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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  o   No  x

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  x   No  o

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 o   No x

As of November 3, 2014, the number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 14,912,613.

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SIENTRA, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2014

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SIENTRA, INC.

Condensed Balance Sheets

 (In thousands, except per share and share amounts)

(Unaudited)

See accompanying notes to condensed financial statements.

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SIENTRA, INC.

Condensed Statements of Operations

 (In thousands, except per share and share amounts)

(Unaudited)

See accompanying notes to condensed financial statements.

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SIENTRA, INC.

Condensed Statements of Cash Flows

(In thousands)

(Unaudited)

See accompanying notes to condensed financial statements.

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SIENTRA, INC.

Notes to the Condensed Financial Statements

(Unaudited)

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.              Initial Public Offering

The Company completed an initial public offering, or IPO, of its common stock on November 3, 2014. See note 11, Subsequent Events for disclosures related to the IPO and other related transactions.

c.               Reverse Stock Split

On October 10, 2014, the board of directors and stockholders approved an amendment to the Company’s fourth amended and restated certificate of incorporation, which was filed on October 17, 2014, which effected a 1 for 2.75 reverse stock split of the Company’s issued and outstanding shares of common stock. The par value of the common stock was not adjusted as a result of the reverse stock split. All issued and outstanding shares of common stock, stock options and warrants and the related per share amounts contained in the Company’s condensed financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented. Also, as a result of the reverse stock split of the common stock, the conversion ratios for all of the Company’s convertible preferred stock have been adjusted such that the preferred stock are now convertible into shares of common stock at a conversion rate of 2.75-to-1 instead of 1-to-1. The number of issued and outstanding shares of preferred stock and their related per share amounts have not been affected by the reverse stock split and therefore have not been adjusted in the Company’s condensed financial statements. However, to the extent that the convertible preferred stock are presented on an as converted to common stock basis, such share and per share amounts contained in the Company’s financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented.

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 final prospectus filed pursuant to Rule 424(b)(1) under the Securities and Exchange Act of 1933, as amended, relating to the Company’s Registration Statement on Form S-1 (File No. 333-198837), filed with the SEC. The results for the three and nine months ended September 30, 2014 are not necessarily indicative of results to be expected for the year ending December 31, 2014, any other interim periods, or any future year or period.

b.              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.

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c.               Significant Accounting Policies

There have been no significant changes to the accounting policies during the three and nine months ended September 30, 2014, as compared to the significant accounting policies described in Note 3 of the “Notes to Financial Statements” in the Company’s audited financial statements included in the final prospectus filed with the SEC on October 29, 2014 other than those listed below.

Deferred Equity Issuance Costs

Deferred equity issuance costs, primarily consisting of legal, accounting and other direct fees and costs relating to the IPO, are capitalized. The deferred equity issuance costs were offset against the IPO proceeds upon the closing of the offering in November 2014. As of September 30, 2014, there was $1,811 in deferred equity issuance costs capitalized in other current assets on the condensed balance sheet. There were no deferred equity issuance costs capitalized as of December 31, 2013.

d.              Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued accounting standard update 2014-09, Revenue from Contracts with Customers.  The standard was issued to provide a single framework that replaces existing industry and transaction specific US GAAP with a five step analysis of transactions to determine when and how revenue is recognized.  This accounting standard updated will be effective for the Company beginning in fiscal year 2018.  The Company is currently assessing the impact that the standard will have on the financial statements upon adoption of the guidance.

In August 2014, the FASB issued accounting standard update 2014-15, Presentation of Financial Statement — Going Concern.  The standard was issued to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.  This accounting standard updated will be effective for the Company beginning in fiscal year 2016.  The Company anticipates there will be no impact on its financial statement upon adoption of this guidance.

3.                                      Fair Value of Financial Instruments

The Company has estimated the fair value of its financial instruments using the following methods and assumptions:

·                                          Cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and customer deposits are carried at cost, which approximates fair value because of the short term nature of those instruments.

·                                          Long-term debt is included in the balance sheet at its amortized cost.  The carrying value of the long-term debt approximates its fair value.  The fair value of the Company’s long-term debt was determined based on the relative timing of the instruments, all under substantially the same terms, including the issuance of each of the three tranches (tranche A, B, and C) drawn in 2013.  In addition, tranches B and C were made available to the Company based on the Company meeting certain performance milestones.  Furthermore, on June 30, 2014, the Company negotiated with Oxford Finance LLC, or Oxford, to amend the Loan and Security Agreement and raise an additional $10,000 in a fourth tranche (tranche D).  The terms for tranche D were substantially the same as for the prior tranches (see Note 8).  Based upon this, for December 31, 2013 and September 30, 2014, the Company has determined the carrying value closely approximates the fair value.

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4.                                      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:

·                                          Level 1 — Quoted prices in active markets for identical assets or liabilities.

·                                          Level 2 — Observable inputs (other than Level 1 quoted prices) such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

·                                          Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

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 Company determines the fair value per share of the underlying common stock by taking into consideration its most recent sale of its convertible preferred stock, the occurrence of the initial public offering, as well as additional factors that the Company deems relevant. 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 following tables present information about the Company’s liabilities that are measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 and indicate the level of the fair value hierarchy utilized to determine such fair value:

The following table provides a rollforward of the aggregate fair values of the Company’s common stock warrants for which fair value is determined by Level 3 inputs:

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5.                                      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 program, 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 under 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 Company accrued for warranties issued during the three months ended September 30, 2014 and 2013 in the amounts of $117 and $97, respectively, and accrued for warranties issued during the nine months ended September 30, 2014 and 2013 in the amounts of $363 and $300, respectively.  As of September 30, 2014 and December 31, 2013, the Company held total warranty liabilities of $878 and $515, respectively.

6.                                      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 September 30, 2014 and 2013, from the computation of diluted net loss per share attributable to common stockholders for the three months and nine months ended September 30, 2014 and 2013 because they had an anti-dilutive impact due to the net loss attributable to common stockholders incurred for the periods.

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7.                                      Balance Sheet Components

a.              Allowance for Sales Returns and Doubtful Accounts

The Company has established an allowance for sales returns of $10,243 and $8,270 as of September 30, 2014 and December 31, 2013, respectively, recorded net against accounts receivable in the balance sheet.

The Company has established an allowance for doubtful accounts of $209 and $273 as of September 30, 2014 and December 31, 2013, 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 September 30, 2014 and 2013 was $47 and $38, respectively. Depreciation expense for the nine month ended September 30, 2014 and 2013 was $126 and $110, respectively.

c.               Goodwill and Other Intangible Assets, net

The goodwill on the condensed balance sheets was $14,278 for all periods presented.

The components of the Company’s intangible assets are as follows:

Amortization expense for the three months ended September 30, 2014 and 2013 was $23 and $33, respectively. Amortization expense for the nine months ended September 30, 2014 and 2013 was $70 and $99, respectively.

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d.              Accrued and Other Current Liabilities

Accrued and other current liabilities consist of the following:

8.                                      Long-term Debt

On January 17, 2013, the Company entered into a Loan and Security Agreement, or the Original Term Loan Agreement, with Oxford providing for a $15,000 term loan facility consisting of original term loans of (i) a $7,500 tranche A term loan, (ii) a $2,500 tranche B term loan and (iii) a $5,000 tranche C term loan, maturing on February 1, 2017.  The term loan facility is collateralized by a first-priority security interest in substantially all of the Company’s assets.  Borrowings under the term loan facility bear interest at a rate equal to 8.4% per annum and the Original Term Loan Agreement provides for interest-only payments through June 30, 2015.  The term loans include an additional lump sum payment of $975 due on February 1, 2017.

On June 30, 2014, the Company entered into the Amended and Restated Loan and Security Agreement, or the Amended Term Loan Agreement, with Oxford, under which the interest-only period for the original term loans was extended to August 1, 2015 and raised an additional $10,000 in a fourth tranche (tranche D) maturing on January 1, 2019. The term loans are collateralized by a first-priority security interest in substantially all of the Company’s assets. The term loans bear interest at a rate equal to 8.4% per annum. The interest-only period for the tranche A, B and C term loans ends on August 1, 2015 and the interest-only period for the tranche D term loan ends on the same date, but with a possible extension of another year if the Company raises at least $50,000 in gross proceeds as part of an initial public offering before June 30, 2015 (see Note 11). The tranche D term loan includes an additional lump sum payment of $650 due on January 1, 2019.

The Amended Term Loan Agreement contains various negative and affirmative covenants, including certain restrictive covenants that limit the Company’s ability to transfer or dispose of certain assets, engage in new lines of business, change the composition of Company management, merge with or acquire other companies, incur additional debt, create new liens and encumbrances, pay dividends or subordinated debt and enter into material transactions with affiliates, among others. The Amended Term Loan Agreement also contains financial reporting requirements.

The aggregate maturities of long-term debt as of September 30, 2014 are: $0 in the remaining three months of 2014, $3,757 in 2015, $11,094 in 2016, $5,558 in 2017, $4,223 in 2018 and $368 in 2019.

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 equal to the lesser of (i) the Series C preferred stock conversion price of $14.671 per share or (ii) the price per share in a subsequent qualified round of financing where gross proceeds are greater than $10,000.

The fair value of the warrants at September 30, 2014 and December 31, 2013 was $335 and $90, respectively, and was recorded in accrued and other current liabilities in the balance sheet. The Company recognized changes in the fair value of these warrants amounting to $42 and $14 in other (expense) income, net in the statements of operations for the three months ended September 30, 2014 and 2013, respectively, and $135 and $34 for the nine months ended September 30, 2014 and 2013, respectively.

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9.                                      Stockholders’ Deficit

a.              Convertible Preferred Stock

Under the Company’s certificate of incorporation, as amended, the Company’s convertible preferred stock is issued in three series: A, B and C. At September 30, 2014 and December 31, 2013, the Company’s convertible preferred stock consists of the following:

b.              Common Stock

The Company’s certificate of incorporation, as amended, authorizes the Company to issue 30,200,000 shares of $0.01 par value common stock. At September 30, 2014 and December 31, 2013, the Company has reserved sufficient shares of common stock for issuance upon conversion of convertible preferred stock and exercise of stock options. Common stockholders are entitled to dividends when and if declared by the board of directors. There have been no dividends declared to date. The holder of each share of common stock is entitled to one vote.

c.               Stock Option Plan

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 for the 2007 Plan.

Options under the 2007 Plan may be granted for periods of up to ten years as determined by the 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. The options generally vest over four years. 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 Equity Incentive 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 $169 and $85 for the three months ended September 30, 2014 and 2013, respectively. Stock-based compensation expense was $368 and $256 for the nine months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, there was $1,784 of unrecognized compensation costs related to stock options. The expense is recorded within the operating expense captions in the statement of operations based on the employees receiving the awards.  These costs are expected to be recognized over weighted average period of 2.84 years.

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10.                               Commitments and Contingencies

a.              Operating Leases

The Company’s general office facility in Santa Barbara, California, lease expires in February 2020. The Company also has warehouse leases for additional general office, warehouse and research and development.   Rent expense was $152 and $84 for the three months ended September 30, 2014 and 2013, respectively, and $332 and $256 for the nine months ended September 30, 2014 and 2013, 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 September 30, 2014.

On March 27, 2012, Mentor Worldwide LLC, or Mentor, a wholly owned subsidiary of Johnson & Johnson, filed thirteen lawsuits against fifteen employees of the Company (all former Mentor employees) and, on June 8, 2012, filed a fourteenth lawsuit against the Company and an additional employee.  In general, these fourteen lawsuits alleged that the former employees of Mentor breached their confidentiality and non-compete agreements when they resigned in favor of employment with the Company; misappropriated confidential Mentor information and trade secrets; and breached their respective duties of loyalty.  Although not a party to thirteen employee lawsuits, the Company provided for the defense of its employees in the lawsuits.  In the employee lawsuits, all of Mentor’s claims for Preliminary Injunctive Relief were denied.  Following that, some of the employee lawsuits were dismissed with prejudice and others dismissed without prejudice.  On October 3, 2013, the last of the thirteen employee lawsuits was dismissed.

In the sole lawsuit against the Company, the Company and its employee prevailed at trial with verdicts of “no liability” rendered by the jury and judge.  Final judgment in this case was entered on October 3, 2013 with the plaintiff ordered to reimburse defendants for certain court costs, and in 2014, Mentor waived its right to appeal.

In 2012, the Company filed a claim with the Hartford Insurance Company, or Hartford, for reimbursement of legal costs incurred in connection with litigation with Mentor.  The Company held a D&O insurance policy with Hartford, and the Company and Hartford settled the matter in May of 2014.  The Company received settlement payments from Hartford and recovery of costs associated with the Mentor litigation of $0 and $0 for the three months ended September 30, 2014 and 2013, respectively, and $2,358 and $0 for the nine months ended September 2014 and 2013, respectively.

11.                               Subsequent Events

a.              Reverse Stock Split

On October 10, 2014, the board of directors and stockholders approved an amendment to the Company’s fourth amended and restated certificate of incorporation, which was filed on October 17, 2014, which effected a 1 for 2.75 reverse stock split of the Company’s issued and outstanding shares of common stock. The par value of the common stock was not adjusted as a result of the reverse stock split. All issued and outstanding shares of common stock, stock options and warrants and the related per share amounts contained in the Company’s condensed financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented. Also, as a result of the reverse stock split of the common stock, the conversion ratios for all of the Company’s convertible preferred stock have been adjusted such that the preferred stock are now convertible into shares of common stock at a conversion rate of 2.75-to-1 instead of 1-to-1. The number of issued and outstanding shares of preferred stock and their related per share amounts have not been affected by the reverse stock split and therefore have not been adjusted in the Company’s condensed financial statements. However, to the extent that the convertible preferred stock are presented on an as converted to common stock basis, such share and per share amounts contained in the Company’s financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented.

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b.              Initial Public Offering

On November 3, 2014, the Company completed the IPO whereby it sold a total of 5,750,000 shares of common stock at $15.00 per share including 750,000 shares sold to underwriters for the exercise of their option to purchase additional shares.  The Company received net proceeds from the IPO of approximately $77,213, after deducting underwriting discounts and commissions and offering expenses of approximately $9,038.  These expenses will be recorded against the proceeds received from the IPO.

The interest-only period for the tranche D term loan was extended from August 1, 2015 to August 1, 2016 as a result of having raised at least $50,000 in gross proceeds in the IPO and the completion of the IPO before June 30, 2015.

The outstanding shares of convertible preferred stock were converted on a 2.75-to-1 basis into shares of common stock concurrent with the closing of the IPO. All of the outstanding shares of Series A, Series B and Series C preferred stock converted into 8,942,925 shares of common stock. Following the closing of the IPO, there were no shares of preferred stock outstanding.

The accompanying unaudited pro forma balance sheet data as of September 30, 2014 has been prepared to give effect to the automatic conversion of all outstanding shares of convertible preferred stock into 8,942,925 shares of common stock and the issuance of 5,750,000 shares of common stock at a price of $15.00 per share, net of deducting underwriting discounts and estimated offering costs in connection with the closing of this IPO.

c.               2014 Equity Incentive Plan

Our board of directors adopted our 2014 Equity Incentive Plan, or 2014 Plan, in July 2014, and our stockholders approved the 2014 Plan in October 2014. The 2014 Plan became effective upon completion of the IPO, at which time the Company ceased making awards under the 2007 Plan. Under the 2014 Plan, the Company may issue ISO, 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 us and our 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.

d.              2014 Employee Stock Purchase Plan

Our board of directors adopted our 2014 Employee Stock Purchase Plan, or our ESPP, in July 2014, and our stockholders approved the ESPP in October 2014. Our ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Code.  The ESPP became effective upon the completion of the IPO. A total of 255,500 shares were initially reserved for issuance under the ESPP, subject to certain annual increases.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 2013 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our final prospectus filed with the Securities and Exchange Commission, or SEC, on October 29, 2014 relating to our Registration Statement on Form S-1, as amended (File No. 333-198837) for our initial public offering, or IPO. 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 of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or 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 choice 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.

Our primary products are silicone gel breast implants for use in breast augmentation and breast reconstruction procedures, which we offer in over 120 variations of shapes, sizes 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.  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 of our breast implants in 1,788 women across 36 investigational sites in the United States.  Our clinical trial is the largest prospective, long-term safety and effectiveness pivotal study of breast implant patients in the United States.

We commenced sales of our breast implants in the United States in the second quarter of 2012.  We sell our breast implants and breast tissue expanders, or Breast Products, exclusively to board-certified and board-admissible plastic surgeons, who we refer to as Plastic Surgeons, and tailor our customer service offerings to their specific needs, which we believe helps secure their loyalty and confidence.  We currently sell our products in the United States where we sell our products through a direct sales organization consisting of 42 employees, including sales representatives and sales management, as of September 30, 2014.

Recent Developments

·                  On October 10, 2014, the board of directors and stockholders approved an amendment to the Company’s fourth amended and restated certificate of incorporation, which was filed on October 17, 2014, which effected a 1 for 2.75 reverse stock split of the Company’s issued and outstanding shares of common stock. As a result of the reverse stock split of the common stock, the conversion ratios for all of the Company’s convertible preferred stock have been adjusted such that the preferred stock are now convertible into shares of common stock at a conversion rate of 2.75-to-1 instead of 1-to-1.

·                  On November 3, 2014, we completed our IPO, whereby we sold a total of 5,750,000 shares of common stock at $15.00 per share including 750,000 shares sold to underwriters for the exercise of their option to purchase additional shares. We received net proceeds from our IPO of approximately $77.2 million after deducting underwriting discounts, commissions and offering expenses of approximately $9 million. These expenses will be recorded against the proceeds received from the IPO.

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·                  The interest-only period for the tranche D term loan with Oxford was extended from August 1, 2015 to August 1, 2016 as a result of having raised at least $50.0 million in gross proceeds in the IPO and the completion of the IPO before June 30, 2015.

·                  Upon the completion of our IPO, all outstanding shares of our convertible preferred stock were converted into 8,942,925 shares of our common stock.

·                  Our board of directors adopted our 2014 Plan in July 2014 and our stockholders approved the 2014 Plan in October 2014. The 2014 Plan became effective upon completion of the IPO, at which time the Company ceased making awards under the 2007 Plan. Under the 2014 Plan, the Company may issue ISO, 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 us and our 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.

·                  Our board of directors adopted our ESPP in July 2014 and our stockholders approved the ESPP in October 2014. Our ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Code.  The ESPP became effective upon the completion of the IPO. A total of 255,500 shares were initially reserved for issuance under the ESPP, subject to certain annual increases.

2007 Acquisition of Grader Street

On April 4, 2007, we acquired substantially all of the assets of Grader Street Medical Products, Inc., or Grader Street (formerly, Silimed, Inc.), a privately held Texas-based company engaged in the development and sale of medical devices, including breast implants, under the terms of an Asset Purchase Agreement, or APA.  The consideration paid by us to Grader Street was $29.9 million in cash, 90,909 shares of our common stock and a series of future contingent payments with a potential total value of $70.0 million.

In March 2012, we initiated an arbitration proceeding against Grader Street, which we refer to as the Grader Street arbitration, to seek a decision that, under the terms of the APA, we were entitled to a substantial reduction in the purchase price reducing contingent payments owed to Grader Street.  On May 16, 2013, we, Grader Street and Grader Street’s founder reached an agreement in which we agreed to pay Grader Street a gross amount of $18.0 million and release all claims that we had against Grader Street and its founder.  Grader Street and its founder also released all claims against us, including all future contingent payments, under the APA.  In addition, under the terms of the agreement, we paid $0.3 million to repurchase 72,727 shares (of the original 90,909 shares issued) held by Grader Street’s founder.

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 97% and 98% of our net sales for the three months ended September 30, 2014 and 2013, respectively, and 97% and 97% of our net sales for the nine months ended September 30, 2014 and 2013, respectively.

We recognize revenue, net of sales discounts and returns, as the customer has a standard six-month window to return purchased products.  We anticipate our net sales will increase as we expand our sales force and marketing programs, increase awareness of our products and increase the comfort of Plastic Surgeons using anatomically-shaped breast implants.  We also expect that, in the future, our net sales will fluctuate on a quarterly basis due to a variety of factors, including seasonality of breast augmentation procedures.  We believe that breast implant sales are subject to seasonal fluctuation due to breast augmentation patients’ planning their surgery leading up to the summer season and in the period around the winter holiday season.

Cost of Goods Sold and Gross Margin

Cost of goods sold consists primarily of costs of finished products purchased from our third-party manufacturer, reserve for product warranties and warehouse and other related costs.

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Our silicone gel breast implants, 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.  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 manufacturing price increases, the changing mix of products sold with different gross margins 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 product evaluation, as well as educational, promotional and marketing activities, including direct and online marketing.  We expect our sales and marketing expenses to increase in absolute dollars as we increase our headcount and expand our marketing programs.

Research and Development Expenses

Our research and development, or R&D, expenses, primarily consist of clinical expenses, regulatory expenses, product development, 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 and completed, including improvements to our existing products, expansions of our existing product lines, new product acquisitions and our FDA-required PMA and 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, insurance, benefits, facilities and information technologies expenses.  Beginning in 2013, G&A expenses also include the federal excise tax on the sale of medical devices in the United States.

In 2012, Mentor filed one lawsuit against us and one of our employees, in addition to thirteen lawsuits against fifteen of our employees who were all former Mentor employees, which we refer to as the Mentor litigation.  In general, these lawsuits alleged that the former employees of Mentor breached their confidentiality and non-compete agreements when they resigned in favor of employment with us, misappropriated confidential Mentor information and trade secrets, and breached their respective duties of loyalty.  Although not a party to thirteen of the lawsuits, we provided for the defense of our employees.  In those lawsuits, all of Mentor’s claims for preliminary injunctive relief were denied and, following that, each of those lawsuits was dismissed.  In the sole lawsuit against us and our employee, we prevailed at trial with verdicts of “no liability” rendered by the jury and judge on all claims.  Final judgment in this case was entered on October 3, 2013 with Mentor ordered to reimburse us for certain court costs, and in 2014, Mentor waived its right to appeal.  For the three months ended September 30, 2014 and 2013, and for the nine months ended September 30, 2014 and 2013, we incurred $0.0 million, $4.7 million, $0.0 million and $10.2 million, respectively, of G&A expenses related to the Mentor litigation, net of Mentor’s reimbursement for certain court costs and preliminary insurance recoveries.

In addition, for the three months ended September 30, 2014 and 2013, and for the nine months ended September 30, 2014 and 2013, we incurred $0.0 million, $0.0 million, $0.0 million and $1.1 million, respectively, of G&A expenses related to the Grader Street arbitration.

Excluding the historic litigation and arbitration expenses described above, 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 incur increased 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, enacted in April 2012.

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Other (Expense) Income, net

Other (expense) income, net primarily consist of interest expense and amortization of debt discount associated with our term loans and insurance recoveries.

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 3 to our financial statements in our Registration Statement on Form S-1, as amended (File No. 333-196081). There have been no material changes to our critical accounting policies and estimates of those disclosed in our Registration Statement on Form S-1.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued accounting standard update 2014-09, Revenue from Contracts with Customers.  The standard was issued to provide a single framework that replaces existing industry and transaction specific US GAAP with a five step analysis of transactions to determine when and how revenue is recognized.  This accounting standard updated will be effective for the Company beginning in fiscal year 2018.  The Company is currently assessing the impact that the standard will have on the financial statements upon adoption of the guidance.

In August 2014, the FASB issued accounting standard update 2014-15, Presentation of Financial Statement — Going Concern.  The standard was issued to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.  This accounting standard updated will be effective for the Company beginning in fiscal year 2016.  The Company anticipates there will be no impact on its financial statement upon adoption of this guidance.

Results of Operations

Comparison of the Three Months Ended September 30, 2014 and 2013

The following table sets forth our results of operations for the three months ended September 30, 2014 and 2013.

Net Sales

Net sales increased $2.7 million, or 33.7%, to $10.7 million for the three months ended September 30, 2014, as compared to $8.0 million for the three months ended September 30, 2013.  This increase was primarily driven by sales of our Breast Products in the United States resulting from increased commercialization activities, including the expansion of our sales organization, increased marketing activities and greater familiarity with our products and customer service offerings by Plastic Surgeons.  As of September 30, 2014, our sales organization included 42 employees, as compared to 36 employees as of September 30, 2013

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Cost of Goods Sold and Gross Margin

Cost of goods sold increased $0.9 million, or 43.9%, to $2.8 million for the three months ended September 30, 2014, as compared to $2.0 million for the three months ended September 30, 2013.  This increase was primarily due to an increase in sales volume.

The gross margins for the three months ended September 30, 2014 and 2013 were 73.5% and 75.3%, respectively.  This decrease was primarily due to manufacturing price increases, incremental warehouse costs, and targeted pricing programs.

Sales and Marketing Expenses

Sales and marketing expenses remained constant at $4.7 million for the three months ended September 30, 2014 and 2013.  This was primarily due to a $0.5 million increase in employee related expense for the sales department and a $0.5 million decrease in marketing costs.

Research and Development Expenses

R&D expenses remained constant at $1.2 million for the three months ended September 30, 2014 and 2013.

General and Administrative Expenses

G&A expenses decreased $3.7 million, or 58.2%, to $2.6 million for the three months ended September 30, 2014, as compared to $6.3 million for the three months ended September 30, 2013.  This decrease was primarily due to the $4.7 million decrease in litigation expenses related to the Mentor litigation partially offset by an increase in expenses related to the federal excise tax and accounting costs.

Other (Expense) Income, net

Other (expense) income, net for the three months ended September 30, 2014 and 2013 was primarily associated with interest expense on our term loans of $0.7 million and $0.2 million, respectively.

Comparison of the Nine Months Ended September 30, 2014 and 2013

The following table sets forth our results of operations for the nine months ended September 30, 2014 and 2013.

Net Sales

Net sales increased $6.7 million, or 25.8%, to $32.6 million for the nine months ended September 30, 2014, as compared to $25.9 million for the nine months ended September 30, 2013.  This increase was primarily driven by sales of our Breast Products in the United States resulting from increased commercialization activities, including the expansion of our sales organization, increased marketing activities and greater familiarity with our products and customer service offerings by Plastic Surgeons.  As of September 30, 2014, our sales organization included 42 employees, as compared to 36 employees as of September 30, 2013.

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Cost of Goods Sold and Gross Margin

Cost of goods sold increased $1.9 million, or 30.5%, to $8.3 million for the nine months ended September 30, 2014, as compared to $6.4 million for the nine months ended September 30, 2013.  This increase was primarily due to an increase in sales volume.

The gross margins for the nine months ended September 30, 2014 and 2013 were 74.6% and 75.5%, respectively.  This decrease was primarily due to manufacturing price increases and targeted pricing programs.

Sales and Marketing Expenses

Sales and marketing expenses increased $1.1 million, or 6.9%, to $16.6 million for the nine months ended September 30, 2014, as compared to $15.5 million for the nine months ended September 30, 2013.  This increase was primarily due to a $0.9 million increase in employee related expense for the sales department and a $0.1 million increase in marketing costs.

Research and Development Expenses

R&D expenses increased $0.2 million, or 4.4%, to $3.6 million for the nine months ended September 30, 2014, as compared to $3.4 million for the nine months ended September 30, 2013.  This increase was primarily due to an increase in employee-related expenses and costs associated with our post-approval study.

General and Administrative Expenses

G&A expenses decreased $8.5 million, or 53.1%, to $7.5 million for the nine months ended September 30, 2014, as compared to $16.1 million for the nine months ended September 30, 2013.  This decrease was primarily due to the $10.2 million decrease in litigation expenses related to the Mentor litigation and $1.1 million decrease in arbitration expenses related to the Grader Street arbitration, partially offset by an increase in expenses related to the federal excise tax and accounting costs.

Other (Expense) Income, net

Other (expense) income, net for the nine months ended September 30, 2014 was primarily associated with interest expense on our term loans of $1.5 million and income from recovery of costs associated with the Mentor litigation of $2.4 million.  Other (expense) income, net for the nine months ended September 30, 2013 was primarily associated with interest expense on our term loans of $0.6 million.

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 and, since 2012, sales of our Breast Products.  To date, we have received gross proceeds from the sales of preferred stock totaling $151.0 million.  We issued and sold preferred stock for aggregate gross proceeds of $65.0 million in March 2012, which was our most recent issuance and sale of preferred stock.  As of September 30, 2014, we had $25.3 million outstanding on our term loans.

On November 3, 2014, we completed our IPO of common stock pursuant to a Registration Statement that was declared effective on October 28, 2014. We sold 5,000,000 shares of our common stock 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 $77.2 million in net proceeds after deducting underwriting discounts and commissions of approximately $6.0 million and offering expenses of approximately $3.0 million. Costs directly associated with our IPO were capitalized and recorded as deferred IPO costs prior to the completion of our IPO. These costs are capitalized in other current assets on the condensed balance sheet at September 30, 2014 and will be recorded as a reduction of the proceeds received in arriving at the amount to be recorded in additional paid-in capital during the fourth quarter. Upon completion of our IPO, all outstanding shares of our convertible preferred stock were converted into 8,942,925 shares of common stock.

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As of September 30, 2014, we had $19.8 million in cash and cash equivalents.  We believe that our available cash on hand and proceeds from our IPO will be sufficient to satisfy our liquidity requirements for at least the next 18 months.  However, the continued growth of our business, including the expansion of our sales force and marketing programs, and research and development activities, will significantly increase our expenses.  In addition, the amount of our future product sales is difficult to predict, especially in light of the recent commercialization of our silicone gel breast implants, and actual sales may be not be in line with our forecasts.  As a result, 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, subject to the restrictions under our Amended Term Loan Agreement.

Our historical cash outflows have primarily been associated with R&D 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.

Cash Flows

The following table shows a summary of our cash flows provided by (used in) operating, investing and financing activities for the periods indicated:

Cash provided by (used in) operating activities

Net cash provided by operating activities was $1.5 million during the nine months ended September 30, 2014 as compared to cash used in operating activities of $18.4 million during the nine months ended September 30, 2013. The decrease in cash used in operating activities between the nine months ended September 30, 2014 and 2013 was primarily associated with the decrease in net loss of $13.4 million and a decrease in cash outflows from operating assets and liabilities resulting from a decrease in inventory purchases, an increase in customer deposits and improved collections of accounts receivable, offset by a reduction in accounts payable.

 Cash used in investing activities

Net cash used in investing activities was $0.3 during the nine months ended September 30, 2014 as compared to $18.0 million during the nine months ended September 30, 2013. The decrease in cash used in investing activities of $17.7 million between the nine months ended September 30, 2014 and 2013 was primarily due to a nonrecurring $18.0 million payment made to Grader Street in May 2013 in connection with the obligations relating to our 2007 acquisition of Grader Street.

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Cash provided by financing activities

Net cash provided by financing activities was $8.9 million during the nine months ended September 30, 2014 as compared to $9.6 million during the nine months ended September 30, 2013. The decrease in cash provided by financing activities of $0.8 million between the nine months ended September 30, 2014 and 2013 was primarily the result of the payment of deferred equity transaction costs of $1.0 million during the nine month ended September 30, 2014 offset by the payment of $0.3 million for the repurchase of common stock during the nine months ended September 30, 2013. 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:

·                  net sales generated by our silicone gel breast implants and tissue expanders and any other future products that we may develop and commercialize;

·                  costs associated with expanding our sales force and marketing programs;

·                  cost associated with developing and commercializing our proposed products or technologies;

·                  cost of obtaining and maintaining regulatory clearance or approval for our current or future products;

·                  cost of ongoing compliance with regulatory requirements;

·                  expenses we incur in connection with potential litigation or governmental investigations;

·                  anticipated or unanticipated capital expenditures; and

·                  unanticipated G&A expenses.

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

·                  support of our commercialization efforts related to our current and future products;

·                  new product acquisition and development efforts;

·                  payment of monthly interest due under our term loans; and

·                  facilities expansion needs.

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.  Our term loans restrict our ability to incur additional pari passu debt.  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 and Need for Financing.”

Indebtedness

Term Loan Agreement

On January 17, 2013, we entered into a Loan and Security Agreement with Oxford, which was amended and restated on June 30, 2014, or the Amended Term Loan Agreement.  Under the Amended Term Loan Agreement, we have (i) a $7.5 million tranche A term loan, (ii) a $2.5 million tranche B term loan, (iii) a $5.0 million tranche C term loan and (iv) a $10.0 million tranche D term loan.  The tranche A, B and C term loans mature on February 1, 2017 and the tranche D term loan matures on January 1, 2019.  The term loans are collateralized by a first-priority security interest in substantially all of our assets.  The term loans bear interest at a rate equal to 8.4% per annum.  The interest-only period for the tranche A, B and C term loans ends on August 1, 2015 and the interest-only period for the tranche D term loan was extended from August 1, 2015 to August 1, 2016 as a result of having raised at least $50.0 million in gross proceeds in the IPO and the completion of the IPO before June 30, 2015.

We may voluntarily repay amounts outstanding under the term loan at any time, subject to paying the final payment.  Upon making the final payment of each term loan, whether on prepayment or at maturity, we are required to pay a 6.5% fee on the aggregate principal amount of the term loan being paid.  In connection with the Amended Term Loan Agreement, we issued to Oxford (i) seven-year warrants in January 2013 to purchase shares of our 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 our common stock with a value equal to 2.5% of the tranche D term loan amount.  The warrants have an exercise price per share equal to the lesser of (i) the Series C preferred stock conversion price of $14.671 per share or (ii) the price per share in a subsequent qualified round of financing where gross proceeds are greater than $10.0 million.

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The Amended Term Loan Agreement contains various negative and affirmative covenants, including certain restrictive covenants that limit our ability to transfer or dispose of certain assets, engage in new lines of business, change the composition of our management, merge with or acquire other companies, incur additional debt, create new liens and encumbrances, pay dividends or subordinated debt and enter into material transactions with affiliates, among others.  The Amended Term Loan Agreement also contains financial reporting requirements.

Contractual Obligations and Commitments

There have been no material changes to our contractual obligations and commitments outside the ordinary course of business from those disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations” in our final prospectus dated October 29, 2014 filed pursuant to Rule 424(b) of the Securities Act with the SEC on October 29, 2014.

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

We are exposed to market risks in the ordinary course of our business.  Our cash and cash equivalents include cash in readily available checking accounts.  Additionally, the interest rate on our term loans is fixed and not subject to changes in market interest rates.

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 have not performed an evaluation of our internal control over financial reporting, such as required by Section 404 of the Sarbanes-Oxley Act, nor have we engaged an independent registered public accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date or for any period reported in our financial statements.  Presently, we are not an accelerated filer, as such term is defined by Rule 12b-2 of the Exchange Act, and therefore, our management is not presently required to perform an annual assessment of the effectiveness of our internal control over financial reporting.  This requirement will first apply to our Annual Report on Form 10-K for the year ended December 31, 2014.  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.  However, in connection with our audit as of and for the year ended December 31, 2013, our independent registered public accounting firm identified two material weaknesses in our internal control over financial reporting.  See “Risk Factors — Risks Related to This Offering and Ownership of Our Common Stock — Our internal control over financial reporting does not currently meet the standards required by Section 404 of the Sarbanes-Oxley Act, and failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could result in material misstatements of our annual or interim financial statements and have a material adverse effect on our business and share price,” for a discussion of these matters.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

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Item 1A. RISK FACTORS.

An investment in our common stock involves risks. 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 our final prospectus filed with the Securities and Exchange Commission, or SEC, on October 29, 2014 related to our Registration Statement on Form S-1, as amended (File No. 333-198837) for our initial public offering, or IPO.

Risks Relating to Our Business and Our Industry

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 September 30, 2014, we had an accumulated deficit of $128.9 million.  To date, we have financed our operations primarily through sales of preferred stock, borrowings under our term loans and, since 2012, sales of our products.  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 nine months ended September 30, 2014, our gross profit was $24.3 million.  However, although we have achieved a positive gross profit, we still operate at a net loss.  The extent of our future net operating losses and the timing of profitability are uncertain, especially in light of the recent commercialization of our silicone gel breast implants, which makes forecasting our sales more difficult.  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 97% and 97% of our net sales for the nine months ended September 30, 2014 and 2013, respectively.  We expect our net sales to continue to be based primarily on sales of our Breast Products.  Any product liability lawsuits, introduction of competitive products by our competitors and other third parties, the loss of market acceptance of our Breast Products, adverse rulings by regulatory authorities, adverse publicity or other adverse events relating to us or our Breast Products may significantly impact our sales and profitability, which would adversely affect our business, financial condition and results of operations.

We rely on a foreign, sole source, third-party to manufacture and supply our silicone gel breast implants, tissue expanders and other products.

We rely on Silimed Industria de Implantes Ltda. (formerly, Silimed-Silicone e Instrumental Medico-Cirugio e Hospitalar Ltda.), or Silimed, our sole source, third-party manufacturer located in Brazil, to manufacture and supply our silicone gel breast implants, tissue expanders and other products, and Silimed relies on Applied Silicone Corporation, or ASC, its sole source, third-party supplier of medical-grade silicone based in Santa Paula, California.  If ASC becomes unable or willing to supply medical-grade silicone to Silimed or if Silimed becomes unable or unwilling to manufacture and supply our silicone gel breast implants, tissue expanders and other products, we will not be able to replace ASC or Silimed quickly, and we have not qualified another silicone supplier nor another manufacturer to source our implants in that event.  Even if we were able to identify a replacement manufacturer or silicone supplier, either would have to be qualified with the FDA, which is an expensive and time-consuming process during which we may experience a supply interruption.  As a result, our financial position and results of operations may be adversely affected.  There can also be no guarantee that ASC or Silimed will be able to meet our demand to produce sufficient quantities of medical-grade silicone or our products in a timely manner.  Furthermore, our current contract with Silimed expires in 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, which would have a material adverse effect on our business, financial condition and results of operations.

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In addition, our reliance on Silimed involves a number of other risks, including, among other things, that:

·                  our products may not be manufactured in accordance with agreed upon specifications or in compliance with regulatory requirements, or its manufacturing facilities may not be able to maintain compliance with regulatory requirements, which could negatively affect the safety or efficacy of our products or cause delays in shipments of our products;

·                  we may not be able to timely respond to unanticipated changes in customer orders, and if orders do not match forecasts, we may have excess or inadequate inventory of materials and components;

·                  we may be subject to price fluctuations when a supply contract is renegotiated or if our existing contract is not renewed;

·                  our agreement with Silimed does not permit us to sell the products we obtain from Silimed in any country other than the United States and Canada;

·                  we, Silimed or ASC may lose access to critical services and components, resulting in an interruption in the manufacture or shipment of our products;

·                  Silimed may not be able to find an alternate supplier in a timely manner if the medical-grade silicone becomes unavailable from ASC or we may not be able to find an alternate supplier in a timely manner if the products become unavailable from Silimed;

·                  we may be required to obtain regulatory approvals related to any change in our supply chain;

·                  ASC may discontinue manufacturing and supplying products to Silimed for risk management reasons;

·                  Silimed may discontinue manufacturing and supplying products to us for risk management reasons; and

·                  Silimed or ASC may encounter financial or other hardships unrelated to our demand for products, which could inhibit its ability to fulfill our orders and meet our requirements.

If any of these risks materialize, it could significantly increase our costs, our ability to generate net sales would 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 affect our business, financial condition and results of operations.

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

Silimed is our sole source, third-party manufacturer and its 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.

Various factors outside our direct control may adversely affect manufacturing and supply of our breast implants, tissue expanders and other products.

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, on quality and 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:

·                  failure of our manufacturer to follow Good Manufacturing Practices, or cGMP, requirements or mishandling of our products while in production or in preparation for transit;

·                  transportation and import and export risk, particularly given the global nature of our supply chain;

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·                  delays in analytical results or failure of analytical techniques that we depend on for quality control and release of products;

·                  natural disasters, labor disputes, financial distress, lack of raw material supply, issues with facilities and equipment or other forms of disruption to business operations affecting our manufacturer or its suppliers; and

·                  latent defects that may become apparent after products have been released and which may result in a recall of such products.

If any of these risks were to materialize, our ability to provide our products to customers on a timely basis would be adversely impacted.

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:

·                  implement and execute our business strategy;

·                  expand and improve the productivity of our sales force and marketing programs to grow sales of our existing and proposed products;

·                  increase awareness of our brand and build loyalty among Plastic Surgeons;

·                  manage expanding operations;

·                  respond effectively to competitive pressures and developments;

·                  enhance our existing products and develop new products;

·                  obtain regulatory clearance or approval to enhance our existing products and commercialize new products;

·                  obtain and maintain adequate levels of coverage and reimbursement for our products;

·                  perform clinical trials with respect to our existing products and any new products; and

·                  attract, retain and motivate qualified personnel in various areas of our business.

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

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