three months ended March 31, 2017 and 2016 because they had an anti-dilutive impact due to the net loss attributable to common stockholders incurred for the periods.

The Company has established an allowance for sales returns of $4.2 million and $3.9 million as of March 31, 2017 and December 31, 2016, respectively, recorded net against accounts receivable in the balance sheet.

The Company has established an allowance for doubtful accounts of $0.4 million and $0.4 million as of March 31, 2017 and December 31, 2016, respectively, recorded net against accounts receivable in the balance sheet.

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Property and equipment, net consist of the following (in thousands):

Depreciation expense for the three months ended March 31, 2017 and 2016 was $0.1 million and $0.1 million, respectively.

Goodwill represents the excess of the purchase price over the fair value of net assets of purchased businesses. Goodwill is not amortized, but instead subject to impairment tests on at least an annual basis and whenever circumstances suggest that goodwill may be impaired.  The Company’s annual test for impairment is performed as of October 1 of each fiscal year. The Company makes a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it is not required to perform the two-step impairment test for that reporting unit.

Under the first step of the test, the Company is required to compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired and the second step of the test is not performed. If the results of the first step of the impairment test indicate that the fair value of a reporting unit does not exceed its carrying amount, then the second step of the test is required. The second step of the test compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The impairment loss is measured by the excess of the carrying amount of the reporting unit goodwill over the implied fair value of that goodwill.

The changes in the carrying amount of goodwill during the three months ended March 31, 2017 were as follows (in thousands):

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The components of the Company’s other intangible assets consist of the following (in thousands):

Amortization expense for the three months ended March 31, 2017 and 2016 was $0.4 million and $0.1 million, respectively. The following table summarizes the estimated amortization expense relating to the Company's intangible assets as of March 31, 2017 (in thousands):

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Accrued and other current liabilities consist of the following (in thousands):

In March 2017, the Company entered into a Loan and Security Agreement, or the Loan Agreement, with Silicon Valley Bank, or SVB. Under the terms of the Loan Agreement, SVB made available to the Company a revolving line of credit of up to $15.0 million, or the Revolving Line, and a $5.0 million term loan, or the Term Loan. As of March 31, 2017, the Company had not borrowed any amounts under the Revolving Line or the Term Loan. The Company intends to use the proceeds from the Loan Agreement for working capital and other general corporate purposes.

Any indebtedness under the Term Loan and the Revolving Line bear interest at a floating per annum rate equal to the prime rate as reported in The Wall Street Journal, which as of the closing date was 3.75%, plus 1.00%. The Term Loan has a scheduled maturity date of March 1, 2020. The Company must make monthly payments of accrued interest under the Term Loan from the funding date of the Term Loan, or the Funding Date, until April 1, 2018, followed by monthly installments of principal and interest through the Term Loan maturity date. The interest-only period may be extended until April 1, 2019 if the Company has obtained FDA certification of the manufacturing facility operated by Vesta by March 31, 2018. The Company may prepay all, but not less than all, of the Term Loan prior to its maturity date provided the Company pays SVB a prepayment charge based on a percentage of the then-outstanding principal balance which shall be equal to 2% if the prepayment occurs prior to the second anniversary of the Funding Date, and 1% if the prepayment occurs thereafter. Upon making the final payment of the Term Loan, whether upon prepayment, acceleration or at maturity, the Company is required to pay a 12.5% fee on the original principal amount of the Term Loan.

The amount of loans available to be drawn under the Revolving Line is based on a borrowing base equal to 80% of the Company’s eligible accounts; provided that if the Company maintains an adjusted quick ratio (as defined in the Loan Agreement) of 1.5:1.0 for three continuous consecutive months, they may access the full Revolving Line. The Company may make (subject to the applicable borrowing base at the time) and repay borrowings from time to time under the Revolving Line until the maturity of the facility on March 13, 2022.  

The Loan Agreement includes customary affirmative and restrictive covenants and representations and warranties, including a financial covenant to maintain the adjusted quick ratio (as defined in the Loan Agreement) of 1.15:1.0 while borrowings are outstanding and until the Company has obtained FDA certification of the manufacturing facility operated by Vesta, a covenant against the occurrence of a “change in control,” financial reporting obligations, and certain limitations on indebtedness, liens, investments, distributions (including dividends), collateral, mergers or acquisitions, taxes, corporate changes, and deposit accounts. The Loan Agreement also includes customary events of default, including payment defaults, breaches of covenants following any applicable cure period, the occurrence of any “material adverse change” as set forth in the Loan Agreement, penalties or judgements in an amount of at least $1,000,000 rendered against the Company by any governmental agency and certain events relating to bankruptcy or insolvency. Upon the occurrence of an event of default, a default interest rate of an additional 5.0% may be applied to any outstanding principal balances, and SVB may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Loan

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Agreement. The Company’s obligations under the Loan Agreement are secured by a security interest in substantially all of The Company’s assets, other than intellectual property.

In connection with the entry into the Term Loan, the Company will issue a warrant to SVB, or the Warrant, exercisable for such number of shares of the Company’s common stock as equal to $87,500 divided by a price per share equal to the average closing price of the Company’s common stock on the NASDAQ Capital Market for the five trading days prior to the Funding Date. The Warrant may be exercised on a cashless basis, and is immediately exercisable from the Funding Date through the earlier of (i) the five year anniversary of the Funding Date, or (ii) the consummation of certain acquisition transactions involving the Company as set forth in the Warrant.

At the closing of the Loan Agreement, SVB earned a commitment fee of $937,500 of which $187,500 was payable on the closing date and the remainder of which is due and payable by the Company in increments of $187,500 on each anniversary thereof. In April 2017, the Company borrowed $5.0 million under the Revolving Line.

The Company’s Amended and Restated Certificate of Incorporation authorizes the Company to issue 210,000,000 shares of common and preferred stock, consisting of 200,000,000 shares of common stock with $0.01 par value and 10,000,000 shares of preferred stock with $0.01 par value. As of March 31, 2017 and December 31, 2016, the Company had no preferred stock issued or outstanding.

On January 17, 2013, the Company entered into a Loan and Security Agreement, or the Original Term Loan Agreement, with Oxford Finance, LLC, or Oxford. On June 30, 2014, the Company entered into an Amended and Restated Loan and Security Agreement, or the Amended Term Loan Agreement, with Oxford. In connection with the Original Term Loan Agreement and the Amended Term Loan Agreement, the Company issued to Oxford (i) seven-year warrants in January 2013 to purchase shares of the Company’s common stock with a value equal to 3.0% of the tranche A, B and C term loans amounts and (ii) seven-year warrants in June 2014 to purchase shares of the Company’s common stock with a value equal to 2.5% of the tranche D term loan amount.  The warrants have an exercise price per share of $14.671. As of March 31, 2017, there were warrants to purchase an aggregate of 47,710 shares of common stock outstanding.

In April 2007, the Company adopted the 2007 Equity Incentive Plan, or the 2007 Plan. The 2007 Plan provides for the granting of stock options to employees, directors and consultants of the Company. Options granted under the 2007 Plan may either be incentive stock options or nonstatutory stock options. Incentive stock options, or ISOs, may be granted only to Company employees. Nonstatutory stock options, or NSOs, may be granted to all eligible recipients. A total of 1,690,448 shares of the Company’s common stock were reserved for issuance under the 2007 Plan.

The Company’s board of directors adopted the 2014 Equity Incentive Plan, or 2014 Plan, in July 2014, and the stockholders approved the 2014 Plan in October 2014. The 2014 Plan became effective upon completion of the IPO on November 3, 2014, at which time the Company ceased granting awards under the 2007 Plan. Under the 2014 Plan, the Company may issue ISOs, NSOs, stock appreciation rights, restricted stock awards, restricted stock unit awards and other forms of stock awards, or collectively, stock awards, all of which may be granted to employees, including officers, non-employee directors and consultants of the Company and their affiliates. ISOs may be granted only to employees.  A total of 1,027,500 shares of common stock were initially reserved for issuance under the 2014 Plan, subject to certain annual increases.  As of March 31, 2017, a total of 707,070 shares of the Company’s common stock were reserved for issuance under the 2014 Plan.

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Pursuant to a board-approved Inducement Plan, the Company may issue NSOs and restricted stock unit awards, or collectively, stock awards, all of which may only be granted to new employees of the Company and their affiliates in accordance with NASDAQ Stock Market Rule 5635(c)(4) as an inducement material to such individuals entering into employment with the Company.  As of March 31, 2017, inducement grants for 330,000 shares of common stock have been awarded, and 34,000 shares of common stock were reserved for future issuance under the Inducement Plan.

Options under the 2007 Plan and the 2014 Plan may be granted for periods of up to ten years as determined by the Company’s board of directors, provided, however, that (i) the exercise price of an ISO shall not be less than 100% of the estimated fair value of the shares on the date of grant, and (ii) the exercise price of an ISO granted to a more than 10% shareholder shall not be less than 110% of the estimated fair value of the shares on the date of grant. An NSO has no such exercise price limitations. NSOs under the Inducement Plan may be granted for periods of up to ten years as determined by the board of directors, provided, the exercise price will be not less than 100% of the estimated fair value of the shares on the date of grant.  Options generally vest with 25% of the grant vesting on the first anniversary and the balance vesting monthly on a straight-lined basis over the requisite service period of three additional years for the award. Additionally, options have been granted to certain key executives that vest upon achievement of performance conditions based on performance targets as defined by the board of directors, which have included net sales targets and defined corporate objectives over the performance period with possible payout ranging from 0% to 100% of the target award.  Compensation expense is recognized on a straight-lined basis over the vesting term of one year based upon the probable performance target that will be met. The vesting provisions of individual options may vary but provide for vesting of at least 25% per year.

The following summarizes all option activity under the 2007 Plan, 2014 Plan and Inducement Plan:

For stock-based awards the Company recognizes compensation expense based on the grant date fair value using the Black-Scholes option valuation model.  Stock-based compensation expense was $0.7 million and $0.4 million for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, there was $4.1 million of unrecognized compensation costs related to stock options. The expense is recorded within the operating expense components in the statement of operations based on the recipients receiving the awards. These costs are expected to be recognized over a weighted average period of 2.52 years.

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The Company has issued restricted stock unit awards, or RSUs, under the 2014 Plan and the Inducement Plan. The RSUs issued generally vest on a straight-line basis, either quarterly over a 4-year requisite service period or annually over a 3-year requisite service period.

Activity related to RSUs is set forth below:

Stock-based compensation expense for RSUs for the three months ended March 31, 2017 and 2016 was $0.5 million and $0.3 million, respectively. As of March 31, 2017, there was $4.9 million of total unrecognized compensation costs related to non-vested RSU awards. The cost is expected to be recognized over a weighted average period of 2.37 years.

The Company’s board of directors adopted the 2014 Employee Stock Purchase Plan, or ESPP, in July 2014, and the stockholders approved the ESPP in October 2014. The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. The ESPP provides for offering periods not to exceed 27 months, and each offering period will include purchase periods, which will be the approximately six-month period commencing with one exercise date and ending with the next exercise date.  Employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the exercise date.  A total of 255,500 shares of common stock were initially reserved for issuance under the ESPP, subject to certain annual increases.  

As of March 31, 2017, the number of shares of common stock reserved for issuance under the ESPP was 770,549.  During the three months ended March 31, 2017, employees purchased 54,559 shares of common stock at a weighted average price of $5.93 per share.  As of March 31, 2017, the number of shares of common stock available for future issuance was 549,073.

The Company estimated the fair value of employee stock purchase rights using the Black-Scholes model. Stock-based compensation expense related to the ESPP was $0.1 million and $0.1 million for the three months ended March 31, 2017 and 2016, respectively.

The Company operates in several tax jurisdictions and is subject to taxes in each jurisdiction in which it conducts business. To date, the Company has incurred cumulative net losses and maintains a full valuation allowance on its net deferred tax assets due to the uncertainty surrounding realization of such assets. However, the Company has deferred tax liabilities associated with indefinite-lived intangible assets that cannot be considered sources of income to support the realization of the deferred tax assets, and has provided for tax expense and a corresponding deferred tax liability associated with these indefinite-lived intangible assets. Tax expense was $25,000 for the three months ended March 31, 2017. There was no tax expense for the three months ended March 31, 2016.

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The Company’s lease for its general office facility in Santa Barbara, California expires in February 2020. The Company also leases additional industrial space for warehouse, research and development and additional general office use.  Rent expense was $0.1 million and $0.1 million for the three months ended March 31, 2017 and 2016, respectively. The Company recognizes rent expense on a straight-line basis over the lease term.

The Company is subject to claims and assessment from time to time in the ordinary course of business. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.

Class Action Shareholder Litigation

On September 25, 2015, a lawsuit styled as a class action of the Company’s stockholders was filed in the United States District Court for the Central District of California. The lawsuit names the Company and certain of its officers as defendants, or the Sientra Defendants, and alleges violations of Sections 10(b) and 20(a) of the Exchange Act in connection with allegedly false and misleading statements concerning the Company’s business, operations, and prospects.  The plaintiff seeks damages and an award of reasonable costs and expenses, including attorneys’ fees. On November 24, 2015, three stockholders (or groups of stockholders) filed motions to appoint lead plaintiff(s) and to approve their selection on lead counsel.  On December 10, 2015, the court entered an order appointing lead plaintiffs and approving their selection of lead counsel.  On February 19, 2016, lead plaintiffs filed their consolidated amended complaint, which added claims under Sections 11, 12(a)(2) and 15 of the Securities Act and named as defendants the underwriters associated with the Company’s follow-on public offering that closed on September 23, 2015, or the Underwriter Defendants. On March 21, 2016, the Sientra Defendants and the Underwriter Defendants each filed a motion to dismiss, or the Motions to Dismiss, the consolidated amended complaints. On April 20, 2016, lead plaintiffs filed their opposition to the Motions to Dismiss, and the Sientra Defendants and Underwriter Defendants filed separate replies on May 5, 2016. On June 9, 2016, the court granted in part and denied in part the Motions to Dismiss.  On July 14, 2016, the Sientra Defendants moved the court to reconsider its June 9, 2016 order and grant the Motions to Dismiss in full. On August 4, 2016, lead plaintiffs filed an opposition to the motion for reconsideration. On August 12, 2016, the court denied the motion for reconsideration, and the Sientra Defendants and the Underwriter Defendants each filed an answer to the consolidated amended complaint.

On October 28, November 5, and November 19, 2015, three lawsuits styled as class actions of the Company’s stockholders were filed in the Superior Court of California for the County of San Mateo. The lawsuits name the Company, certain of its officers and directors, and the underwriters associated with the Company’s follow-on public offering that closed on September 23, 2015 as defendants. The lawsuits allege violations of Sections 11, 12(a)(2), and 15 of the Securities Act in connection with allegedly false and misleading statements in the Company’s offering documents associated with the follow-on offering concerning its business, operations, and prospects. The plaintiffs seek damages and an award of reasonable costs and expenses, including attorneys’ fees. On December 4, 2015, defendants removed all three lawsuits to the United States District Court for the Northern District of California.  On December 15 and December 16, 2015, plaintiffs filed motions to remand the lawsuits back to San Mateo Superior Court, or the Motions to Remand.  On January 19, 2016, defendants filed their opposition to the Motions to Remand, and plaintiffs filed their reply in support of the Motions to Remand on January 26, 2016. 

On May 20, 2016, the United States District Court for the Northern District of California granted plaintiffs’ Motions to Remand, and the San Mateo Superior Court received the remanded cases on May 27, 2016.  On July 19, 2016, the San Mateo Superior Court consolidated the three lawsuits.  On August 2, 2016, plaintiffs filed their consolidated complaint. On August 5, 2016, defendants filed a motion to stay all proceedings in favor of the class action filed in the United States District Court for the Central District of California.

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On September 13, 2016, the parties to the actions pending in the San Mateo Superior Court and the United States District Court for the Central District of California signed a memorandum of understanding that sets forth the material deal points of a settlement that covers both actions and includes class-wide relief. On September 13, 2016 and September 20, 2016, respectively, the parties filed notices of settlement in both courts. On September 22, 2016, the United States District Court for the Central District of California stayed that action pending the court’s approval of a settlement. On September 23, 2016, the San Mateo Superior Court stayed that action as well pending the court’s approval of a settlement.

On December 20, 2016, the plaintiffs in the federal court action filed a motion for preliminary approval of the class action settlement.  On January 23, 2017, the United States District Court for the Central District of California preliminarily approved the settlement. A final approval hearing in that court is scheduled for May 22, 2017.  On January 5, 2017, the plaintiffs in the state court action also filed a motion for preliminary approval of the class action settlement.  On February 7, 2017, the San Mateo Superior Court preliminarily approved the settlement.  A final approval hearing in that court is scheduled for May 31, 2017.  On April 24, 2017, the plaintiffs in the federal court action and the state court action each filed their motion for final approval of the class action settlement, approval of the proposed plan of allocation, and an award of attorneys’ fees and expenses.  The settlement is contingent upon final approval by both the San Mateo Superior Court and the United States District Court for the Central District of California.

As a result of these developments, the Company determined a probable loss had been incurred and recognized a net charge to earnings of approximately $1.6 million for the year ended December 31, 2016 within general and administrative expense which was comprised of the loss contingency of approximately $10.9 million, net of expected insurance proceeds of approximately $9.4 million. In the first quarter of 2017, the Company received $9.3 million in insurance proceeds and paid the $10.9 million loss contingency. The remaining insurance proceeds receivable is classified as “insurance recovery receivable” on the accompanying condensed balance sheets. While it is possible that the Company may incur a loss greater than the amounts recognized in the accompanying financial statements, the Company is unable to determine a range of possible losses greater than the amount recognized.

Silimed Litigation

On November 6, 2016, Silimed filed a lawsuit in the United States District Court for the Southern District of New York naming Sientra as the defendant and alleging breach of contract of the Silimed Agreement, unfair competition and misappropriation of trade secrets against us.  In its complaint, Silimed alleges that our theft, misuse, and improper disclosure of Silimed’s confidential, proprietary, and trade secret manufacturing information was done in order for us to develop our own manufacturing capability that we intend to use to manufacture our PMA-approved products.  Silimed is seeking a declaration that we are in material breach of the Silimed Agreement, a preliminary and permanent injunction to prevent our allegedly wrongful use and disclosure of Silimed’s confidential and proprietary information, as well as unquantified compensatory and punitive damages.  On November 15, 2016, Sientra filed its answer and counterclaims for declaratory judgment in which it denied that Silimed is entitled to any relief including, among other reasons, because of Silimed’s material breach of the Silimed Agreement and Silimed’s unclean hands, and further seeks declaratory relief that Sientra is the owner of certain assets it acquired from Silimed, Inc. in 2007, that Sientra owns, or is exclusively licensed, to any improvements created since April 2007, that Silimed lacks any confidential information or proprietary rights under the Silimed Agreement, and that Silimed lacks any relevant trade secret rights.  On December 9, 2016, Silimed filed a motion to strike the Company’s counterclaims.  Briefing on that motion was completed on December 30, 2016, and the parties are waiting for a decision from the court.  On February 1, 2017, Sientra filed a motion to stay Silimed’s breach of contract claim in light of a demand for arbitration filed by Sientra against Silimed on January 20, 2017 concerning Silimed’s material breaches of the Silimed Agreement, and to further dismiss, or alternatively stay, the unfair competition and misappropriation of trade secrets claims.  Briefing on that motion was completed on February 22, 2017, and the parties are waiting for a decision from the court.  On February 3, 2017, the court held an initial pre-trial conference and entered a pre-trial scheduling order which set a final pre-trial conference date of August 3, 2018.  We believe that Silimed’s claims are legally and factually unsupported and intend to defend this lawsuit vigorously.

On January 20, 2017, Sientra filed an arbitration demand in the International Center for Dispute Resolution, or ICDR, in New York naming Silimed as the defendant and alleging material breach of the Silimed Agreement, gross

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negligence and tortious interference by Silimed, as well as seeking certain declaratory relief.  Among other things, Sientra alleges that Silimed’s supply failure constitutes a material breach of the Silimed Agreement, and that such breach was caused by Silimed’s grossly negligent or other willful conduct related to its regulatory suspensions and the fire at its manufacturing facility.   Silimed filed its answer to Sientra’s arbitration demand and counterclaim on March 8, 2017.  Sientra filed its answer to Silimed’s counterclaims on April 10, 2017.  The parties nominated their party arbitrators on March 13, 2017 and their appointment was confirmed by the ICDR by April 5. 2017.  The party appointed arbitrators nominated a president of the tribunal on May 8, 2017 and their appointment is awaiting confirmation from the ICDR.

It is possible that additional suits will be filed, or allegations made by stockholders, with respect to these same or other matters and also naming the Company and/or its officers and directors as defendants. The Company believes it has meritorious defenses and intends to defend these lawsuits vigorously. 

13.Subsequent Events

On May 8, 2017, the Company amended its employment agreement with Jeffrey M. Nugent, the Company’s Chief Executive Officer, to increase his base salary from $600,000 to $636,000 per annum to be effective as of January 1, 2017 and to extend the date that the Company shall continue to pay for Mr. Nugent’s relocation expenses from December 31, 2016 to December 31, 2017.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF 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 unaudited condensed financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 2016 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on March 14, 2017, or the Annual Report. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Sientra,” “the Company,” “we,” “us” and “our” refer to Sientra, Inc.

Forward-Looking Statements

The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and in our other filings with the SEC. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements.

Overview

We are a medical aesthetics company committed to making a difference in patients’ lives by enhancing their body image, growing their self‑esteem and restoring their confidence. 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 breast tissue expanders, or Breast Products, 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 have recently expanded our product portfolio through two acquisitions.  We began selling BIOCORNEUM®, an advanced silicone scar treatment directly to physicians after we acquired BIOCORNEUM® from Enaltus in March 2016.  Additionally, we began selling the AlloX2®, and Dermaspan™ lines of breast tissue expanders, as well as the Softspan™ line of general tissue expanders, after we acquired these product lines from SSP in November 2016.

Our primary products are silicone gel breast implants for use in breast augmentation and breast reconstruction procedures, which we offer in approximately 400 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 texturing. 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 texturing 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 ongoing, 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

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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 nine‑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.

We sell our Breast Products exclusively to board‑certified and board‑admissible plastic surgeons, as determined by the American Board of Plastic Surgery, who we refer to as Plastic Surgeons. These surgeons have completed the extensive multi‑year plastic surgery residency training required by the American Board of Plastic Surgery. While aesthetic procedures are performed by a wide range of medical professionals, including dermatologists, otolaryngologists, obstetricians, gynecologists, dentists and other specialists, the majority of aesthetic surgical procedures are performed by Plastic Surgeons. Plastic Surgeons are thought leaders in the medical aesthetics industry. According to the American Board of Plastic Surgery, there are approximately 6,500 board‑certified plastic surgeons in the United States. We seek to provide Plastic Surgeons with differentiated services, including enhanced customer service offerings, a ten‑year limited warranty that we believe is the best in the industry based on: providing patients with the largest 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 our industry‑first CapCon Care Program, or C3 Program, through which we offer no‑charge replacement implants to breast augmentation patients who experience capsular contracture within the first five years after implantation with our smooth or textured breast implants.

Between October 9, 2015 and March 1, 2016, we voluntarily suspended the sale of all Sientra devices manufactured by Silimed due to the suspension of Silimed’s CE and ISO 13485 certifications by TÜV SÜD, Silimed’s notified body under EU regulations.  This was followed by Brazilian regulatory inquiries of Silimed and a suspension by the Brazilian regulatory agency ANVISA and the Department of the Secretary of State of Rio de Janeiro of the manufacturing and shipment of all medical devices made by Silimed, and their recommendation that plastic surgeons discontinue implanting the devices until further notice. See Note 1(b) to our Financial Statements for more information on the history of these developments with Silimed.  

After ongoing discussions with the FDA and our own review of the matter with the assistance of independent experts in quality management systems, cGMP, and data-based risk assessment, on March 1, 2016, we lifted the temporary hold on sales.  We also informed our Plastic Surgeons apprising them of our controlled market re-entry plan designed to optimize our inventory supply, which continues to be limited.

The events involving Silimed will likely continue to adversely impact our business, in particular due to the limitations on our existing inventory levels, the uncertainty of our customers’ responsiveness to our controlled market re-entry plan, the fact that Silimed filed a lawsuit against us alleging, among other things, a material breach of the existing manufacturing contract, which expired on its terms on April 1, 2017 without renewal.  See “Risk Factors — Risks Relating to Our Business and Our Industry” for further detail.

In response to these events and anticipated impacts on our business, we have increasingly focused our efforts on securing and qualifying an alternate manufacturing supplier.

On August 9, 2016, we announced our collaboration with Vesta, pursuant to which we are working with Vesta towards establishing a dedicated contract 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.  In addition, on March 14, 2017, we announced that we had submitted a PMA supplement to the FDA for the manufacturing of our PMA-approved breast implants by Vesta.

We sell our products in the United States through a direct sales organization, which as of March 31, 2017, consisted of 46 employees, including 38 sales representatives and 8 sales managers.

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Components of Operating Results

Net Sales

We recognize revenue, net of sales discounts and estimated returns, as the customer has a standard six-month window to return purchased Breast Products. We commenced sales of our Breast Products in the United States in the second quarter of 2012 and our Breast Products have historically accounted for substantially all of our net sales. However, sales of our Breast Products accounted for 78% and 79% of our net sales for the three months ended March 31, 2017 and 2016, respectively. The percentage decrease in sales of Breast Products for the three months ended March 31, 2017 reflects a shift in product mix due to the increase of sales of our scar management products as a result of the acquisition of BIOCORNEUM® on March 9, 2016. Our net sales for the three months ended March 31, 2016 reflects the combined effect of the temporary hold on sales and implanting of Breast Products until March 1, 2016, our controlled re-entry to market designed to optimize our supply of Breast Products inventory and the commercial introduction of our scar management products. Sales of scar management products are included in the results of operations from the date of acquisition and accounted for 19% and 17% of our net sales for the three months ended March 31, 2017 and 2016, respectively.

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. We believe that breast implant sales are subject to seasonal fluctuation due to breast augmentation patients’ planning their surgery 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 costs of finished products purchased from our third‑party manufacturers, reserve for product warranties, inventory fair market value adjustment, royalty costs, and warehouse and other related costs.

With respect to our breast implants, each particular style of implant has a fixed unit cost under the contract with our third-party manufacturers. Our recently acquired breast tissue expanders are manufactured in the United States under an exclusive contract with SiMatrix, a subsidiary of Vesta.  Under our contract with SiMatrix, each particular product has a fixed unit cost. Our BIOCORNEUM® scar management products are manufactured in the United States under an exclusive contract with Formulated Solutions. Under our contract with Formulated Solutions, each particular product has a fixed unit cost.

We provide a commercial warranty on our silicone gel breast implants. The warranty covers device ruptures in certain circumstances and estimated warranty costs are recorded at the time of sale. In addition, the inventory fair market value associated with a non-cash purchase accounting adjustment and our royalty costs related to the acquisition of the tissue expander portfolio from SSP are recorded at the time of sale. Our warehouse and other related costs include labor, rent, product shipments from our third-party manufacturers, and other related costs.

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, 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 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, promotional and marketing activities, including direct and online marketing. We expect our sales and marketing expenses to fluctuate in future periods as a result of headcount and timing of our marketing programs.  However, we generally expect these costs will increase in absolute dollars.

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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 stock‑based 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 FDA‑required PMA post‑approval studies of our breast implants. However, we generally expect these costs will increase in absolute terms over time as we continue to expand our product portfolio and add related personnel.

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, business development and administrative functions.  Other G&A expenses include 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 increase as we continue to build our finance, legal, information technology, human resources and other general administration resources to continue to advance the commercialization of our products.  In addition, we expect to continue to incur G&A expenses in connection with operating as a public company, which may increase further when we are no longer able to rely on the “emerging growth company” exemption we are afforded under the Jumpstart Our Business Startups Act, or the JOBS Act.

Other Income (Expense), net

Other income (expense), net primarily consists of interest income, interest expense, changes in the fair value of common stock warrants and amortization of issuance costs associated with the Loan Agreement.

Income Taxes

Income tax expense consists of an estimate for income taxes based on the projected income tax expense for the period ended March 31, 2017. 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. However, as a result of the BIOCORNEUM® and tissue expander portfolio acquisitions, we have deferred tax liabilities associated with indefinite-lived intangible assets that cannot be considered sources of income to support the realization of the deferred tax assets, and have provided for tax expense and a corresponding deferred tax liability associated with these indefinite-lived intangible assets.

Critical Accounting Policies and Significant Judgments and Estimates

The preparation of our unaudited condensed financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the revenues and expenses incurred during the reported periods. 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 the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We discussed accounting policies and assumptions that involve a higher degree of judgment and complexity in Note 2 of the “Notes to Financial Statements” in our audited financial statements included in the Annual Report. There have been no material changes to our critical accounting policies and estimates from those disclosed in the Annual Report.

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Recent Accounting Pronouncements

Please refer to Note 2 - Summary of Significant Accounting Policies in the notes to the unaudited condensed financial statements included in this Form 10-Q for information on recent accounting pronouncements and the expected impact on our financial statements.

Results of Operations

Comparison of the Three Months Ended March 31, 2017 and 2016

The following table sets forth our results of operations for the three months ended March 31, 2017 and 2016:

Net Sales

Net sales increased $6.0 million, or 409.1%, to $7.5 million for the three months ended March 31, 2017, as compared to $1.5 million for the three months ended March 31, 2016.  Net sales of our Breast Products increased $4.6 million to $5.8 million for the three months ended March 31, 2017, as compared to $1.2 million for the three months ended March 31, 2016, as a result of our controlled re-entry to market designed to optimize our supply of Breast Product inventory after the voluntary hold on the sale and implanting of all Sientra devices manufactured by Silimed between October 9, 2015 and March 1, 2016. Net sales of Breast Products for the three months ended March 31, 2017 also included sales of the tissue expander portfolio we acquired from SSP in November 2016.  Net sales of our scar management products increased $1.1 million to $1.4 million for the three months ended March 31, 2017, as compared to $0.3 million for the three months ended March 31, 2016, as a result of integrating scar management products into our product mix after our acquisition of BIOCORNEUM® on March 9, 2016.

As of March 31, 2017, our sales organization included 38 sales representatives as compared to 35 sales representatives as of March 31, 2016.

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Cost of Goods Sold and Gross Margin

Cost of goods sold increased $1.6 million, or 205.5%, to $2.3 million for the three months ended March 31, 2017, as compared to $0.8 million for the three months ended March 31, 2016. This increase was primarily due to an increase in sales volume driven by our controlled re-entry of Breast Products into the marketplace after the voluntary hold on the sale and implanting of all Sientra devices manufactured by Silimed between October 9, 2015 and March 1, 2016, along with an increase in sales volume of our scar management products after the acquisition of BIOCORNEUM® on March 9, 2016 and sales of our tissue expander portfolio we acquired from SSP in November 2016.

The gross margins for the three months ended March 31, 2017 and 2016 were 69.0% and 48.3%, respectively. The increase was primarily due to a decrease in reserves for inventory obsolescence recorded for product that we estimate to expire prior to being sold and decreased fixed overhead as a percentage of net sales, offset by the increase in amortization related to the fair value of inventory recorded from our acquisition of the SSP tissue expander portfolio in the fourth quarter of 2016.  

Sales and Marketing Expenses

Sales and marketing expenses increased $1.9 million, or 36.1%, to $7.0 million for the three months ended March 31, 2017, as compared to $5.1 million for the three months ended March 31, 2016. The increase consisted primarily of a $1.0 million increase in direct marketing activities and travel expenses related to sales training and tradeshows and a $0.7 million increase in employee related costs as a result of an increase in variable expenses and stock based compensation.

Research and Development Expenses

Research and development expenses increased $0.9 million, or 41.6%, to $3.2 million for the three months ended March 31, 2017, as compared to $2.3 million for the three months ended March 31, 2016. The increase was primarily due to an increase of $0.7 million in employee related costs as a result of an increase in headcount and an increase of $0.3 million in consulting expenses related to product development activities.

General and Administrative Expenses

G&A expenses increased $1.2 million, or 21.8%, to $6.4 million for the three months ended March 31, 2017, as compared to $5.3 million for the three months ended March 31, 2016. The increase consisted primarily of a $0.7 million increase in employee related costs, a $0.2 million increase in outside legal counsel and consulting expenses, and $0.3 million increase in amortization costs related to the BIOCORNEUM® and SSP tissue expander portfolio acquisitions.

Other Income (Expense), net

Other income (expense), net for the three months ended March 31, 2017 was primarily associated with interest income on cash held in a money market account, expense recognized for the change in fair value of warrants and amortization of issuance costs associated with the Loan Agreement. Other income (expense), net for the three months ended March 31, 2016 was primarily associated with expense recognized for the change in fair value of warrants.

Income Tax Expense

Income tax expense for the three months ended March 31, 2017 was associated with a deferred tax liability associated with indefinite-lived intangible assets from the BIOCORNEUM® acquisition and the tissue expander portfolio acquisition from SSP that cannot offset deferred tax assets. There was no income tax expense recognized for the three months ended March 31, 2016.

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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 continue to grow as we expand our operations.  We 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, sales of our products since 2012, and the proceeds from the sale of our common stock in public offerings. As of March 31, 2017, we had no long-term debt or borrowings under our revolving line of credit.

In November 2014, we completed our IPO of common stock in which we sold 5,750,000 shares at a price of $15.00 per share, raising approximately $77.0 million in net proceeds after deducting underwriting discounts and commissions of approximately $6.0 million and offering expenses of approximately $3.2 million.

On September 23, 2015, we completed a follow-on public offering of common stock in which we sold 3,000,000 shares at a price of $22.00 per share, raising approximately $61.4 million in net proceeds after deducting underwriting discounts and commissions of approximately $4.0 million and offering expenses of approximately $0.6 million.

On March 13, 2017, we entered into a Loan Agreement with SVB. Under the terms of the Loan Agreement, SVB made available to us a $15.0 million Revolving Line and a $5.0 million Term Loan. The Revolving Line expires in March 2020. The terms and conditions of our Loan Agreement are described in Note 9 of our unaudited condensed financial statements included in this report. In April 2017, we borrowed $5.0 million under the Revolving Line.

As of March 31, 2017, we had $58.8 million in cash and cash equivalents. Our historical cash outflows have primarily been associated with research and development activities, especially related to obtaining FDA approval for our breast implant portfolio and complying with the FDA’s post-approval requirements, activities relating to commercialization and increases in working capital, including the purchase of inventory as well as the expansion of our sales force and marketing programs. In addition, we have used cash to fund the acquisitions of BIOCORNEUM® and the tissue expander portfolio from SSP. We believe that our available cash on hand, along with the availability under the Loan Agreement, will be sufficient to satisfy our liquidity requirements for at least the next 12 months from the date our financial statements are issued.

However, we expect that uncertainty regarding expenses we may continue to incur in connection with establishing new manufacturing capacity with Vesta or any other third-party manufacturer for our breast implants, and our uncertainty regarding the amount of additional expenses we may incur in connection with regulatory inquiries, as well as expenses we may incur defending against litigation claims, including the Silimed Litigation, may have a material effect on our future cash outflows and our liquidity. As a result, we may be required to make or increase our borrowings under the Loan Agreement, as well as seek additional funds in the future from public or private offerings of our capital stock, borrowings under additional term loans or from other sources.

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:

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Cash used in operating activities

Net cash used in operating activities was $8.2 million during the three months ended March 31, 2017, as compared to $12.4 million during the three months ended March 31, 2016. The decrease in cash used in operating activities between the three months ended March 31, 2017 and 2016 was primarily associated with an increase in accrued liabilities due to the timing and payments of commissions, bonuses and vendor invoices during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016.

Cash used in investing activities

Net cash used in investing activities was $1.0 million during the three months ended March 31, 2017 as compared to $7.4 million during the three months ended March 31, 2016. The decrease in cash used in investing activities between the three months ended March 31, 2017 and 2016 was primarily due to the $6.8 million cash outflow for the acquisition of BIOCORNEUM® for the three months ended March 31, 2016.

Cash provided by financing activities

Net cash provided by financing activities was $0.7 million during the three months ended March 31, 2017 as compared to $0.5 million during the three months ended March 31, 2016.  The increase in cash provided by financing activities was primarily the result of an increase in proceeds from exercise of employee stock options, offset by tax payments related to shares withheld for vested RSUs for the three months ended March 31, 2017.

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:

Our primary short-term capital needs, which are subject to change, include expenditures related to:

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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.”

Contractual Obligations and Commitments

As of March 31, 2017, there have been no material changes to our contractual obligations and commitments outside the ordinary course of business from those disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations” in the Annual Report.

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 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of March 31, 2017, we had $58.8 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 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our independent registered public accounting firm will first be required to attest to the effectiveness of our internal control over financial reporting for our Annual Report on Form 10-K for the first year we are no longer an “emerging growth company” under the JOBS Act.

As we disclosed in our Annual Report, we identified a material weakness in our internal control over financial reporting related to the Company not maintaining sufficiently trained resources with knowledge of internal control over financial reporting as it relates to accounting for significant unusual transactions, including coordination with external service providers. As a result, we did not have in place effective management review controls over business combinations, specifically key assumptions, financial data and calculations used to measure the fair value of acquired assets and liabilities, including contingent consideration prepared by its external service provider.

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As described in our Annual Report, we are taking steps to remediate this material weakness in internal control over financial reporting; however, additional time will be required to assess and ensure remediation of these processes and procedures.  Our goal is to remediate the identified material weakness by the end of 2017.

Because of the material weakness in our internal control over financial reporting as previously disclosed, our chief executive officer and chief financial officer concluded that, as of March 31, 2017, the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, were not effective.  Our management, including our chief executive officer and chief financial officer, has concluded that, notwithstanding the material weakness in our internal control over financial reporting, the condensed consolidated financial statements in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.

Changes in Internal Control over Financial Reporting

We are taking actions to remediate the material weakness relating to our internal control over financial reporting, as described above. Except as otherwise described herein, there was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in legal proceedings and regulatory proceedings arising out of our operations. We establish reserves for specific liabilities in connection with legal actions that we deem to be probable and estimable. The ability to predict the ultimate outcome of such matters involves judgments, estimates, and inherent uncertainties. The actual outcome of such matters could differ materially from management’s estimates.

Class Action Shareholder Litigation

On September 25, 2015, a lawsuit styled as a class action of the Company’s stockholders was filed in the United States District Court for the Central District of California. The lawsuit names the Company and certain of our officers as defendants, or the Sientra Defendants, and alleges violations of Sections 10(b) and 20(a) of the Exchange Act in connection with allegedly false and misleading statements concerning the Company’s business, operations, and prospects.  The plaintiff seeks damages and an award of reasonable costs and expenses, including attorneys’ fees. On November 24, 2015, three stockholders (or groups of stockholders) filed motions to appoint lead plaintiff(s) and to approve their selection of lead counsel.  On December 10, 2015, the court entered an order appointing lead plaintiffs and approving their selection of lead counsel.  On February 19, 2016, lead plaintiffs filed their consolidated amended complaint, which added claims under Sections 11, 12(a)(2), and 15 of the Securities Act and named as defendants the underwriters associated with the Company’s follow-on public offering that closed on September 23, 2015, or the Underwriter Defendants. On March 21, 2016, the Sientra Defendants and the Underwriter Defendants each filed a motion to dismiss, or the Motions to Dismiss, the consolidated amended complaints. On April 20, 2016, lead plaintiffs filed their opposition to the Motions to Dismiss, and the Sientra Defendants and Underwriter Defendants filed separate replies on May 5, 2016. On June 9, 2016, the court granted in part and denied in part the Motions to Dismiss.  On July 14, 2016, the Sientra Defendants moved the court to reconsider its June 9, 2016 order and grant the Motions to Dismiss in full. On August 4, 2016, lead plaintiffs filed an opposition to the motion for reconsideration. On August 12, 2016, the court denied the motion for reconsideration, and the Sientra Defendants and the Underwriter Defendants each filed an answer to the consolidated amended complaint. 

On October 28, November 5, and November 19, 2015, three lawsuits styled as class actions of the Company’s stockholders were filed in the Superior Court of California for the County of San Mateo. The lawsuits name the Company, certain of our officers and directors, and the underwriters associated with our follow-on public offering that closed on September 23, 2015 as defendants. The lawsuits allege violations of Sections 11, 12(a)(2), and 15 of

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the Securities Act in connection with allegedly false and misleading statements in our offering documents associated with the follow-on offering concerning our business, operations, and prospects. The plaintiffs seek damages and an award of reasonable costs and expenses, including attorneys’ fees. On December 4, 2015, defendants removed all three lawsuits to the United States District Court for the Northern District of California.  On December 15 and December 16, 2015, plaintiffs filed motions to remand the lawsuits back to San Mateo Superior Court, or Motions to Remand.  On January 19, 2016, defendants filed their opposition to the Motions to Remand, and plaintiffs filed their reply in support of the Motions to Remand on January 26, 2016. 

On May 20, 2016, the United States District Court for the Northern District of California granted plaintiffs’ Motions to Remand, and the San Mateo Superior Court received the remanded cases on May 27, 2016.  On July 19, 2016, the San Mateo Superior Court consolidated the three lawsuits.  On August 2, 2016, plaintiffs filed their consolidated complaint. On August 5, 2016, defendants filed a motion to stay all proceedings in favor of the class action filed in the United States District Court for the Central District of California.

On September 13, 2016, the parties to the actions pending in the San Mateo Superior Court and the United States District Court for the Central District of California signed a memorandum of understanding that sets forth the material deal points of a settlement that covers both actions and includes class-wide relief. On September 13, 2016, and September 20, 2016, respectively, the parties filed notices of settlement in both courts. On September 22, 2016, the United States District Court for the Central District of California stayed that action pending the court’s approval of a settlement. On September 23, 2016, the San Mateo Superior Court stayed that action as well as pending the court’s approval of a settlement.

On December 20, 2016, the plaintiffs in the federal court action filed a motion for preliminary approval of the class action settlement.  On January 23, 2017, the United States District Court for the Central District of California preliminarily approved the settlement. A final approval hearing in that court is scheduled for May 22, 2017.  On January 5, 2017, the plaintiffs in the state court action also filed a motion for preliminary approval of the class action settlement.  On February 7, 2017, the San Mateo Superior Court preliminarily approved the settlement.  A final approval hearing in that court is scheduled for May 31, 2017.  On April 24, 2017, the plaintiffs in the federal court action and the state court action each filed their motion for final approval of the class action settlement, approval of the proposed plan of allocation, and an award of attorneys’ fees and expenses. The settlement is contingent upon final approval by both the San Mateo Superior Court and the United States District Court for the Central District of California.

As a result of these developments, we determined that a probable loss had been incurred and we recognized a net charge to earnings of approximately $1.6 million for the year ended December 31, 2016 within general and administrative expense which was comprised of the loss contingency of approximately $10.9 million, net of expected insurance proceeds of approximately $9.4 million. In the first quarter of 2017, we received $9.3 million in insurance proceeds and paid the $10.9 million loss contingency. The remaining insurance proceeds receivable is classified as “insurance recovery receivable” on the accompanying condensed balance sheets. While it is possible that the Company may incur a loss greater than the amounts recognized in the accompanying financial statements, the Company is unable to determine a range of possible losses greater than the amount recognized.

Silimed Litigation

On November 6, 2016, Silimed filed a lawsuit in the United States District Court for the Southern District of New York naming Sientra as the defendant and alleging breach of contract of the Silimed Agreement, unfair competition and misappropriation of trade secrets against us.  In its complaint, Silimed alleges that our theft, misuse, and improper disclosure of Silimed’s confidential, proprietary, and trade secret manufacturing information was done in order for us to develop our own manufacturing capability that we intend to use to manufacture our PMA-approved products.  Silimed is seeking a declaration that we are in material breach of the Silimed Agreement, a preliminary and permanent injunction to prevent our allegedly wrongful use and disclosure of Silimed’s confidential and proprietary information, as well as unquantified compensatory and punitive damages.  On November 15, 2016, Sientra filed its answer and counterclaims for declaratory judgment in which it denied that Silimed is entitled to any relief including, among other reasons, because of Silimed’s material breach of the Silimed Agreement and Silimed’s unclean hands, and further seeks declaratory relief that Sientra is the owner of certain assets it acquired from Silimed, Inc. in 2007, that Sientra owns, or is exclusively licensed, to any improvements created since April 2007,

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that Silimed lacks any confidential information or proprietary rights under the Silimed Agreement, and that Silimed lacks any relevant trade secret rights.  On December 9, 2016, Silimed filed a motion to strike the Company’s counterclaims.  Briefing on that motion was completed on December 30, 2016, and the parties are waiting for a decision from the court.  On February 1, 2017, Sientra filed a motion to stay Silimed’s breach of contract claim in light of a demand for arbitration filed by Sientra against Silimed on January 20, 2017 concerning Silimed’s material breaches of the Silimed Agreement, and to further dismiss, or alternatively stay, the unfair competition and misappropriation of trade secrets claims.  Briefing on that motion was completed on February 22, 2017, and the parties are waiting for a decision from the court.  On February 3, 2017, the court held an initial pre-trial conference and entered a pre-trial scheduling order which set a final pre-trial conference date of August 3, 2018.  We believe that Silimed’s claims are legally and factually unsupported and intend to defend this lawsuit vigorously.

On January 20, 2017, Sientra filed an arbitration demand in the International Center for Dispute Resolution, or ICDR, in New York naming Silimed as the defendant and alleging material breach of the Silimed Agreement, gross negligence and tortious interference by Silimed, as well as seeking certain declaratory relief.  Among other things, Sientra alleges that Silimed’s supply failure constitutes a material breach of the Silimed Agreement, and that such breach was caused by Silimed’s grossly negligent or other willful conduct related to its regulatory suspensions and the fire at its manufacturing facility.   Silimed filed its answer to Sientra’s arbitration demand and counterclaim on March 8, 2017.  Sientra filed its answer to Silimed’s counterclaims on April 10, 2017.  The parties nominated their party arbitrators on March 13, 2017 and their appointment was confirmed by the ICDR by April 5. 2017. The party appointed arbitrators nominated a president of the tribunal on May 8, 2017 and their appointment is awaiting confirmation from the ICDR.

Item 1A. RISK FACTORS

You should carefully consider the following risk factors, as well as the other information in this report, before deciding whether to purchase, hold or sell shares of our common stock. The occurrence of any of the following risks could harm our business, financial condition, results of operations and/or growth prospects or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. You should consider all of the risk factors described when evaluating our business. We have marked with an asterisk (*) those risk factors that reflect changes from the risk factors included in Item 1A of the Annual Report.

Risks Relating to Our Business and Our Industry

We may not be able to procure and qualify a new manufacturer for our silicone gel breast implants and other products previously manufactured by Silimed.*

Our manufacturing contract with Silimed expired on its terms on April 1, 2017, and we did not renew it.  Moreover, our existing inventory of breast implants that were previously manufactured by Silimed is limited.

Although we have entered into a definitive manufacturing agreement with Vesta, Vesta has not yet been qualified as a manufacturer to source our implants. We recently submitted a PMA supplement to the FDA for the manufacturing of our PMA-approved implants by Vesta, but the timing of when we may obtain FDA approval, if any, could be subject to delays, some of which are beyond our control. Moreover, Vesta, or any other alternate manufacturer, would need to be qualified with the FDA, which is an expensive and time-consuming process. Any delays or our inability to qualify Vesta or negotiate a manufacturing agreement and qualify another alternate manufacturer could result in a supply interruption, which would materially adversely affect our business, financial condition and results of operations.

We are in litigation with Silimed, our former sole source supplier of our silicone gel breast implants and certain other products.*

On November 6, 2016, Silimed filed a lawsuit in the United States District Court for the Southern District of New York naming Sientra as the defendant and alleging breach of contract of the Silimed Agreement, unfair competition and misappropriation of trade secrets against us.  In its complaint, Silimed alleges that our theft, misuse, and

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improper disclosure of Silimed’s confidential, proprietary, and trade secret manufacturing information was done in order for us to develop our own manufacturing capability that we intend to use to manufacture our PMA-approved products.  Silimed is seeking a declaration that we are in material breach of the Silimed Agreement, a preliminary and permanent injunction to prevent our allegedly wrongful use and disclosure of Silimed’s confidential and proprietary information, as well as unquantified compensatory and punitive damages.  On November 15, 2016, Sientra filed its answer and counterclaims for declaratory judgment in which it denied that Silimed is entitled to any relief including, among other reasons, because of Silimed’s material breach of the Silimed Agreement and Silimed’s unclean hands, and further seeks declaratory relief that Sientra is the owner of certain assets it acquired from Silimed, Inc. in 2007, that Sientra owns, or is exclusively licensed, to any improvements created since April 2007, that Silimed lacks any confidential information or proprietary rights under the Silimed Agreement, and that Silimed lacks any relevant trade secret rights.  On December 9, 2016, Silimed filed a motion to strike the Company’s counterclaims.  Briefing on that motion was completed on December 30, 2016, and the parties are waiting for a decision from the court.  On February 1, 2017, Sientra filed a motion to stay Silimed’s breach of contract claim in light of a demand for arbitration filed by Sientra against Silimed on January 20, 2017 concerning Silimed’s material breaches of the Silimed Agreement, and to further dismiss, or alternatively stay, the unfair competition and misappropriation of trade secrets claims.  Briefing on that motion was completed on February 22, 2017, and the parties are waiting for a decision from the court. On February 3, 2017, the court held an initial pre-trial conference and entered a pre-trial scheduling order which set a final pre-trial conference date of August 3, 2018.  We believe that Silimed’s claims are legally and factually unsupported and intend to defend this lawsuit vigorously.

We believe Silimed’s claims are legally and factually unsupported and intend to defend this lawsuit vigorously.  However, we cannot provide assurance that we will be successful in our defense.  If Silimed were to succeed in establishing that any protectable Silimed IP rights were in fact unlawfully compromised by our new manufacturing relationship with Vesta in a manner that warrants injunctive relief, we could be subject to an injunction which may delay or otherwise hinder our ability to procure and qualify an alternate manufacturing supplier of our silicone gel breast implants, and we could be required to pay Silimed damages, which risks could have a material adverse effect on our business, results of operations and financial condition depending on the scope of any injunctive relief and the size of any damage award.  Adverse effects, if any, on our business results of operations and financial condition with respect to such claims are difficult to assess.  In any event, we expect to incur increased costs associated with defending this lawsuit and the diversion of our management’s attention from the existing business, which could also adversely affect our results of operations and financial condition.  

We depend on a positive reaction from our Plastic Surgeons and their patients to successfully re-enter the market after our voluntary suspension of the sale of Sientra devices manufactured by Silimed.*

As a result of the regulatory inquiries into Silimed-manufactured products, on October 9, 2015, we voluntarily placed a temporary hold on the sale of all Sientra devices manufactured by Silimed and recommended that plastic surgeons discontinue implanting the devices until further notice. We then conducted extensive independent, third-party testing and analyses of our finished goods inventory which indicated no anticipated safety concerns with the use of Sientra’s products, including our breast implants, consistent with their FDA approval status in 2012. Each of the FDA, ANVISA and MHRA also noted that no risks to patient health have been identified in connection with implanting Silimed-manufactured products, and, accordingly, there is no need to adopt any procedure or action for those patients who have received them. Therefore, on March 1, 2016, we lifted the temporary hold on the sale of our devices manufactured by Silimed and informed our Plastic Surgeons of our controlled market re-entry plan designed to optimize our inventory levels, which continues to be limited.  Although our market re-entry decision was based on extensive testing and detailed independent third party reviews, we depend on a continued positive reception from our Plastic Surgeon customers and their patients to be able to reestablish the market position we had prior to the voluntary suspension. Additionally, our re-entry into the market has required us to effectively and responsibly educate accounts on the results of our testing and reconfirm our strong clinical data, while providing the same high levels of customer service to which our Plastic Surgeons are accustomed. Our plastic surgery consultants are working diligently to solidify the confidence and support of all our Plastic Surgeons; however, if we are not successful in re-establishing and maintaining these relationships or competing effectively in this market, our sales revenues, market share and financial performance will be affected negatively.

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Contracting with any third-party manufacturer and supplier involves inherent risks and various factors outside our direct control that may adversely affect the manufacturing and supply of our breast implants, tissue expanders and other products.

Our reliance on any third-party manufacturer, including Vesta, Formulated Solutions, LLC, or Formulated Solutions, which supplies our BIOCORNEUM® scar management products, SiMatrix, a Vesta subsidiary that supplies the tissue expanders we recently acquired from SSP, or any other third-party manufacturer we procure and qualify for the manufacture of our breast implants involves a number of risks. Manufacturing and supply of our breast implants, tissue expanders and other products is technically challenging. Changes that our manufacturers may make outside the purview of our direct control can have an impact on our processes and quality, as well as the successful delivery of products to Plastic Surgeons.  Mistakes and mishandling are not uncommon and can affect production and supply. Additionally, there are only a few suppliers of medical-grade silicone available, and if these suppliers become unable or unwilling to supply medical-grade silicone to Vesta, Formulated Solutions, SiMatrix or any other manufacturer that we may engage with, an alternate supply of medical-grade silicone may not be able to be found in a timely manner. Some of the additional risks with relying on third-party manufacturers and suppliers include:

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The materialization of any of these risks and limitations inherent in a third-party manufacturing contractual relationship could significantly increase our costs, impair our ability to generate net sales, and adversely affect market acceptance of our products and customers may instead purchase or use our competitors’ products, which could materially adversely and severely affect our business, financial condition and results of operations.

We have incurred significant net operating losses since inception and cannot assure you that we will achieve profitability.*

Since our inception, we have incurred significant net operating losses.  As of March 31, 2017, we had an accumulated deficit of $226.9 million. To date, we have financed our operations primarily through sales of preferred stock, borrowings under our term loans, sales of our products since 2012, our initial public offering and our follow-on public offering of our common stock.  We have devoted substantially all of our resources to the acquisition and clinical development of our products, the commercial launch of our products, the development of a sales and marketing team and the assembly of a management team to manage our business.

For the three months ended March 31, 2017, our net loss was $11.4 million. The extent of our future operating losses and the timing of profitability are uncertain, especially in light of our inventory supply issues. We will need to generate significant sales to achieve profitability, and we might not be able to do so.  Even if we do generate significant sales, we might not be able to achieve, sustain or increase profitability on a quarterly or annual basis in the future.  If our sales grow more slowly than we have forecasted, or if our operating expenses exceed our forecasts, our financial performance and results of operations will be adversely affected.

Our future profitability depends on the success of our Breast Products.

Our Breast Products have historically accounted for substantially all of our net sales and we expect our Breast Products to continue to be a substantial majority of our net sales. Our inability to manage our inventory supply issues, the inability to qualify Vesta or another third party as an alternate manufacturer, the potential loss of market acceptance of our Breast Products, or any adverse rulings by regulatory authorities, any adverse finding in the Silimed Litigation, any adverse publicity or other adverse events relating to us or our Breast Products, or the introduction of competitive products by our competitors and other third parties, would adversely affect our business, financial condition and results of operations.

Any negative publicity concerning our products could harm our business and reputation and negatively impact our financial results.

The responses of potential patients, physicians, the news media, legislative and regulatory bodies and others to information about complications or alleged complications of our products could result in negative publicity and could materially reduce market acceptance of our products.  These responses or any investigations and potential resulting negative publicity may have a material adverse effect on our business and reputation and negatively impact our financial condition, results of operations or the market price of our common stock.  In addition, significant negative publicity could result in an increased number of product liability claims against us.

We may not realize the benefits of our acquisitions which may be subject to additional risks and uncertainties.

In March 2016, we acquired BIOCORNEUM®, an advanced silicone gel scar management product from Enaltus.  In November 2016, we acquired certain assets, consisting of the Dermaspan™, Softspan™, and AlloX2® tissue expanders, from SSP.  These acquisitions were made in an effort to add differentiated and complementary products that serve the needs of Plastic Surgeons while diversifying our business mix.

Our acquisition of BIOCORNEUM® involves risks and uncertainties including that we have limited experience in the scar management industry, our management’s attention may be diverted from our existing business as we attempt to integrate BIOCORNEUM® and the integration may not be successful. Additionally, BIOCORNEUM® is an over-the-counter pharmaceutical registered with the FDA, and there may be risks associated with the use of BIOCORNEUM® including skin irritation, rash, itching or accidental application into the eye or ingestion. We also rely on Formulated Solutions as our sole source, third-party manufacturer of BIOCORNEUM® and if Formulated

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Solutions becomes unable or unwilling to supply BIOCORNEUM®, we may not be able to find an alternate supplier in a timely manner.

Our acquisition of the tissue expanders from SSP also involves risk and uncertainties including that our management’s attention may be diverted from our existing business as we integrate the Dermaspan™, Softspan™, and AlloX2® tissue expanders; and the integration of these products into our existing business may not be successful or we may not achieve the anticipated benefits.  Additionally, these SSP products are currently manufactured and supplied by SiMatrix, a Vesta subsidiary, and if SiMatrix becomes unable or unwilling to supply these products, we may not be able to find an alternate supplier in a timely manner.  Our existing manufacturing contract with SiMatrix expires on its terms on November 1, 2017, and there can be no assurance that SiMatrix will agree to continue to manufacture and supply such products after the expiration of our contract or they may impose increased pricing terms if the contract is renegotiated or renewed.

We do not know if we will be able to successfully integrate these recently acquired products into our existing business, or whether unforeseen risks associated with their uses will materialize. Our inability to integrate these acquired products effectively or realize anticipated synergies may adversely affect our business, financial condition and results of operations.

We may not realize the benefits of partnerships with other companies, acquisitions of complementary products or technologies or other strategic alternatives.

In addition to our acquisitions of BIOCORNEUM® and the tissue expanders from SSP, from time to time, we may consider additional opportunities to partner with or acquire other businesses, products or technologies that may enhance our product platform or technology, expand the breadth of our markets or customer base or advance our business strategies. Potential partnerships or acquisitions involve numerous risks, including:

We do not know if we will be able to identify partnerships or acquisitions we deem suitable, whether we will be able to successfully complete any such partnerships or acquisitions on favorable terms or at all, or whether we will be able to successfully integrate any partnered or acquired products or technologies.  Our potential inability to integrate any partnered or acquired products or technologies effectively or realize anticipated synergies may adversely affect our business, financial condition and results of operations.

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We have a limited operating history and may face difficulties encountered by companies early in their commercialization in competitive and rapidly evolving markets.

We commenced operations in 2007 and began commercializing silicone gel breast implants in the second quarter of 2012.  Accordingly, we have a limited operating history upon which to evaluate our business and forecast our future net sales and operating results.  In assessing our business prospects, you should consider the various risks and difficulties frequently encountered by companies early in their commercialization in competitive markets, particularly companies that develop and sell medical devices.  These risks include our ability to:

Due to our limited operating history, we may not have the institutional knowledge or experience to be able to effectively address these and other risks that we may face.  In addition, we may not be able to develop insights into trends that could emerge and negatively affect our business and may fail to respond effectively to those trends.  As a result of these or other risks, we may not be able to execute key components of our business strategy, and our business, financial condition and operating results may suffer.

If we fail to compete effectively against our competitors, both of which have significantly greater resources than we have, our net sales and operating results may be negatively affected.

Our industry is intensely competitive and subject to rapid change from the introduction of new products, technologies and other activities of industry participants.  Our competitors, Mentor, a wholly owned subsidiary of Johnson & Johnson, and Allergan are well-capitalized global pharmaceutical companies that have been the market leaders for many years and have the majority share of the breast implant market in the United States.  These competitors also enjoy several competitive advantages over us, including:

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If we fail to compete effectively against our competitors, our net sales and operating results may be negatively affected.

Pricing pressure from customers and our competitors may impact our ability to sell our products at prices necessary to support our current business strategies.

Our 2012 entry into the U.S. breast implant market represented a significant expansion of the breast implant choices and technologies available in the United States.  As a result of our entry into the U.S. breast implant market, our competitors intensified competitive pricing pressure for traditional round-shaped breast implants.  If we are not successful in convincing customers or third-party payors of our breast implants as compared to our competitors’ products, third-party payors may not cover or adequately reimburse our products and customers may choose our competitors’ products.

The long-term safety of our products has not fully been established and our breast implants are currently under study in our PMA post-approval studies, which could reveal unanticipated complications.

We have been marketing our silicone gel breast implants in the United States with pre-market approval from the FDA since 2012. However, there could still be unanticipated complications or unforeseen health consequences of being implanted with our silicone gel breast implants over the long-term (defined as 10 years or more). Additionally, we rely on our clinical data to make favorable comparisons of our product to our competitive products, and our longer-term data may change over time. Further, future studies or clinical experience may indicate that treatment with our products is not differentiated to treatment with competitive products. Such results could slow the adoption of our products and significantly reduce our sales, which could prevent us from achieving our forecasted sales targets or achieving or sustaining profitability. Moreover, if long-term results and experience indicate that our products cause unexpected or serious complications, we could be subject to mandatory product recalls, suspension or withdrawal of clearance or approval by the FDA or other applicable regulatory bodies and significant legal liability.

Among the long-term health risks of breast implants which are being studied is the possible association between breast implants and a rare form of cancer called anaplastic large-cell lymphoma.*

In January 2011, the FDA indicated that there was a possible association between saline and silicone gel breast implants and anaplastic large-cell lymphoma, or ALCL. Since our FDA approval in 2012, Sientra’s breast-implant product label, which is approved by the FDA, has been required to contain a description of ALCL as a possible, though rare, outcome. Since its report in January 2011, the FDA continues to gather information about ALCL in women with breast implants through the review of medical device reports, review of medical literature, and collaboration with international regulators, scientific experts, ASPS, ASAPS, ISAPS, and other organizations. On February 1, 2017, the FDA provided further guidance on ALCL and has reiterated that ALCL is extremely rare, and stated that at this time, most data suggests that ALCL occurs more frequently following implantation of breast implants with textured surfaces rather than those with smooth surfaces.  The FDA noted it does not recommend prophylactic breast implant removal in a patient without symptoms or other abnormality. Further studies or clinical experience may indicate that breast implants, including our products, expose individuals to a more substantial risk of developing ALCL or other unexpected complications than currently anticipated. As a result, we may be exposed to increased regulatory scrutiny, negative publicity and lawsuits from any individual who may develop ALCL after using our products, any of which could have a significant negative impact on our results of operations or financial condition. Moreover, if long-term results and clinical experience indicate that our products cause unexpected or serious complications, we could be subject to mandatory product recalls, suspension or withdrawal of regulatory clearances and approvals and significant legal liability.

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If we are unable to train Plastic Surgeons on the safe and appropriate use of our products, we may be unable to achieve our expected growth.

An important part of our sales process includes the ability to educate Plastic Surgeons about the availability of anatomically-shaped breast implants and train Plastic Surgeons on the safe and appropriate use of our products.  If we become unable to attract potential new Plastic Surgeon customers to our education and training programs, we may be unable to achieve our expected growth.

There is a learning process involved for Plastic Surgeons to become proficient in the use of our anatomically-shaped products.  It is critical to the success of our commercialization efforts to train a sufficient number of Plastic Surgeons and provide them with adequate instruction in the appropriate use of our products via preceptorships and additional demonstration surgeries.  This training process may take longer than expected and may therefore affect our ability to increase sales.  Following completion of training, we rely on the trained Plastic Surgeons to advocate the benefits of our products in the marketplace.  Convincing Plastic Surgeons to dedicate the time and energy necessary for adequate training is challenging, and we cannot assure you that we will be successful in these efforts.  If Plastic Surgeons are not properly trained, they may misuse or ineffectively use our products.  This may also result in, among other things, unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us, any of which could have an adverse effect on our business and reputation.

If we are unable to continue to enhance our existing Breast Products and develop and market new products that respond to customer needs and preferences and achieve market acceptance, we may experience a decrease in demand for our products and our business could suffer.

We may not be able to compete effectively with our competitors, and ultimately satisfy the needs and preferences of our customers, unless we can continue to enhance existing products and develop and market new innovative products.  Product development requires the investment of significant financial, technological and other resources.  Product improvements and new product introductions also require significant planning, design, development and testing at the technological, product and manufacturing process levels and we may not be able to timely develop product improvements or new products.  Our competitors’ new products may beat our products to market, be more effective with new features, obtain better market acceptance or render our products obsolete.  Any new or modified products that we develop may not receive clearance or approval from the FDA, or achieve market acceptance or otherwise generate any meaningful sales or profits for us relative to our expectations based on, among other things, existing and anticipated investments in manufacturing capacity and commitments to fund advertising, marketing, promotional programs and research and development.

If changes in the economy and consumer spending reduce consumer demand for our products, our sales and profitability would suffer.

We are subject to the risks arising from adverse changes in general economic and market conditions.  Certain elective procedures, such as breast augmentation and body contouring, are typically not covered by insurance.  Adverse changes in the economy may cause consumers to reassess their spending choices and reduce the demand for these surgeries and could have an adverse effect on consumer spending.  This shift could have an adverse effect on our net sales.  Furthermore, consumer preferences and trends may shift due to a variety of factors, including changes in demographic and social trends, public health initiatives and product innovations, which may reduce consumer demand for our products.

We are required to maintain high levels of inventory, which could consume a significant amount of our resources and reduce our cash flows.

We need to maintain substantial levels of inventory to protect ourselves from supply interruptions, provide our customers with a wide range of shapes and sizes of our breast implants, and account for the high return rates we experience as Plastic Surgeons typically order our products in multiple sizes for a single surgery and then return what they do not use.  As a result of the substantial inventory levels we like to maintain, we are subject to the risk that a substantial portion of our inventory becomes obsolete. The materialization of any of these risks may have a material adverse effect on our earnings and cash flows due to the resulting costs associated with the inventory impairment charges and costs required to replace such inventory.  Additionally, our ability to find an alternate

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supplier in a timely manner, may affect our ability to maintain the level of inventory supply we require to protect ourselves from supply interruptions that could have an unfavorable impact on our net sales.

Any disruption at our facilities could adversely affect our business and operating results.

Our principal offices are located in Santa Barbara, California.  Substantially all of our operations are conducted at this location, including customer service, development and management and administrative functions.  Substantially all of our inventory of finished goods is held at a second location in Santa Barbara, California. Despite our efforts to safeguard our facilities, including acquiring insurance, adopting health and safety protocols and utilizing off-site storage of computer data, vandalism, terrorism or a natural or other disaster, such as an earthquake, fire or flood, could damage or destroy our inventory of finished goods, cause substantial delays in our operations, result in the loss of key information and cause us to incur additional expenses.  Our insurance may not cover our losses in any particular case.  In addition, regardless of the level of insurance coverage, damage to our facilities may have a material adverse effect on our business, financial condition and operating results.

If there are significant disruptions in our information technology systems, our business, financial condition and operating results could be adversely affected.

The efficient operation of our business depends on our information technology systems.  We rely on our information technology systems to effectively manage sales and marketing data, accounting and financial functions, inventory, product development tasks, clinical data, and customer service and technical support functions.  Our information technology systems are vulnerable to damage or interruption from earthquakes, fires, floods and other natural disasters, terrorist attacks, computer viruses or hackers, power losses, and computer system or data network failures.  In addition, a variety of our software systems are cloud-based data management applications hosted by third-party service providers whose security and information technology systems are subject to similar risks.

The failure of our or our service providers’ information technology could disrupt our entire operation or result in decreased sales, increased overhead costs and product shortages, all of which could have a material adverse effect on our reputation, business, financial condition and operating results.

We may be adversely affected by earthquakes or other natural disasters and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.

Our corporate headquarters and certain other facilities are located in Santa Barbara, California, which in the past has experienced both severe earthquakes and wildfires.  We do not carry earthquake insurance.  Earthquakes, wildfires or other natural disasters could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition and prospects.

If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters, that damaged critical infrastructure, such as our enterprise financial systems or manufacturing resource planning and enterprise quality systems, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time.  The disaster recovery and business continuity plans we have in place currently are limited and are unlikely to prove adequate in the event of a serious disaster or similar event.  We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which, particularly when taken together with our lack of earthquake insurance, could have a material adverse effect on our business.

Failure to obtain hospital or group purchasing organization contracts could have a material adverse effect on our financial condition and operating results.

A portion of our net sales is derived from sales to hospitals.  Many hospital customers, through the contracting process, limit the number of breast implant suppliers that may sell to their institution.  Hospitals may choose to contract with our competitors who have a broader range of products that can be used in a wider variety of procedures or our competitors may actively position their broader product portfolios against us during the hospital

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contracting process.  Any limitations on the number of hospitals to which we can sell our products may significantly restrict our ability to grow.

In addition, contracts with hospitals and group purchasing organizations, or GPOs, often have complex insurance and indemnification requirements, which may not be beneficial to us, or we may not be able to successfully negotiate contracts with a substantial number of hospitals and GPOs at all, which could adversely affect our business, financial condition and results of operations.

Our business could suffer if we lose the services of key personnel or are unable to attract and retain additional qualified personnel.

We are dependent upon the continued services of key personnel, including members of our executive management team who have extensive experience in our industry. The loss of any one of these individuals could disrupt our operations or our strategic plans. Additionally, our future success will depend on, among other things, our ability to continue to hire and retain the necessary qualified sales, marketing and managerial personnel, for whom we compete with numerous other companies, academic institutions and organizations. If we lose key employees, if we are unable to attract or retain other qualified personnel, or if our management team is not able to effectively manage us through these events, our business, financial condition, and results of operations may be adversely affected.

We will need to increase the size of our organization, and we may experience difficulties in managing growth.*

As of March 31, 2017, we had approximately 93 full-time employees.  Our management and personnel, and the systems and facilities we currently have in place, may not be adequate to support future growth.  Effectively executing our growth strategy requires that we increase net sales through sales and marketing activities, recruit and retain additional employees and continue to improve our operational, financial and management controls, reporting systems and procedures. If we are not able to effectively expand our organization in these ways, we may not be able to successfully execute our growth strategy, and our business, financial condition and results of operations may suffer.

Risks Related to Our Financial Results

Our quarterly net sales and operating results are unpredictable and may fluctuate significantly from quarter to quarter due to factors outside our control, which could adversely affect our business, results of operations and the trading price of our common stock.*

Our net sales and operating results may vary significantly from quarter to quarter and year to year due to a number of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate.  Our net sales and results of operations will be affected by numerous factors, including:

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