UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

 

 

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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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 2, 2016, the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was 18,072,524.

 

 

 

SIENTRA, INC.

 

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2016

 

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.

 

 

SIENTRA, INC.

Condensed Statements of Operations

(In thousands, except per share and share amounts)

(Unaudited)

 

 

See accompanying notes to condensed financial statements.

SIENTRA, INC.

Condensed Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

See accompanying notes to condensed financial statements.

SIENTRA, INC.

Notes to the Condensed Financial Statements

(In thousands, except per share and share amounts)

(Unaudited)

 

1. Formation and Business of the Company

 

a.Formation

 

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., or Silimed, on April 4, 2007. The purpose of the acquisition was to acquire the rights to the silicone breast implant clinical trials. 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, tissue expanders, and body contouring products.

b.    Follow-On Offering

 

On September 23, 2015, the Company closed a follow-on public offering, whereby it sold 3,000,000 shares of its common stock, at a price to the public of $22.00 per share. The Company received net proceeds from the follow-on offering of approximately $61,397 after deducting underwriting discounts and commissions of $3,960 and offering expenses of approximately $643.

 

c.    Regulatory Inquiries Regarding Products Manufactured by Silimed

 

There have been recent regulatory inquiries related to medical devices manufactured by Silimed Industria de Implantes Ltda. (formerly, Silimed-Silicone e Instrumental Medico-Cirugio e Hospitalar Ltda.), or Silimed, the Company’s contract manufacturer.

On September 23, 2015, the Medicines and Healthcare Products Regulatory Agency, or MHRA, an executive agency of the United Kingdom, or U.K., issued a press release announcing the suspension of sales and implanting in the U.K. of all medical devices manufactured by Silimed following the suspension of the CE certificate of these products issued by TUV SUD, Silimed’s notified body under European Union, or EU, regulation. The suspension of Silimed’s CE certificate by TUV SUD followed TUV SUD’s inspection at Silimed’s manufacturing facilities in Brazil, relating to particles on Silimed breast products. Breast implants have stringent standards for manufacturing and robust quality systems, but there is no specific or defined standard for particles on breast implants. MHRA noted that no risks to patient health have been identified in connection with implanting Silimed products, and, accordingly, there is no need to adopt any procedure or action for those patients who have received them.

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 that while they continue to review the technical compliance related to Good Manufacturing Practices, or GMP, of Silimed’s manufacturing facility, and as a precautionary measure, they temporarily suspended the manufacturing and shipment of all medical devices made by Silimed, including products manufactured for Sientra. ANVISA reiterated that no risks to patient health have been identified in connection with implanting Silimed products, and, accordingly, there is no need to adopt any procedure or action for those patients who have received them. Furthermore, ANVISA also indicated that, based on their contact to date with foreign regulatory authorities, there have been no reports of adverse events related to the use of Silimed products.

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.  The Company had ongoing discussions with the FDA regarding European and Brazilian regulatory inquiries into Silimed products, and conducted its own review of the matter with the assistance of independent experts in quality management systems, GMP and data-based risk assessment.  The FDA also reiterated that no reports of adverse events and no risks to patient health had been identified in connection with this issue.

On January 27, 2016, after completing an analysis and risk assessment, ANVISA announced their authorization of Silimed to resume the commercialization and use of its previously manufactured products.  ANVISA concluded there was no evidence to prove that the presence of surface particles on the silicone implants represented risks which are additional to the ones inherent in the product.  However, Silimed continues to be suspended from manufacturing and commercializing new batches of implants until an inspection is performed to reassess the fulfillment of its GMP compliance.

On March 1, 2016, after the completion of independent, third-party testing and analyses of its devices manufactured by Silimed, the Company lifted the temporary hold on the sale of such devices.  The Company also sent a letter to Plastic Surgeons informing them of the Company’s market re-entry plans. The results of the Company’s testing indicate no anticipated significant safety concerns with the use of its products, including its breast implants, consistent with their approval status since 2012.

 

2. Summary of Significant Accounting Policies

 

a.Basis of Presentation

 

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, 2015 filed with the SEC on March 10, 2016, or the Annual Report. The results for the three months ended March 31, 2016 are not necessarily indicative of results to be expected for the year ending December 31, 2016, any other interim periods, or any future year or period.

 

b.Going Concern

 

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. Silimed is the Company’s sole source manufacturer of silicone gel breast implants, tissue expanders and other products. The continuation of the Company as a going concern is dependent upon many factors including the satisfactory resolution of the regulatory inquiries of Silimed’s medical devices, Silimed’s ability to resume the manufacturing of the Company’s medical devices, the availability of alternative manufacturing sources, and the resumption of the sale of the Company’s products. Since inception, the Company has incurred net losses. At March 31, 2016, the Company had cash and cash equivalents of $93,493. The Company’s ability to continue to meet its obligations and to achieve its business objectives is dependent upon, amongst other things, generating sufficient revenues. The Company believes that it has the ability to continue as a going concern for at least 12 months. 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.

 

 

c.Use of Estimates

 

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.

 

d.Significant Accounting Policies

 

There have been no significant changes to the accounting policies during the three months ended March 31, 2016, as compared to the significant accounting policies described in the “Notes to Financial Statements” in the Annual Report.

 

e.Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board, or FASB, issued accounting standard update, or ASU, 2014-09, Revenue from Contracts with Customers.  The standard was issued to provide a single framework that replaces existing industry and transaction specific U.S. 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 U.S. 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. The Company is currently evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

 

In February 2016, the FASB issued accounting standard update 2016-02, Leases (Topic 842) which supersedes FASB Accounting Standard Codification Leases (Topic 840). The standard is intended to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This accounting standard update will be effective for the Company beginning in fiscal year 2019. The Company is currently evaluating the impact that adoption of the standard will have on the financial statements and related disclosures.

 

In March 2016, the FASB issued accounting standard update 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. This accounting standard update will be effective for the Company beginning in fiscal year 2017. The Company is currently evaluating the impact that adoption of the standard will have on the financial statements and related disclosures.

 

f.Reclassifications

 

Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

 

 

3.Acquisition

 

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 objective and adds a complementary product that serves the needs of its customers. As a result of the acquisition, the Company recorded $141 of professional fees for the three months ended March 31, 2016, which are included in general and administrative expense. The aggregate preliminary acquisition date fair value of the consideration transferred was estimated at $7,409, which consisted of the following:

 

 

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 future payments due under the deferred consideration are $546. 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 an other long-term liability and are subject to the recognition of subsequent changes in fair value through the results 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 $2,723 of goodwill is 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.

 

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:

 

 

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

 

 

The Company retained an independent third-party appraiser to assist management in its valuation; however, the purchase price allocation has not been finalized. This could result in adjustments to the carrying value of the assets acquired and

liabilities assumed, the useful lives of intangible assets and residual amount allocated to goodwill. 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 business combination was not material to the Company's condensed results of operations.

 

4.Fair Value of Financial Instruments

 

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, 2016, the Company had no outstanding long-term debt.

 

5.Fair Value Measurements

 

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® 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, 2016 and December 31, 2015 and indicate the level of the fair value hierarchy utilized to determine such fair value:

 

 

 

 

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 the “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:

 

 

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

 

 

6.Product Warranties

 

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.

 

The following table provides a rollforward of the accrued warranties:

 

 

 

 

 

7.Net Loss Per Share

 

Basic 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 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), and the weighted average conversion of the convertible preferred stock into shares of common stock (using the if-converted method). Dilutive loss per share is the same as basic 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, 2016 and 2015, from the computation of diluted net loss per share attributable to common stockholders for the three months ended March 31, 2016 and 2015 because they had an anti-dilutive impact due to the net loss attributable to common stockholders incurred for the periods.

 

 

 

 

8.Balance Sheet Components

 

a.Allowance for Sales Returns and Doubtful Accounts

 

The Company has established an allowance for sales returns of $2,205 and $660 as of March 31, 2016 and December 31, 2015, respectively, recorded net against accounts receivable in the balance sheet.

 

The Company has established an allowance for doubtful accounts of $508 and $456 as of March 31, 2016 and December 31, 2015, respectively, recorded net against accounts receivable in the balance sheet.

 

b.Property and Equipment

 

Property and equipment, net consist of the following:

 

 

 

Depreciation expense for the three months ended March 31, 2016 and 2015 was $70 and $68, respectively.

 

 

c.Goodwill and Other Intangible Assets, net

 

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, 2016 were as follows:

 

 

 

The components of the Company’s other intangible assets consist of the following:

 

 

Amortization expense for the three months ended March 31, 2016 and 2015 was $74 and $15, respectively. The following table summarizes the estimated amortization expense relating to the Company's intangible assets as of March 31, 2016:

 

 

 

d.Accrued and Other Current Liabilities

 

Accrued and other current liabilities consist of the following:

 

 

 

 

 

 

9.Stockholders’ Equity

 

a.Authorized Stock

 

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, 2016 and December 31, 2015, the Company had no preferred stock issued or outstanding.

 

b.Stock Warrants

 

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 the 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, 2016, the Company had 47,710 warrants outstanding.

 

c.Stock Option Plans

 

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, 2016, a total of 2,045,495 shares of the Company’s common stock were reserved for issuance under the 2014 Plan.

 

In March 2016, the Company’s board of directors adopted the Inducement Plan. Under the 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.  A total of 180,000 shares of the Company’s common stock were initially reserved for 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 which 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 $374 and $445 for the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, there was $4,397 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 employees receiving the awards. These costs are expected to be recognized over weighted average period of 2.95 years.

 

d.Restricted Stock Units

 

The Company has issued restricted stock unit awards, or RSUs, under the 2014 Plan. The RSUs issued 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, 2016 and 2015 was $264 and $0, respectively. As of March 31, 2016, there was $3,939 of total unrecognized compensation cost related to non-vested RSU awards. The cost is expected to be recognized over a weighted average period of 2.77 years.

e.Employee Stock Purchase Plan

 

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 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, except that the first offering period commenced on the first trading day following the effective date of the Company’s registration statement.  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, 2016, the number of shares of common stock reserved for issuance under the ESPP was 584,563.  During the three months ended March 31, 2016, employees purchased 68,226 shares of common stock at a weighted average price of $6.30 per share.  As of March 31, 2016, the number of shares of common stock available for future issuance was 472,087.

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 $101 and $98 for the three months ended March 31, 2016 and 2015, respectively.

 

10.Commitments and Contingencies

 

a.Operating Leases

 

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 $127 and $123 for the three months ended March 31, 2016 and 2015, respectively. The Company recognizes rent expense on a straight-line basis over the lease term.

 

b.Contingencies

 

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. There were no contingent liabilities requiring accrual at March 31, 2016.

 

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 Sientra Defendants, and alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, or 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 a claim under Section 11 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.

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.

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.  Due to the early stage of these proceedings, the Company is not able to predict or reasonably estimate the ultimate outcome or possible losses relating to these claims.

 

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, 2015 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, 2015, filed with the Securities and Exchange Commission on March 10, 2016. 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. During the first quarter of 2016, we acquired bioCorneum®, an advanced silicone scar treatment, or Scar Management Products, which are sold directly to physicians. 

Our primary products are silicone gel breast implants for use in breast augmentation and breast reconstruction procedures, which we offer in over 195 variations of shapes, sizes, fill volumes and textures. Our breast implants are primarily used in elective procedures which are generally performed on a cash‑pay basis. Many of our breast implants incorporate one or more differentiated technologies, including a proprietary high‑strength, cohesive silicone gel and proprietary texturing branded TRUE Texture®. Our breast implants offer a desired balance between strength, shape retention and softness due to the high‑strength, cohesive silicone gel used in our manufacturing process. TRUE Texture® provides texturing on the implant shell that is designed to reduce the incidence of malposition, rotation and capsular contracture. We also offer breast tissue expanders and a range of other aesthetic and specialty products. We do not have any patents or patent applications, but rely on trade secrets, proprietary know‑how and regulatory barriers to protect our products and technologies.

Our breast implants were approved by the U.S. Food and Drug Administration, or FDA, in 2012, based on data we collected from our ongoing, long‑term clinical trial, or the Study, of our breast implants in 1,788 women across 36 investigational sites in the United States, which included 3,506 implants (approximately 53% of which were smooth and 47% of which were textured). Our clinical trial is the largest prospective, long‑term safety and effectiveness pivotal study of breast implants in the United States and included 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 Study are subject to serial MRI screening 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 trials 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, Inc., 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 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 our sole manufacturer and supplier Silimed due to the suspension of Silimed’s CE certificate by TUV SUD, Silimed’s notified body under EU regulations, followed by Brazilian regulatory inquiries and a temporary 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 recommended that plastic surgeons discontinue implanting the devices until further notice. As of March 1, 2016, after ongoing discussions with the FDA and our own review of the matter with the assistance of independent experts in quality management systems, Good Manufacturing Practices, or GMP, and data-based risk assessment, we lifted this temporary hold on sale and also sent a letter to our Plastic Surgeons informing them of our market re-entry plans. In addition, on October 22, 2015, there was a fire in the manufacturing building where Silimed primarily manufactures our breast implants. We are working with Silimed to seek clarity as to the near and long-term capabilities of Silimed’s manufacturing operations. See “Risk Factors — Risks Relating to Our Business and Our Industry” for further detail.

We sell our products in the United States through a direct sales organization consisting of 42 employees, including 35 sales representatives and 7 sales managers, as of March 31, 2016.

 

Recent Developments

 

Acquisition of bioCorneum®

 

On March 9, 2016, we entered into an asset 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 aggregate preliminary acquisition date fair value of the consideration transferred was estimated at $7.4 million. The acquisition of bioCorneum® aligns with our business development objective and further leverages the business by adding a complementary product that serves the needs of plastic surgeons and dermatologists.

 

Our Nine-Year Follow-Up Data from the pivotal trial that was the basis of PMA Approval in the United States.  

 

In April 2016, an update on the nine-year follow-up data from Sientra’s ongoing PMA Study of our gel breast implants, authored by Stevens, Calobrace, Harrington, et al, was published in the peer-reviewed Aesthetic Surgery Journal. Among the significant statistics reported were data on key complications measured among the 1,116 women in the primary-

augmentation cohort of Sientra’s Core Study, an ongoing 10-year open label, prospective, multicenter clinical study, including:

 

 

 

The patients underwent magnetic resonance imaging (MRI) screening at year 3 and continue on even years through 10 years.  As MRI evaluation to detect silent rupture is not performed at 9-years, Kaplan-Meier rupture rates are presented through 8-years to include both silent and symptomatic ruptures.

 

Our clinical study was not designed to facilitate head-to-head comparisons with our competitors. However, our clinical data and our competitors’ clinical data are publicly available to both surgeons and patients who are able to use such data to compare and contrast competing implants. For example, comparisons of the nine-year follow-up data from our pivotal study to the nine-year follow-up data from our competitors’ pivotal studies are shown below:

 

 

Additionally, the update on the nine-year follow-up data presented comparisons of the interim ten-year follow-up data from our pivotal study to the ten-year follow-up data from our competitors’ pivotal studies as shown below:

 

____________________

N = Number of patients

 

 

Components of Operating Results

 

Net Sales

 

We commenced sales of our breast implants in the United States in the second quarter of 2012 and our Breast Products have historically accounted for substantially all of our net sales.  Sales of our Breast Products accounted for 79% and 98% of our net sales for the three months ended March 31, 2016 and 2015, respectively. During the first quarter of 2016, we acquired bioCorneum®, an advanced silicone scar treatment, and have included the results of operations from the date of

acquisition.  We sell our bioCorneum®, or Scar Management Products, to physicians which accounted for 17% of our net sales for the three months ended March 31, 2016.

 

We recognize revenue, net of sales discounts and estimated returns, as the customer has a standard six-month window to return purchased products.  There are several uncertainties regarding the recent events involving Silimed that may have a material unfavorable impact on our net sales, including the suspension of the sale and manufacturing of Silimed’s products by certain foreign regulatory agencies, our voluntary hold on the sale and implanting of all Sientra devices manufactured by Silimed between October 9, 2015 and March 1, 2016, our uncertainty regarding the resolution of the regulatory inquiries, the delay of sales pending such resolution, and our uncertainty of our customers responsiveness to our market re-entry. Additionally, the fire at Silimed’s facility that manufactures our breast implants, including the status of equipment that is used to manufacture such implants and the potential feasibility, production capacity and timing related to Silimed’s ability to manufacture breast implants in other facilities, may affect inventory adjustments and have an additional unfavorable impact on our net sales.

We expect that, in the future, assuming a favorable outcome of the aforementioned recent events, that 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 and warehouse and other related costs.

Our Breast Products, tissue expanders and other products are manufactured under an exclusive contract with Silimed. Under our contract with Silimed, each particular style of implant has a fixed unit cost. Our bioCorneum® Scar Management Products are manufactured in the U.S. under an exclusive contract with Formulated Solutions, LLC, or Formulated Solutions. Under our contract with Formulated Solutions, each particular product has a fixed unit cost.

In addition to product costs, we provide a commercial warranty on our silicone gel-filled breast implants. The warranty covers device ruptures in certain circumstances. Estimated warranty costs are recorded at the time of sale. Our warehouse and other related costs include labor, rent, product shipments from our third party manufacturer 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 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.

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 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, employee benefits, facilities and information technologies expenses. In 2015, G&A expenses also include the federal excise tax on the sale of medical devices in the United States.

 

We expect future G&A expenses to increase as we 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 becoming 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, and legal counsel and litigation expenses in connection with the recently filed lawsuits styled as class actions of the Company’s stockholders.

 

Other Income (Expense), net

 

Other income (expense), net primarily consists of interest income and changes in the fair value of common stock warrants.

 

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 our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission on March 10, 2016. There have been no material changes to our critical accounting policies and estimates of those disclosed in our Annual Report on Form 10-K.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB, issued accounting standard update, or ASU, 2014-09, Revenue from Contracts with Customers.  The standard was issued to provide a single framework that replaces existing industry and transaction specific U.S. 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 U.S. GAAP when it becomes effective.  In July 2015, the FASB voted to approve the deferral of the effective date of ASU 2014-09 by one year.  Therefore, ASU 2014-09 will become effective for us beginning in fiscal year 2018. Early adoption would be permitted for us beginning in fiscal year 2017. The standard permits the use of either the retrospective or cumulative transition method. We are currently evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

 

In February 2016, the FASB issued accounting standard update 2016-02, Leases (Topic 842) which supersedes FASB Accounting Standard Codification Leases (Topic 840). The standard is intended to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This accounting standard update will be effective for us beginning in fiscal year

2019. We are currently evaluating the impact that adoption of the standard will have on the financial statements and related disclosures.

 

In March 2016, the FASB issued accounting standard update 2016-09, Compensation – Stock Compensation. 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. This accounting standard update will be effective for us beginning in fiscal year 2017. We are currently evaluating the impact that adoption of the standard will have on the financial statements and related disclosures.

 

 

 

Results of Operations

 

Comparison of the Three Months Ended March 31, 2016 and 2015

 

The following table sets forth our results of operations for the three months ended March 31, 2016 and 2015:

 

 

Net Sales

 

Net sales decreased $11.0 million, or 88.2%, to $1.5 million for the three months ended March 31, 2016, as compared to $12.4 million for the three months ended March 31, 2015.  This decrease was  driven by our voluntary hold on the sale and implanting of all Sientra devices manufactured by Silimed between October 9, 2015 and March 1, 2016.    

 

There are several uncertainties regarding the recent events involving Silimed that may have a material unfavorable impact on our net sales, including the suspension of the sale and manufacturing of Silimed’s products by certain foreign regulatory agencies, our voluntary hold on the sale and implanting of all Sientra devices manufactured by Silimed between October 9, 2015 and March 1, 2016, our uncertainty regarding the resolution of the regulatory inquiries and the delay of sales pending such resolution. Additionally, the fire at Silimed’s facility that manufactures our breast implants, including the status of equipment that is used to manufacture such implants and the potential feasibility, production capacity and timing related to Silimed’s ability to manufacture breast implants in other facilities, may affect inventory adjustments and have an additional unfavorable impact on our net sales.

 

As of March 31, 2016, our sales organization included 35 sales representatives as compared to 43 sales representatives as of March 31, 2015.

 

Cost of Goods Sold and Gross Margin

 

Cost of goods sold decreased $2.5 million, or 76.5%, to $0.8 million for the three months ended March 31, 2016, as compared to $3.2 million for the three months ended March 31, 2015.  This decrease was primarily due to a decrease in sales volume driven by our voluntary hold on sales, and an incremental $0.3 million reserve for inventory obsolescence recorded for product that we estimate to expire prior to being sold.

 

The gross margins for the three months ended March 31, 2016 and 2015 were 48.3% and 74.0%, respectively.  This decrease was primarily due to an incremental $0.3 million reserve for inventory obsolescence recorded for product that we estimate to expire prior to being sold, greater fixed overhead as a percentage of net sales, and manufacturing costs increases.

 

Sales and Marketing Expenses

 

Sales and marketing decreased $1.7 million, or 25.5%, to $5.1 million for the three months ended March 31, 2016, as compared to $6.9 million for the three months ended March 31, 2015. This was primarily due to a decrease in employee-related expense for the sales department as a result of decreased employee headcount and a decrease in marketing costs.

 

Research and Development Expenses

 

R&D expenses increased $1.0 million, or 79.5%, to $2.3 million for the three months ended March 31, 2016, as compared to $1.3 million for the three months ended March 31, 2015. This increase was primarily due to an increase in product development costs.

 

General and Administrative Expenses

 

G&A expenses increased $1.6 million, or 42.1%, to $5.3 million for the three months ended March 31, 2016, as compared to $3.7 million for the three months ended March 31, 2015.  This increase was primarily due to an increase in expenses related to public company costs, outside legal counsel costs and employee-related costs.

 

Other Income (Expense), net

 

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. Other income (expense), net for the three months ended March 31, 2015 was primarily associated with interest expense on our term loans.

 

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 our initial public offering and our recent follow-on offering.  To date, we have received gross proceeds from the sales of preferred stock totaling $151.0 million including $65.0 million of gross proceeds from the sale of preferred stock in March 2012, which was our most recent issuance and sale of preferred stock.  As of March 31, 2016, we had no long-term debt.

 

On November 3, 2014, we completed our IPO of common stock in which we sold 5,000,000 shares at a price of $15.00 per share. Additionally, the underwriters exercised their option to purchase an additional 750,000 shares at $15.00 per share. As a result of our IPO, we raised a total of 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. Costs directly associated with our IPO were capitalized and recorded as deferred IPO costs in other current assets prior to the

completion of our IPO. Upon completion of the IPO, the issuance costs were reclassified to additional paid-in capital to offset the IPO proceeds. Upon completion of our IPO, all outstanding shares of our convertible preferred stock were converted into 8,942,925 shares of common stock.

 

On September 23, 2015, we completed our follow-on public offering of common stock in which we sold 3,000,000 shares at a price of $22.00 per share. As a result of our follow-on offering, we raised a total of 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.

 

As of March 31, 2016, we had $93.5 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, the Mentor litigation, 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.  We believe that our available cash on hand will be sufficient to satisfy our liquidity requirements for at least the next 12 months. However, we expect that the recent events involving Silimed, including our voluntary hold on the sale and implanting of all Sientra devices manufactured by Silimed between October 9, 2015 and March 1, 2016, our uncertainty regarding the amount of additional expenses we may incur in connection with regulatory inquiries, as well as expenses we may incur in connection with reestablishing our inventory supply as a result of the fire in Silimed’s manufacturing facility and expenses we may incur defending against litigation claims, may have a material effect on our future cash outflows and Sientra’s liquidity. As a result of the recent events and the resulting potential demands on Sientra’s liquidity, we may be required to seek additional funds in the future from public or private offerings of our capital stock, borrowings under term loans or 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:

 

 

Cash used in operating activities

 

Net cash used in operating activities was $12.4 million during the three months ended March 31, 2016 as compared to $3.0 million during the three months ended March 31, 2015. The increase in cash used in operating activities between the three months ended March 31, 2016 and 2015 was primarily associated with the increase in net loss of $8.6 million and a decrease in net working capital.

 

Cash used in investing activities

 

Net cash used in investing activities was $7.4 million during the three months ended March 31, 2016 as compared to $0.1 million during the three months ended March 31, 2015. The increase in cash used in investing activities between the three months ended March 31, 2016 and 2015 was primarily due to an increase in property and equipment purchases and the acquisition of bioCorneum®.

 

Cash used in financing activities

 

Net cash provided by financing activities was $0.5 million during the three months ended March 31, 2016 as compared to net cash used in financing activities of $33 thousand during the three months ended March 31, 2015.  The increase in cash provided by financing activities was primarily the result of contributions from common stock issued under the employee stock purchase plan.

 

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:

 

 

 

expenses we incur in connection with defending against the lawsuits filed against us alleging violations of the Exchange Act and the Securities Act in connection with allegedly false and misleading statements concerning Sientra’s business, operations, and prospects;

 

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 additional 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

 

There have been no material changes to our contractual obligations and commitments outside the ordinary course of business as of March 31, 2016 from those disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations” in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission on March 10, 2016.

 

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, 2016, we had $93.5 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.

 

ITEM 4: 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 principal 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 of March 31, 2016, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and principal financial officer, of 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. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to achieve their stated purpose as of March 31, 2016.

 

An evaluation was also performed under the supervision and with the participation of our management, including our chief executive officer and our principal financial officer, of any change in our internal control over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. That evaluation did not identify any change in our internal control over financial reporting that occurred during our latest fiscal quarter 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

 

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 of 1934, as amended, or 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 a claim under Section 11 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 filled 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.

 

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 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. 

 

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 us and/or our officers and directors as defendants. We believe we have meritorious defenses and intend to defend these lawsuits vigorously.  Due to the early stage of these proceedings, we are not able to predict or reasonably estimate the ultimate outcome or possible losses relating to these claims.

 

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 our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission on March 10, 2016.

 

Risks Relating to Our Business and Our Industry

 

There have been several foreign regulatory inquiries which have affected our ability to rely on Silimed, our sole source, third-party manufacturer and supplier of our silicone gel breast implants, tissue expanders and other products.*

We currently rely on Silimed, our sole source, third-party manufacturer located in Brazil, to manufacture and supply our silicone gel breast implants, tissue expanders and other products. Several recent events have occurred which affect our ability to rely on Silimed as our source for our silicone gel breast implants, tissue expanders and other products in the short and long term.

On September 23, 2015, the Medicines and Healthcare Products Regulatory Agency, or the MHRA, an executive agency of the U.K., issued a press release announcing the suspension of sales and implanting in U.K. of all medical devices manufactured by Silimed following the suspension of the CE certificate of these products issued by TUV SUD, Silimed’s notified body under EU regulation. The suspension of Silimed’s CE certificate by TUV SUD followed TUV SUD’s inspection at Silimed’s manufacturing facilities in Brazil, relating to 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 that while they continue to review the technical compliance related to GMP of Silimed’s manufacturing facility, and as a precautionary measure, they temporarily suspended the manufacturing and shipment of all medical devices made by Silimed, including products manufactured for Sientra.

On January 27, 2016, after completing an analysis and risk assessment, ANVISA announced their 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 the silicone implants represented risks which are additional to the ones inherent in the product.  However, Silimed continues to be suspended from manufacturing and commercializing new batches of implants until an inspection is performed to reassess the fulfillment of its GMP compliance.  Additionally, the suspension of Silimed’s CE certificate by TUV SUD, and the suspension on the commercialization of Silimed’s previously manufactured products in Europe by the MHRA remains in place and the determination of Silimed’s manufacturing facilities is still under evaluation, and we cannot predict the outcome of these matters. The FDA and other U.S. and foreign regulatory agencies have substantial discretion to require additional testing, to impose restrictions on marketed products or on us, including the withdrawal or recall of such products from the market.

The suspension of the sale and manufacturing of Silimed’s products by foreign regulatory agencies, our uncertainty regarding the resolution of the regulatory inquiries and our uncertainty as to when Silimed may be able to resume manufacturing may result in a delay or inability for us to meet our demand to supply our products in a timely manner and as a result, our ability to generate net sales may be impaired, market acceptance of our products could be adversely affected 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 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 products, between October 9, 2015 and March 1, 2016, 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. The Company has been in ongoing discussions with the FDA regarding European and Brazilian regulatory inquiries into Silimed products, and conducted its own review of the matter with the assistance of independent experts in quality management systems, GMP and data-based risk assessment. Breast implants have stringent standards for manufacturing and robust quality systems, but there is no specific or defined standard for particles on breast implants. Each of the FDA, ANVISA and MHRA noted that no risks to patient health have been identified in connection with implanting Silimed products, and, accordingly, there is no need to adopt any procedure or action for those patients who have received them. Additionally, the FDA and ANVISA indicated that there have been no reports of adverse events related to this issue. After extensive independent, third-party testing and analyses of our finished goods inventory indicated no anticipated significant safety concerns with the use of our products, including our breast implants, consistent with their FDA approval status in 2012, as of March 1, 2016, we lifted the temporary hold on the sale of our devices manufactured by Silimed and also sent a letter to our Plastic Surgeons informing them of our market re-entry plans.  Although our market re-entry decision was based on extensive testing and detailed independent third party reviews, we depend on a 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.  Our re-entry into the market requires 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 trust and support of all our Plastic Surgeons during this important phase of our market re-entry, however, if we are not successful in re-establishing these relationships, adapting our business systems, or competing effectively in this market, our sales revenues, market share and financial performance will be affected negatively.

 

The fire at one of Silimed’s manufacturing buildings has affected our ability to rely on Silimed as our source for our silicone gel breast implants, tissue expanders and other products.*

On October 22, 2015, there was a fire at one of Silimed’s two manufacturing buildings in Rio de Janeiro, Brazil. The fire occurred in the building where Sientra’s breast implants are primarily manufactured, or building F2. Silimed has indicated to us that a smaller production facility in Silimed’s second building, or building F1, which was not impacted by the fire,

has the potential to be modified for breast implant manufacturing. In order to commence the manufacturing of breast implants, certain areas in building F1 would need to be reconfigured and receive certification and approval by appropriate regulatory bodies. We are working with Silimed to seek clarity as to the near and long-term capabilities of Silimed’s manufacturing operations, including the status of equipment that is used to manufacture breast implants and the potential feasibility, production capacity and timing related to Silimed’s ability to manufacture our breast implants.  The delay in the manufacturing of our breast implants caused by the fire, our uncertainty regarding when Silimed’s facility will be operational and able to manufacture our breast implants, and the extent of the damage caused by the fire may have a severe impact on our ability to meet our demand to supply our products in a timely manner and as a result, our financial condition and results of operations may be adversely affected.

We may not be able to find an alternate manufacturer if Silimed is unable to resume manufacturing.* 

 

If Silimed is unable to resume manufacturing of our silicone gel breast implants, tissue expanders and other products, or if Silimed becomes unwilling to manufacture and supply our products once it is able to resume manufacturing, we may not be able to replace Silimed quickly, and although we have been exploring our strategic alternatives, we have not qualified another manufacturer to source our implants. Even if we are able to identify an alternate manufacturer for our silicone gel breast implants, tissue expanders and other products, we would need to negotiate a transaction with such manufacturer and they would have to be qualified with the FDA, which is an expensive and time-consuming process during which we may experience a supply interruption, which could materially adversely and severely affect our business, financial condition and results of operations.

 

Our existing contract with Silimed contains prohibitive terms and limitations.*

 

Our existing contract with Silimed has prohibitive terms and limitations including that it expires in April 2017, and there can be no assurance that Silimed will agree to continue to manufacture and supply our products after the expiration of our contract or they may impose increased pricing terms if the contract is renegotiated or renewed. Additionally, our agreement with Silimed contains exclusive terms and does not permit us to sell the products we obtain from Silimed in any country other than the United States and Canada. If Silimed is unable to resume manufacturing and supplying our products, we may need to terminate our existing contract with Silimed to secure an alternate supplier, and Silimed may be unwilling to comply with the termination of our agreement. If Silimed is unwilling to comply or cooperate with the termination of our agreement if they are unable to resume manufacturing our products, or if they increase our pricing terms or refuse to continue to manufacture and supply our products, we could be materially adversely affected and our business, financial condition and results of operations could suffer.

 

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

 

Our reliance on any third-party manufacturer, including Silimed, involves a number of risks. Manufacturing and supply of our breast implants, tissue expanders and other products is technically challenging. Changes that our manufacturer 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. Some of these risks include:

 

 

 

 

 

 

 

 

 

 

 

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, 2016, we had an accumulated deficit of $187.2 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.

We commenced sales of our breast implants in the second quarter of 2012.  For the three months ended March 31, 2016, our gross profit was $0.7 million.  However, although we have achieved a positive gross profit, we had a net loss of $11.9 million for the three months ended March 31, 2016.  The extent of our future operating losses and the timing of profitability are uncertain, especially in light of our voluntary hold of the sale of all Sientra devices manufactured by Silimed between October 9, 2015 and March 1, 2016. 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.*

Sales of our Breast Products accounted for 79% and 98% of our net sales for the three months ended March 31, 2016 and 2015, respectively, and we expect our net sales to continue to be based primarily on sales of our Breast Products. Our voluntary hold on the sale of Sientra devices manufactured by Silimed between October 9, 2015 and March 1, 2016, the potential loss of market acceptance of our Breast Products, and any adverse rulings by regulatory authorities, 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, may significantly impact our sales and profitability, which 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, including the suspension of Silimed’s CE certificate by TUV SUD, and the subsequent suspension by ANVISA on the manufacturing and shipment of all medical devices made by Silimed, including products manufactured for Sientra while they review the technical compliance related to GMP of Silimed’s manufacturing facility, 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 acquisition of bioCorneum® which may be subject to additional risks and uncertainties.*

We recently acquired bioCorneum®, an advanced silicone gel scar management product from Enaltus, LLC for $7.4 million in an effort to add a differentiated and complementary product that serves the needs of board-certified 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 product 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, LLC as our sole source, third-party manufacturer of bioCorneum® and if Formulated Solutions, LLC becomes unable or unwilling to supply bioCorneum®, we may not be able to find an alternate supplier in a timely manner. We do not know if we will be able to successfully integrate bioCorneum into our existing business, or whether unforeseen risks associated with the use of bioCorneum® will materialize and our potential inability to integrate bioCorneum® effectively or realize anticipated synergies may adversely affect our business, financial condition and results of operations.

 

Silimed relies on a sole source, third-party supplier of the medical-grade silicone used in its silicone gel breast implants, tissue expanders and other products.*

Silimed, our sole source, third-party manufacturer and supplier relies on Applied Silicone Corporation, or ASC, its sole source, third-party supplier of medical-grade silicone based in Santa Paula, California, for the silicone gel used in its breast implants, tissue expanders and other products. If ASC becomes unable or unwilling to supply medical-grade silicone to Silimed, Silimed may not be able to find an alternate supplier in a timely manner, since the availability of suppliers of medical-grade silicone is limited. In addition, ASC may discontinue manufacturing and supplying products to Silimed for risk management reasons, lose access to critical services and components, resulting in an interruption in the manufacturing or shipment of our products, or encounter financial or other hardships unrelated to Silimed and our demand for products, which could inhibit its ability to fulfill Silimed’s orders. If Silimed is able to resume manufacturing our products, and any of these risks related to Silimed’s reliance on ASC materialize, our business, financial condition and results of operations could be adversely affected.

 

There are inherent risks in contracting with manufacturers located outside of the United States such as in Brazil.*

Silimed’s manufacturing plant is located in Brazil.  There are inherent risks in contracting with manufacturers located outside of the United States such as in Brazil, including the risks of economic change, recession, labor strikes or disruptions, political turmoil, new or changing tariffs or trade barriers, new or different restrictions on importing or exporting, civil unrest, infrastructure failure, cultural differences in doing business, lack of contract enforceability, lack of

protection for intellectual property, war and terrorism.  If any of these risks were to materialize, we and Silimed would both be materially adversely affected and our business, financial condition and results of operations would suffer.

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

From time to time, we may consider 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.

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: