ZELTIQ
Zeltiq Aesthetics Inc (Form: 10-Q, Received: 10/31/2013 06:03:48)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________
FORM 10-Q
____________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period             to             .
Commission file number: 001-35318
____________________________________________
ZELTIQ Aesthetics, Inc.
(Exact name of registrant as specified in its charter)
____________________________________________
Delaware
 
27-0119051
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer
identification no.)
4698 Willow Road, Suite 100
Pleasanton, CA 94588
(Address of principal executive offices and Zip Code)
(925) 474-2500
(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   ý     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   ý     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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
 
Large accelerated filer
 
¨
  
Accelerated filer
 
ý
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes   ¨     No   ý
As of October 25, 2013 , th ere were 36,420,623 shares of the registrant’s common stock, par value $0.001 per share, outstanding.
 


Table of Contents

ZELTIQ Aesthetics, Inc.
INDEX
 
 
 
PAGE
NUMBER
PART I
FINANCIAL INFORMATION
 
ITEM 1:
 
 
 
 
 
 
ITEM 2:
ITEM 3:
ITEM 4:
 
 
 
PART II
OTHER INFORMATION
 
ITEM 1:
ITEM 1A:
ITEM 2:
ITEM 3:
ITEM 4:
ITEM 5:
ITEM 6:
 

2

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZELTIQ Aesthetics, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share data)
 
 
September 30,
2013
 
December 31,
2012
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
24,219

 
$
22,876

Short-term investments
18,980

 
22,563

Accounts receivable, net
6,638

 
7,133

Inventory
8,418

 
10,871

Prepaid expenses and other current assets
3,943

 
3,600

Total current assets
62,198

 
67,043

Long-term investments
12,666

 
13,141

Restricted cash
329

 
469

Property and equipment, net
2,086

 
2,336

Intangible asset, net
6,656

 
7,181

Other assets
86

 
99

Total assets
$
84,021

 
$
90,269

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
2,588

 
$
4,976

Accrued liabilities
16,371

 
11,076

Deferred revenue
1,250

 
1,401

Total current liabilities
20,209

 
17,453

Other non-current liabilities
245

 
236

Total liabilities
$
20,454

 
$
17,689

Commitments and contingencies (Note 6)

 

STOCKHOLDERS’ EQUITY:
 
 
 
Preferred stock, $0.01 par value: 50,000,000 shares authorized and no shares issued and outstanding at September 30, 2013, and December 31, 2012

 

Common stock, $0.001 par value: 500,000,000 shares authorized at September 30, 2013, and December 31, 2012; 36,289,608 and 35,852,105 shares issued and outstanding at September 30, 2013, and December 31, 2012, respectively
41

 
39

Additional paid-in capital
191,172

 
186,287

Accumulated other comprehensive income
8

 
8

Accumulated deficit
(127,654
)
 
(113,754
)
Total stockholders’ equity
63,567

 
72,580

Total liabilities and stockholders’ equity
$
84,021

 
$
90,269

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


3

Table of Contents

ZELTIQ Aesthetics, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except share and per share data)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Revenue
$
29,465

 
$
17,928

 
$
75,785

 
$
57,597

Cost of revenue
8,236

 
5,953

 
23,462

 
19,096

Gross profit
21,229

 
11,975

 
52,323

 
38,501

Operating expenses:
 
 
 
 
 
 
 
Research and development
4,257

 
2,450

 
11,904

 
9,217

Sales and marketing
15,487

 
10,881

 
42,654

 
39,632

General and administrative
4,374

 
3,760

 
11,808

 
13,169

Total operating expenses
24,118

 
17,091

 
66,366

 
62,018

Loss from operations
(2,889
)
 
(5,116
)
 
(14,043
)
 
(23,517
)
Interest income, net
17

 
11

 
60

 
100

Other income (expense), net
90

 
(44
)
 
162

 
(108
)
Loss before provision for income taxes
(2,782
)
 
(5,149
)
 
(13,821
)
 
(23,525
)
Provision for income taxes
29

 
33

 
79

 
103

Net loss
$
(2,811
)
 
$
(5,182
)
 
(13,900
)
 
(23,628
)
Net loss per share, basic and diluted
$
(0.08
)
 
$
(0.15
)
 
$
(0.39
)
 
$
(0.69
)
Weighted average shares of common stock outstanding used in computing net loss per share, basic and diluted
36,206,008

 
35,068,076

 
36,048,303

 
34,444,680

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


4

Table of Contents

ZELTIQ Aesthetics, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
(In thousands)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Net loss
$
(2,811
)
 
$
(5,182
)
 
$
(13,900
)
 
$
(23,628
)
Other comprehensive (loss) income
 
 
 
 
 
 
 
Changes in unrealized (losses) gains on available-for-sale securities
16

 
28

 

 
13

Other comprehensive (loss) income
16

 
28

 

 
13

Comprehensive loss
$
(2,795
)
 
$
(5,154
)
 
$
(13,900
)
 
$
(23,615
)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


5

Table of Contents

ZELTIQ Aesthetics, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
Nine Months Ended
 
September 30,
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(13,900
)
 
(23,628
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
1,273

 
1,182

Stock-based compensation
4,097

 
3,922

Amortization (accretion) of investment premium (discount), net
270

 
122

(Recovery from) provision for doubtful accounts receivable
(12
)
 
(7
)
Provision for excess and obsolete inventory
107

 
(26
)
Loss on disposal and write-off of property and equipment
2

 
192

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
507

 
(2,095
)
Inventory
2,346

 
(3,177
)
Prepaid expenses and other assets
(330
)
 
(1,070
)
Deferred revenue, net of deferred costs
(151
)
 
744

Accounts payable, accrued and other non-current liabilities
2,831

 
5,298

Net cash used in operating activities
(2,960
)
 
(18,543
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of investments
(24,158
)
 
(52,596
)
Sale of investments
10,550

 
7,750

Maturity of investments
17,396

 

Purchase of property and equipment
(415
)
 
(755
)
Change in restricted cash
140

 
(131
)
Net cash provided by (used in) investing activities
3,513

 
(45,732
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Repayment of notes payable

 
(310
)
Proceeds from repayment of note receivable by a stockholder

 
245

Proceeds from issuance of common stock upon exercise of stock options
854

 
2,604

Tax payments related to shares withheld for vested restricted stock units
(64
)
 

Net cash provided by financing activities
790

 
2,539

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1,343

 
(61,736
)
CASH AND CASH EQUIVALENTS—Beginning of period
22,876

 
83,908

CASH AND CASH EQUIVALENTS—End of period
$
24,219

 
$
22,172

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6


Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements are unaudited. These interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The December 31, 2012 , condensed consolidated balance sheet was derived from the audited financial statements as of that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.

The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to state fairly the Company's financial position as of September 30, 2013 , results of operations for the three and nine months ended September 30, 2013 and 2012 , comprehensive loss for the three and nine months ended September 30, 2013 and 2012 , and cash flows for the nine months ended September 30, 2013 and 2012 . The interim results for the three and nine months ended September 30, 2013 , are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 , or for any other future annual or interim period. Certain amounts in the prior year's condensed consolidated statement of cash flows have been reclassified to conform to the current period's presentation. These reclassifications had no impact on previously reported consolidated balance sheets or results of consolidated statements of operations.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations", “Quantitative and Qualitative Disclosures About Market Risk” and the Consolidated Financial Statements and notes thereto included in Items 7, 7A and 8, respectively, in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 .

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain 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 revenue and expenses during the reported periods. The primary estimates underlying the Company's financial statements include the value of revenue elements, product warranty, inventory valuation, allowance for doubtful accounts receivable, assumptions regarding variables used in calculating the fair value of the Company's equity awards, fair value of investments, useful lives of intangibles, income taxes and contingent liabilities. Actual results could differ from those estimates.

Critical Accounting Policies

There have been no material changes to the Company’s critical accounting policies during the nine months ended September 30, 2013 , as compared to the critical accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 .

Recent Accounting Pronouncements

On February 5, 2013, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This guidance is the culmination of the FASB's redeliberation on reporting reclassification adjustments from accumulated other comprehensive income. The Company adopted this guidance effective during the first quarter of 2013 and such adoption did not have a material impact on the Company's condensed consolidated financial statements.


7


2. Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company did not hold any Level 3 assets or liabilities at September 30, 2013 .

The categorization of a financial instrument within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The Company classifies its cash equivalents and investments within Level 1 and Level 2, as it uses quoted market prices or alternative pricing sources and models utilizing market observable inputs. The following tables set forth the fair value of the Company’s financial assets and liabilities by level within the fair value hierarchy (in thousands):
 
 
As of September 30, 2013
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
Financial Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
11,357

 
$

 
$

 
$
11,357

Short-term investments:
 
 
 
 
 
 
 
U.S. Agency securities

 
7,770

 

 
7,770

U.S. Treasury

 
1,001

 

 
1,001

Corporate bonds

 
7,378

 

 
7,378

Commercial paper

 
1,999

 

 
1,999

Certificates of deposit
832

 

 

 
832

Long-term investments:
 
 
 
 
 
 
 
U.S. Agency securities

 
7,874

 

 
7,874

U.S. Treasury

 
1,016

 

 
1,016

Corporate bonds

 
2,797

 

 
2,797

Certificates of deposit
979

 

 

 
979

 
$
13,168

 
$
29,835

 
$

 
$
43,003



8


 
As of December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
Financial Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
18,274

 
$

 
$

 
$
18,274

Short-term investments:
 
 
 
 
 
 

U.S. Agency securities

 
11,077

 

 
11,077

Corporate bonds

 
8,417

 

 
8,417

Commercial paper

 
1,998

 

 
1,998

Certificates of deposit
1,071

 

 

 
1,071

Long-term investments:
 
 
 
 
 
 

U.S. Agency securities

 
7,753

 

 
7,753

Corporate bonds

 
5,388

 

 
5,388

 
$
19,345

 
$
34,633

 
$

 
$
53,978


During the three and nine months ended September 30, 2013 , the Company did not have any transfers of financial assets measured at fair value on a recurring basis to or from Level 1, Level 2 or Level 3. The Company did not hold any Level 3 assets or liabilities at September 30, 2013 , and at December 31, 2012 .

The carrying amounts of the Company’s cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities.

3. Balance Sheet Components

Investments

The Company's short-term and long-term investments as of September 30, 2013 , are as follows (in thousands):
Short-term
 
 
 
 
 
 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. Agency securities
$
7,768

 
$
2

 
$

 
$
7,770

U.S. Treasury
1,000

 
1

 

 
1,001

Corporate bonds
7,377

 
3

 
(2
)
 
7,378

Commercial paper
1,999

 

 

 
1,999

Certificates of deposit
832

 

 

 
832

Total
$
18,976

 
$
6

 
$
(2
)
 
$
18,980

 
 
 
 
 
 
 
 
Long-term
 
 
 
 
 
 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. Agency securities
$
7,870

 
$
5

 
$
(1
)
 
$
7,874

U.S. Treasury
1,015

 
1

 

 
1,016

Corporate bonds
2,799

 

 
(2
)
 
2,797

Certificates of deposit
979

 

 

 
979

Total
$
12,663

 
$
6

 
$
(3
)
 
$
12,666



9


The Company's short-term and long-term investments as of December 31, 2012 , are as follows (in thousands):

Short-term
 
 
 
 
 
 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. Agency securities
$
11,071

 
$
6

 
$

 
$
11,077

Corporate bonds
8,414

 
3

 

 
8,417

Commercial paper
1,998

 

 

 
1,998

Certificates of deposit
1,071

 

 

 
1,071

Total
$
22,554

 
$
9

 
$

 
$
22,563

 
 
 
 
 
 
 
 
Long-term
 
 
 
 
 
 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. Agency securities
$
7,750

 
$
3

 
$

 
$
7,753

Corporate bonds
5,392

 
1

 
(5
)
 
5,388

Total
$
13,142

 
$
4

 
$
(5
)
 
$
13,141


For the each of the three and nine months ended September 30, 2013 and 2012 , gains or losses realized on the sale of investments were insignificant.

The contractual maturities of the Company's short-term and long-term investments as of September 30, 2013 , are as follows (in thousands):

 
September 30, 2013
 
Amortized Cost
 
Fair Value
Due in one year or less
$
18,976

 
$
18,980

Due in one year to five years
12,663

 
12,666

 
$
31,639

 
$
31,646


When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below the amortized cost basis, review of current market liquidity, interest rate risk, the financial condition of the issuer, as well as credit rating downgrades. The Company believes that the unrealized losses are not other-than-temporary. The Company does not have a foreseeable need to liquidate the portfolio and anticipates recovering the full cost of the securities either as market conditions improve, or as the securities mature.


10


Inventory

Inventory is stated at the lower of cost (which approximates actual cost on a first-in, first-out basis) or market, computed on a standard cost basis. Inventory that is obsolete or in excess of forecasted usage is written down to its estimated net realizable value based on assumptions about future demand and market conditions. The increase (decrease) in the provision for excess and obsolete inventory totaled $0.1 million and $(26,000) for nine months ended September 30, 2013 and 2012 , respectively, and was charged to cost of revenue in order to establish a new cost basis for the inventory. The components of inventory consist of the following (in thousands):
 
 
September 30,
2013
 
December 31,
2012
Raw materials
$
4,893

 
$
8,302

Finished goods
3,525

 
2,569

          Total inventory
$
8,418

 
$
10,871


Property and equipment, net

Property and equipment, net comprised the following (in thousands):
 
 
September 30,
2013
 
December 31,
2012
Lab equipment, tooling and molds
$
1,990

 
$
1,987

Computer software
1,424

 
1,243

Computer equipment
812

 
753

Leasehold improvements
716

 
636

Furniture and fixtures
311

 
288

Vehicles
35

 
35

Total property and equipment
5,288

 
4,942

Less: Accumulated depreciation and amortization
(3,310
)
 
(2,610
)
Construction in progress
108

 
4

Property and equipment, net
$
2,086

 
$
2,336


Accrued Liabilities

The following table shows the components of accrued liabilities (in thousands):
 
 
September 30,
2013
 
December 31,
2012
Accrued payroll and employee related expenses
$
6,986

 
$
3,430

Accrued marketing expenses
3,476

 
3,287

Accrued royalty
1,751

 
1,343

Sales and other taxes payable
1,448

 
1,177

Accrued warranty
765

 
902

Accrued legal expenses
598

 
415

Other accrued liabilities
1,347

 
522

Total accrued liabilities
$
16,371

 
$
11,076


Product Warranty

Effective in the second quarter of 2013, the Company provide s a standard limited warranty on its products of generally one year for both control units and applicators. Prior to this change, the Company provided a standard limited warranty on its products of generally three years for control units and one year for applicators, while for direct customers in Europe, the Company offered a one year standard warranty on control units.

11



The Company accrues for the estimated future costs of repair or replacement upon shipment. The warranty accrual is recorded to cost of revenue and is based upon historical and forecasted trends in the volume of product failures during the warranty period and the cost to repair or replace the equipment. The Company bases product warranty costs on related freight, material, technical support labor and overhead costs. The estimated product warranty costs are assessed by considering historical costs and applying the experienced failure rates to the outstanding warranty period for products sold. The Company exercises judgment in estimating the expected product warranty costs, using data such as the actual and projected product failure rates, and average repair costs, including freight, material, technical support labor, and overhead costs, for products returned under warranty.

The estimated product warranty accrual was as follows (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Balance at the beginning of the period
$
726

 
$
933

 
$
902

 
$
742

Accruals for warranties issued
45

 
135

 
142

 
633

Settlements of warranty claims
(6
)
 
(205
)
 
(279
)
 
(512
)
Balance at the end of the period
$
765

 
$
863

 
$
765

 
$
863


4. Intangible Asset, Net

The intangible asset consists of an exclusive license agreement with Massachusetts General Hospital, or MGH, for commercializing patents and other technology. All milestone payments payable by the Company pursuant to the terms of the agreement subsequent to the date of the Food and Drug Administration, or FDA, approval are capitalized as purchased technology when paid, and are subsequently amortized into cost of revenue using the straight-line method over the estimated remaining useful life of the technology, not to exceed the term of the agreement or the life of the patent.

Intangible asset, net comprised the following (in thousands):
 
 
September 30,
2013
 
December 31,
2012
Purchased technology
$
8,050

 
$
8,050

Less: Accumulated amortization
(1,394
)
 
(869
)
     Intangible asset, net
$
6,656

 
$
7,181


The amortization expense of the intangible asset was $0.2 million and $0.5 million for both the three and nine months ended September 30, 2013 and 2012 , respectively.

The total estimated annual future amortization expense of this intangible asset as of September 30, 2013 , is as follows (in thousands):

Fiscal Year
 
2013 (remaining 3 months)
$
175

2014
701

2015
701

2016
701

2017
701

Thereafter
3,677

Total
$
6,656



12


5. Related Party Transactions

Notes Receivable from a Stockholder

In December 2007 , the Company issued 445,509 shares of its common stock to an executive in exchange for full recourse promissory notes in the aggregate amount of approximately $0.2 million . The promissory notes bore interest from the date of issuance until January 1, 2010 , at a rate of 4.72%  per annum compounded annually and last bore interest at a rate of 4.00%  per annum, and were collateralized by the related common stock and the executive’s assets. The executive separated from the Company on December 3, 2010 . The promissory notes were due and payable in full (including all accrued and unpaid interest) upon nine months following the Company’s initial public offering of its common stock. These notes receivable were related to a prior exercise of stock options and were recorded as a contra stockholders’ equity account.

In July 2012, the promissory notes were paid in full.

Brazilian Distribution Agreement

The Company entered into a distribution agreement with ADVANCE Medical, Inc. and its wholly-owned subsidiaries, or ADVANCE, dated March 18, 2011 , and amended on February 27, 2012 , and September 4, 2012 , appointing ADVANCE as the exclusive distributor of CoolSculpting in Brazil and Mexico. ADVANCE is required to purchase a minimum quantity of the Company’s products each calendar quarter throughout the term of the distribution agreement. Venrock, a principal stockholder of the Company, owns a significant equity interest in ADVANCE Medical, Ltd., the parent company of ADVANCE. Dr. Bryan E. Roberts, who is a member of the Company's Board of Directors, is also a partner of Venrock Associates. The revenue recognized by the Company under this distribution agreement was $0.6 million and $1.4 million for the three and nine months ended September 30, 2013 , respectively, compared to $0.6 million and $1.9 million for the three and nine months ended September 30, 2012 , respectively. The accounts receivable balance under this distribution agreement was $83,000 and $0.1 million as of September 30, 2013 , and December 31, 2012 , respectively.

6. Commitments and Contingencies

Lease Commitments

The Company leases facilities with lease terms that expire at various dates through December 31, 2014. Rent expense for non-cancellable operating leases with scheduled rent increases is recognized on a straight-line basis over the lease term. Rent expense was $0.4 million and $1.0 million for the three and nine months ended September 30, 2013 , respectively, compared to $0.3 million and $0.9 million for the three and nine months ended September 30, 2012 , respectively.

Future minimum lease payments under the non-cancelable operating leases as of September 30, 2013 , are as follows (in thousands):

Year Ending December 31,
Amount
2013 (remaining 3 months)
$
346

2014
1,201

     Total future minimum lease payments
$
1,547


Purchase Commitments

The Company had non-cancelable purchase obligations to contract manufacturers and suppliers for $3.6 million and $2.2 million at September 30, 2013 and December 31, 2012 , respectively.


13


Legal Matters

From time to time, the Company may be involved in legal and administrative proceedings and claims of various types. The Company records a liability in its consolidated financial statements for these matters when a loss is known and considered probable and the amount can be reasonably estimated. Management reviews these estimates in each accounting period as additional information becomes known and adjusts the loss provision when appropriate. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in the consolidated financial statements. If a loss is probable but the amount of loss cannot be reasonably estimated, the Company discloses the loss contingency and an estimate of possible loss or range of loss (unless such an estimate cannot be made). The Company does not recognize gain contingencies until they are realized. Legal costs incurred in connection with loss contingencies are expensed as incurred.

On March 13, 2012 , an alleged purchaser of the Company's publicly traded common stock, Ivan Marcano, filed a securities class action in the Superior Court of California, County of Alameda, entitled Marcano v. Nye, et al., Case No. RG12621290.  The complaint alleged that the Company made false and misleading statements or omitted to state facts necessary to make the disclosures not misleading in its Form S-1, and the amendments thereto, issued in connection with the Company's initial public offering.  The claims were asserted under Sections 11 and 15 of the Securities Act of 1933. On March 15, 2012 , April 3, 2012 , and May 24, 2012 , three additional and substantially similar lawsuits were filed in the same court, some adding the Company's underwriters as defendants. All four cases were consolidated and a consolidated complaint was deemed operative. On August 24, 2012 , the Company filed a demurrer to the consolidated complaint.  Subsequently, Plaintiffs agreed to dismiss the Company's outside directors and its underwriters from the litigation without prejudice. On November 9, 2012 , the court sustained the Company's demurrer with leave to amend. Plaintiffs filed a second amended complaint on January 14, 2013 , again asserting claims under Sections 11 and 15 of the Securities Act of 1933. The second amended complaint sought compensatory damages and equitable relief on behalf of the class for an amount to be proven at trial. On February 25, 2013 , the Company filed a demurrer to the second amended complaint. On May 17, 2013 , the Court issued an order sustaining the demurrer without leave to amend and ordering the action dismissed. On June 7, 2013 , the Court entered a judgment dismissing the action with prejudice.  Plaintiffs’ time in which to appeal the judgment has lapsed and the Court’s dismissal is final.

Indemnifications

In the normal course of business, the Company enters into contracts that contain a variety of representations and warranties and provide for general indemnifications. The Company's exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made. To date, the Company has not paid any claims, and the Company believes that the estimated fair value of these indemnification obligations is minimal and it has not accrued any amounts for these obligations.

Severance

Effective April 3, 2012 , the Company's Vice President of North American Sales resigned from the Company.  On April 18, 2012 , the Company's President and CEO resigned from his positions he held with the Company. As a result of these resignations, the Company incurred $0.9 million in termination benefits and $0.7 million in costs related to the modification of the employees' stock options, which were recorded during the nine months ended September 30, 2012

Subsequent to these resignations, during the second quarter of 2012, the Company's management made a decision to terminate as well as accept resignations from several employees. As a result of these actions, the Company incurred approximately $0.8 million in termination benefits, which were recorded as part of operating expenses in the Company's condensed consolidated statement of operations. 

As of September 30, 2013 , all of the termination benefits had been paid. No similar costs were incurred during the three and nine months ended September 30, 2013 .


14


7. Stock-Based Compensation Expense

Stock-Based Compensation Activity

Activity under the Company’s stock-based compensation plans is set forth below:
 
 
 
 
 
Options Outstanding
 
 
Shares
Available
for Grant
 
Number of
Stock Options
Outstanding
 
Weighted-
Average
Exercise
Price
Balance,
December 31, 2012
1,103,836

 
4,128,334

 
$
4.96

Additional shares reserved
1,200,000

 

 

Options granted
(490,000
)
 
490,000

 
5.34

Restricted stock units granted
(1,042,400
)
 

 

Options exercised

 
(295,760
)
 
1.88

Options canceled
279,481

 
(279,481
)
 
7.26

Restricted stock units canceled
144,189

 

 

Restricted stock units withheld for tax
15,919

 

 

Balance,
September 30, 2013
1,211,025

 
4,043,093

 
$
5.07


Restricted Stock Activity

Activity related to restricted stock units and awards is set forth below:

 
 
Number of Units and Awards
 
Weighted-
Average
Grant Date Fair Value
Balance,
December 31, 2012
1,157,450

 
$
5.38

Restricted stock units granted
1,042,400

 
4.37

Restricted stock units released
(81,709
)
 
5.85

Restricted stock units canceled
(144,189
)
 
4.27

Balance,
September 30, 2013
1,973,952

 
$
4.90


During the three and nine months ended September 30, 2013 , 13,710 and 81,709 shares vested, respectively, subject to previously granted restricted stock units. A majority of these vested restricted stock units were net share settled. During the three and nine months ended September 30, 2013 , the Company withheld 214 and 15,919 shares, respectively, based upon the Company's closing stock price on the vesting date to settle the employee's minimum statutory obligation for the applicable income and other employment taxes. During the three and nine months ended September 30, 2012 , 64,175 and 106,959 shares vested, respectively, subject to previously granted restricted stock units.

Subsequently, the Company remitted cash to the appropriate taxing authorities. Total payments for employee's tax obligations to the relevant taxing authority were $2,000 and $64,000 for the three and nine months ended September 30, 2013 , respectively. The payments were used for tax withholdings related to the net share settlements of restricted stock units.

15



Stock-Based Compensation Expense

Stock-based compensation expense related to all of the Company's stock-based awards and employee stock purchases was allocated as follows (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Cost of revenue
$
67

 
$
33

 
$
175

 
$
92

Research and development
240

 
205

 
663

 
658

Sales and marketing
432

 
289

 
1,091

 
797

General and administrative
759

 
897

 
2,168

 
2,375

Total stock-based compensation
$
1,498

 
$
1,424

 
$
4,097

 
$
3,922


Stock-based compensation expense includes charges related to performance based stock options and restricted stock units granted to certain executives. Stock-based compensation expense related to performance based stock options and restricted stock units was $0.2 million and $0.8 million for the three and nine months ended September 30, 2013 , respectively, compared to $0.1 million for both the three and nine months ended September 30, 2012 .

Additionally, stock-based compensation expense for the nine months ended September 30, 2012 , includes $0.7 million in modification charges incurred in connection with the severance packages to the Company's former executives. There were no such charges in either of the three or nine months ended September 30, 2013 .

As of September 30, 2013 , the total unrecognized compensation costs related to outstanding stock options, awards and employee stock purchases was $12.2 million , which is expected to be recognized using the straight-line attribution method over 2.8 years .

Employee Stock–Based Compensation

Stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense on a straight-line basis over the requisite service period. The fair value of stock-based awards to employees is estimated using the Black-Scholes option pricing model. The Company estimates its forfeiture rate based on an analysis of its actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate assumption based on actual forfeitures, analysis of employee turnover, and other related factors.

The fair value of employee stock options was estimated using the following weighted-average assumptions:
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Expected term (in years)
4.8

 
5.2

 
4.8

 
5.2

Expected volatility
49
%
 
61
%
 
51
%
 
61
%
Risk-free interest rate
1.34
%
 
0.74
%
 
1.05
%
 
0.84
%
Expected dividend yield
%
 
%
 
%
 
%

During the three and nine months ended September 30, 2013 , the Company granted 90,000 and 465,000 stock options, respectively, to employees with a weighted-average grant date fair value of $3.14 and $2.38 per share, respectively. During the three and nine months ended September 30, 2012 , the Company granted 1,528,704 and 2,245,927 stock options, respectively, to employees with a weighted-average grant date fair value of $2.66 and $3.16 per share, respectively.

During the three and nine months ended September 30, 2013 , the Company granted 64,400 and 1,042,400 restricted stock units, respectively, to employees with a weighted-average grant date fair value of $8.06 and $4.37 per share, respectively. During the three and nine months ended September 30, 2012 , the Company granted 715,548 and 1,135,566 restricted stock units, respectively, to employees with a weighted-average grant date fair value of $5.04 and $5.87 per share, respectively.


16


As of September 30, 2013 , the unrecognized compensation cost related to the Company's employee stock purchase plan, or ESPP, was $0.1 million , which will be recognized using the straight-line attribution method over 0.2 years .

Stock-Based Compensation for Non-employees

Stock-based compensation expense related to stock-based awards to non-employees is recognized as the stock-based awards are earned, generally through the provision of services. The Company believes that the fair value of the stock-based awards is more reliably measurable than the fair value of the services received. The fair value of the granted stock-based awards is calculated at each reporting date using the Black-Scholes option pricing model. During the nine months ended September 30, 2013 , the Company granted stock-based awards to a non-employee which will vest over 2 years . There were no stock-based awards approved or issued during the three months ended September 30, 2013 . During the nine months ended September 30, 2012 , the Company granted stock-based awards to a non-employee which vested over 0.5 years . There were no stock-based awards app roved or issued during the three months ended September 30, 2012 . Stock-based compensation expense related to non-employee grants was $0.1 million and $0.2 million for the three and nine months ended September 30, 2013 , respectively, compared to $0.4 million and $0.8 million for the three and nine months ended September 30, 2012 , respectively.

8. Net Loss per Share of Common Stock

Basic net loss per share of common stock is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss per share of common stock is computed by giving effect to all potentially dilutive securities outstanding during the period, including options. Basic and diluted net loss per share was the same for all periods presented as the inclusion of all potentially dilutive securities outstanding were anti-dilutive. As such, the numerator and the denominator used in computing both basic and diluted net loss are the same for each period presented.

A reconciliation of the numerator and denominator used in the calculation of the basic and diluted net loss per share is as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Historical net loss per share:
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
Net loss (in thousands)
$
(2,811
)
 
$
(5,182
)
 
$
(13,900
)
 
$
(23,628
)
Denominator
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding used in computing net loss per share - basic and diluted
36,206,008

 
35,068,076

 
36,048,303

 
34,444,680

Basic and diluted net loss per share
$
(0.08
)
 
$
(0.15
)
 
$
(0.39
)
 
$
(0.69
)

The following outstanding potentially dilutive securities were excluded from the computation of diluted net loss per share of common stock for the periods presented, because including them would have been anti-dilutive:
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Options to purchase common stock
953,292

 
4,039,649

 
3,163,050

 
4,039,649

Restricted stock units
28,861

 
47,658

 
102,916

 
90,634

Common stock issuable pursuant to the ESPP
33,630

 
10,709

 
844

 
6,334

Total
1,015,783

 
4,098,016

 
3,266,810

 
4,136,617


9. Income Taxes

The Company recorded an income tax provision of $29,000 and $0.1 million for the three and nine months ended September 30, 2013 , respectively, compared to an income tax provision of $33,000 and $0.1 million for the three and nine months ended September 30, 2012 , respectively. The income tax provision for the three and nine months ended September 30, 2013 and 2012 , reflects income tax expense in certain non-U.S. jurisdictions. The Company continues to maintain a valuation allowance for its U.S. federal and state deferred tax assets.

17



On January 2, 2013, the President signed into law The American Taxpayer Relief Act of 2012, or ATRA. Under prior law, a taxpayer was entitled to a research tax credit for qualifying amounts incurred through December 31, 2011. The ATRA extends the research credit for two years for qualified research expenditures incurred through the end of 2013. The extension of the research credit is retroactive and includes amounts incurred after 2011. The benefit of the reinstated credit did not impact the income statement in the period of enactment, which was the first quarter of 2013, as the research and development credit carryforwards are offset by a full valuation allowance.

At September 30, 2013 , the Company had $1.2 million of unrecognized tax benefits, of which $0.1 million , if recognized, would affect the effective tax rate due to the valuation allowance that currently offsets deferred tax assets. The Company recognizes interest and penalties related to uncertain tax positions as part of the income tax provision. To date, such interest and penalties have not been material.

The Company files annual income tax returns in multiple taxing jurisdictions around the world. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, the Company believes that its reserves for income taxes reflect the most likely outcome. The Company adjusts these reserves, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position could require the use of cash. As of  September 30, 2013 , changes to the Company's uncertain tax positions in the next 12 months that are reasonably possible are not expected to have a significant impact on the Company's financial position or results of operations.

10. Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company has one business activity and there are no segment managers who are held accountable for operations. Accordingly, the Company has a single reportable segment structure. All of the Company’s principal operations and decision-making functions are located in the United States.

The Company’s revenue by geographic region, based on the location to where the product was shipped, is summarized as follows (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
North America
$
23,500

 
$
13,691

 
$
61,295

 
$
43,342

International
5,965

 
4,237

 
14,490

 
14,255

     Total
$
29,465

 
$
17,928

 
$
75,785

 
$
57,597


North America includes the United States and related territories, as well as Canada. International is the rest of the world. Revenue for the United States was $21.8 million and $57.7 million for the three and nine months ended September 30, 2013 , respectively, compared to $13.0 million and $41.4 million for the three and nine months ended September 30, 2012 , respectively.

The following table sets forth revenue by product expressed as dollar amounts (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
System revenue
$
15,889

 
$
8,507

 
$
39,939

 
$
29,528

Consumable revenue
13,576

 
9,421

 
35,846

 
28,069

     Total
$
29,465

 
$
17,928

 
$
75,785

 
$
57,597


Substantially all of the Company’s long-lived assets are located in the United States of America.


18


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and with our Management's Discussion and Analysis of Financial Condition and Results of Operations and financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012 . In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the section entitled Risk Factors in this Quarterly Report on Form 10-Q.

Overview

We are a medical technology company focused on developing and commercializing products utilizing our proprietary controlled cooling technology platform. Our first commercial product, the CoolSculpting system, is designed to selectively reduce stubborn fat bulges. We generate revenue from sales of our CoolSculpting system and from sales of consumables to our customers. We received clearance from the Food and Drug Administration, or FDA, in September 2010 to market CoolSculpting for the selective reduction of fat around the flanks, an area commonly referred to as the “love handles.” In May 2012, CoolSculpting was cleared by the FDA for treatment of "belly fat" or non-surgical reduction of fat for the abdomen area. We may seek additional regulatory clearances from the FDA to expand our U.S. marketed indications for CoolSculpting to areas on the body other than the flanks and abdomen. We have received regulatory approval or are otherwise free to market CoolSculpting in numerous international markets where use of the product is generally not limited to specific treatment areas. Customers in these markets commonly perform CoolSculpting procedures on the inner thighs, back, and chest, in addition to the flanks and abdomen.

In the United States and related territories and Canada we use our direct sales organization to selectively market CoolSculpting. In markets outside of North America, including Asia Pacific and Europe, we sell CoolSculpting through a direct sales organization as well as a network of distributors. We intend to continue developing our international sales and marketing organization to focus on increasing sales and strengthening our customer relationships. We also intend to seek regulatory approval to market CoolSculpting in key additional international markets, including China. Revenue from markets outside of North America accounted for 20% and 19% of our total revenue for the three and nine months ended September 30, 2013 , respectively, compared to 24% and 25% of our total revenue for the three and nine months ended September 30, 2012 , respectively.

Our ongoing research and development activities are primarily focused on improving and enhancing our CoolSculpting system and CoolSculpting procedure. In addition to these development activities related to CoolSculpting, we are exploring additional uses of our proprietary controlled cooling technology platform for the dermatology, plastic surgery, and aesthetic markets. We are also exploring potential therapeutic uses for our platform technology, either directly or through collaborative arrangements with strategic partners.

Revenue

We generate revenue from sales of our CoolSculpting system and from sales of consumables to our customers. We generated revenue of $29.5 million and $75.8 million for the three and nine months ended September 30, 2013 , respectively, compared to $17.9 million and $57.6 million for the three and nine months ended September 30, 2012 , respectively.

System revenue.  Sales of our CoolSculpting system include the CoolSculpting control unit and our CoolSculpting applicators. Some practices may purchase more than one CoolSculpting system. Our standard terms do not allow for trial or evaluation periods, rights of return, or refund payments contingent upon the customer obtaining financing or other terms that could impact the customer’s obligation. System revenue represented 54% and 53% of our total revenue for the three and nine months ended September 30, 2013 , respectively, compared to 47% and 51% of our total revenue for the three and nine months ended September 30, 2012 , respectively. Our worldwide installed base grew by 40% from 1,363 units as of September 30, 2012 , to 1,912 units as of September 30, 2013 .

Consumable revenue.  We generate consumable revenue through sales of CoolSculpting procedure packs, each of which includes our consumable CoolGels and CoolLiners and a disposable computer cartridge that we market as the CoolCard. The CoolCard contains enabling software that permits our customer to perform a fixed number of CoolSculpting cycles. Consumable revenue represented 46% and 47% of our total revenue for the three and nine months ended September 30, 2013 , respectively, compared to 53% and 49% of our total revenue for the three and nine months ended September 30, 2012 , respectively. We shipped 114,768 and 305,121 CoolSculpting cycles to our customers during the three and nine months ended September 30, 2013 , respectively, compared to 77,500 and 225,520 CoolSculpting cycles during the three and nine months ended September 30, 2012 , respectively.


19

Table of Contents

Our business plan focuses on expanding our installed base of systems at customers, and increasing our consumable revenue by driving demand for CoolSculpting procedures through our customer and consumer marketing programs. We anticipate that as we implement our business plan our consumable revenue will increase as a percentage of our total revenue.

Seasonality. Seasonal fluctuations in the number of customers in their offices and available to take appointments as well as their patients have affected, and are likely to continue to affect, our business. Specifically, our customers often take vacation or are on holiday during the summer months and therefore tend to perform fewer procedures, particularly in Europe. These seasonal trends have caused and will likely continue to cause, fluctuations in our quarterly results, including fluctuations in sequential revenue growth rates.

Market in which we operate. The medical technology and aesthetic product markets are highly competitive and dynamic, and are characterized by rapid and substantial technological development and product innovations. We compete with many other technologies for consumer demand. Further, the aesthetic industry in which we operate is particularly vulnerable to economic trends. The decision to undergo a procedure from our systems is driven by consumer demand. Procedures performed using our systems are elective procedures, the cost of which must be borne by the patient, and are not reimbursable through government or private health insurance. In times of economic uncertainty or recession, individuals often reduce the amount of money that they spend on discretionary items, including aesthetic procedures. The general economic difficulties being experienced and the lack of availability of consumer credit for some of our customers' patients could adversely affect the markets in which we operate.

Critical Accounting Policies and Estimates

Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended  December 31, 2012 .

Our critical accounting policies have not materially changed during the nine months ended   September 30, 2013 . Furthermore, the preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Our management believes that we consistently apply these judgments and estimates and the consolidated financial statements and accompanying notes fairly represent all periods presented. However, any differences between these judgments and estimates and actual results could have a material impact on our consolidated statements of income and financial position.

Critical accounting estimates, as defined by the Securities and Exchange Commission, are those that are most important to the portrayal of our consolidated financial condition and results of operations and require our management’s most difficult and subjective judgments and estimates of matters that are inherently uncertain. Our critical accounting estimates include those regarding (1) revenue recognition and the fair value of revenue elements, (2) investments, including the fair value of such investments, (3) warranty accruals, (4) valuation and recognition of stock-based compensation, and (5) provision for income taxes, tax liabilities and valuation allowance for deferred tax assets. For a discussion of our critical accounting estimates, see Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended  December 31, 2012 .

Results of Operations

Revenue (in thousands, except for percentages):

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
$ Change
 
% Change
 
2013
 
2012
 
$ Change
 
% Change
System revenue
$
15,889

 
$
8,507

 
$
7,382

 
87
%
 
$
39,939

 
$
29,528

 
$
10,411

 
35
%
Consumable revenue
13,576

 
9,421

 
4,155

 
44
%
 
35,846

 
28,069

 
7,777

 
28
%
Total revenue
$
29,465

 
$
17,928

 
$
11,537

 
64
%
 
$
75,785

 
$
57,597

 
$
18,188

 
32
%

Overall, we experienced an increase in revenue driven primarily by the expansion of our sales force into new and existing key markets, increased focus and prioritization of our business through our revamped sales team structure and training, a larger percentage of total revenue contribution from North America revenue which has a higher average selling price, the introduction of new applicators and an increase in our installed base of CoolSculpting systems.

20

Table of Contents


System revenue.  We experienced incremental growth in system revenue for both the three and nine months ended September 30, 2013 , as compared to the same periods in 2012 , as a result of increased North America system sales due to the reasons stated above and to a lesser extent increased international sales as result of the launch of our international direct sales organization during the second quarter of 2012. We also continue to experience a high rate of new system placements. Additionally, our system revenue increased as result of the launch of our CoolCurve+ applicator during the third quarter of 2012 and the launch of our CoolFit applicator during the first quarter of 2013, which increased the number of applicators included in each standard CoolSculpting system. We also experienced increased sales of applicators, primarily of our CoolFit applicator and some CoolCurve+ applicators, to existing customers, as our customers look to optimize their existing system to fit different body shapes and sizes.

Consumable revenue.  The increase in consumable revenue was primarily due to the growth of our worldwide installed base of CoolSculpting systems, and an increased number of cycles shipped to our customers driven by our targeted customer and consumer marketing programs. Our installed base increased primarily in North America and to a lesser extent in Europe resulting from the launch of our international direct sales organization during the second quarter of 2012. This increase was partially offset by rebates associated with the Crystal Rewards Program, our customer loyalty program related to consumable purchases, that was launched in the third quarter of 2012 .

Cost of Revenue and Gross Profit (in thousands, except for percentages):

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
$ Change
 
% Change
 
2013
 
2012
 
$ Change
 
% Change
Cost of revenue
$
8,236

 
$
5,953

 
$
2,283

 
38
%
 
$
23,462

 
$
19,096

 
$
4,366

 
23
%
% of total revenue
28
%
 
33
%
 
 
 
 
 
31
%
 
33
%
 
 
 
 
Gross profit
$
21,229

 
$
11,975

 
$
9,254

 
77
%
 
$
52,323

 
$
38,501

 
$
13,822

 
36
%
Gross profit %
72
%
 
67
%
 
 
 
 
 
69
%
 
67
%
 
 
 
 

Gross profit as a percentage of revenue typically fluctuates with product and regional mix, selling prices, material costs and revenue levels. The increase in gross profit as a percentage of revenue for the three and nine months ended September 30, 2013 , as compared to the same periods in 2012, was primarily attributable to higher overall sales volumes and higher average selling prices, as well as our continued focus on cost reduction across our product portfolio and the completion of the in-sourced manufacturing structure during the second quarter of 2013. Specifically, higher production from higher sales led to better utilization on a relatively fixed base of overhead costs. We also experienced an increase in gross profit as result of a decrease in warranty charges as we continue to experience a reduction in product failure rates. Gross profit was reduced in part due to the inclusion of the 2.3% Medical Device Excise Tax on all U.S. sales as part of the Patient Protection and Affordable Care Act of 2010 which went into effect on January 1, 2013.
 
Operating Expenses (in thousands, except for percentages):

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
$ Change
 
% Change
 
2013
 
2012
 
$ Change
 
% Change
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
$
4,257

 
$
2,450

 
$
1,807

 
74
%
 
$
11,904

 
$
9,217

 
$
2,687

 
29
 %
% of total revenue
14
%
 
14
%
 
 
 
 
 
16
%
 
16
%
 
 
 
 
Sales and marketing
$
15,487

 
$
10,881

 
$
4,606

 
42
%
 
$
42,654

 
$
39,632

 
$
3,022

 
8
 %
% of total revenue
53
%
 
61
%
 
 
 
 
 
56
%
 
69
%
 
 
 
 
General and administrative
$
4,374

 
$
3,760

 
$
614

 
16
%
 
$
11,808

 
$
13,169

 
$
(1,361
)
 
(10
)%
% of total revenue
15
%
 
21
%
 
 
 
 
 
16
%
 
23
%
 
 
 
 
Total operating expenses
$
24,118

 
$
17,091

 
$
7,027

 
41
%
 
$
66,366

 
$
62,018

 
$
4,348

 
7
 %

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Research and development.  Research and development expenses increased for the three months ended September 30, 2013 , compared to the same period in 2012, primarily due to a $1.1 million increase in payroll related costs attributed to higher headcount and an increase in performance-based compensation, as well as a $0.4 million increase in consulting, development and clinical costs, as we continue to explore ways to leverage our proprietary cooling platform for additional applications and indications.

Research and development expenses increased for the nine months ended September 30, 2013 , compared to the same period in 2012, primarily due to a $1.5 million increase in payroll related costs attributed to higher headcount and an increase in performance-based compensation, as well as a $1.2 million increase in consulting, development and clinical costs, as we continue to explore ways to leverage our proprietary cooling platform for additional applications and indications.

Sales and marketing.  Sales and marketing expenses increased for the three months ended September 30, 2013 , compared to the same period in 2012, primarily due to a $3.0 million increase in payroll related costs resulting from higher headcount, an increase in performance-based compensation and the expansion of our sales force into new and existing markets driving growth in revenue. Sales and marketing expenses also increased by $0.7 million as result of actions taken to retrofit systems for CoolConnect, a tool used as a point of sale initiative which launched during the second quarter of 2013.

Sales and marketing expenses increased for the nine months ended September 30, 2013 , compared to the same period in 2012, primarily due to a $5.2 million increase in payroll related costs resulting from higher headcount, an increase in performance-based compensation, and the expansion of our sales force into new and existing markets driving growth in revenue. Sales and marketing expenses also increased by $0.7 million as result of actions taken to retrofit systems for CoolConnect, a tool used as a point of sale initiative which launched during the second quarter of 2013. This increase was offset in part by a $4.3 million decrease in advertising expenses resulting from our shift in emphasis from Direct-to-Consumer advertising programs to a more localized co-operative marketing strategy with individual practices.

General and administrative.  General and administrative expenses increased for the three months ended September 30, 2013 , compared to the same period in 2012, primarily due to a $1.1 million increase in payroll related costs resulting from higher headcount in certain functions to support growth in our business and an increase in performance-based compensation, which was offset in part by a reduction in costs associated with non-recurring severance expenses. This increase was also offset in part by a$0.5 million decrease in legal expenses due to the resolution of various legal matters in 2013, including shareholder and certain IP related litigation.

General and administrative expenses decreased for the nine months ended September 30, 2013 , compared to the same period in 2012, primarily due to a $1.8 million decrease in legal expenses due to the resolution of various legal matters in 2013, including shareholder and certain IP related litigation. This decrease was offset in part by a $0.6 million increase in payroll related costs resulting from higher headcount in certain functions to support growth in our business and an increase in performance-based compensation, which was offset in part by a reduction in costs associated with non-recurring severance expenses.

Interest Income and Other Income (Expense), Net (in thousands, except for percentages):

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
$ Change
 
% Change
 
2013
 
2012
 
$ Change
 
% Change
Interest income, net
$
17

 
$
11

 
$
6

 
55
 %
 
$
60

 
$
100

 
$
(40
)
 
(40
)%
% of total revenue
%
 
 %
 
 
 
 
 
%
 
 %
 
 
 
 
Other income (expense), net
$
90

 
$
(44
)
 
$
134

 
(305
)%
 
$
162

 
$
(108
)
 
$
270

 
(250
)%
% of total revenue
%
 
 %
 
 
 
 
 
%
 
 %
 
 
 
 

Interest income, net.  For both the three and nine months ended September 30, 2013 and 2012 , interest income was earned on our available-for-sale securities. The amount of income earned varies based on the type of investments held, market conditions and other factors.


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Other income (expense), net. The increase in other income in three months ended September 30, 2013 , compared to the same period in 2012, was as a result of a favorable change in foreign exchange rates. The increase in other income in nine months ended September 30, 2013 , compared to the same period in 2012, was as result of a favorable change in foreign exchange rates and proceeds received as result of a favorable patent defense ruling.

Liquidity and Capital Resources

Since our inception, we have financed our operations to date primarily through private placements of convertible preferred stock, promissory notes, borrowings under a loan agreement, product sales and the proceeds from our initial public offering, or IPO.

The following table summarizes our working capital, cash and cash equivalents, short-term and long-term investments as of September 30, 2013 , and December 31, 2012 (in thousands):

 
September 30,
 
December 31,
 
2013
 
2012
Cash and cash equivalents
$
24,219

 
$
22,876

Short-term investments
18,980

 
22,563

Long-term investments
12,666

 
13,141

Total
$
55,865

 
$
58,580

 
 
 
 
Working capital
$
41,989

 
$
49,590


Summary Statement of Cash Flows

The following table summarizes our cash flows for the nine months ended September 30, 2013 and 2012 (in thousands):
 
 
Nine Months Ended
 
September 30,
 
2013
 
2012
Net cash used in operating activities
$
(2,960
)
 
$
(18,543
)
Net cash provided by (used in) investing activities
3,513

 
(45,732
)
Net cash provided by financing activities
790

 
2,539

Net increase (decrease) in cash and cash equivalents
$
1,343

 
$
(61,736
)

Cash Flows for the Nine Months Ended September 30, 2013 and 2012

Operating activities.  Net cash used in operating activities was $3.0 million during the nine months ended September 30, 2013 , and consisted of a net loss of $13.9 million and a net change in operating assets and liabilities of $5.2 million , offset by non-cash items of $5.7 million . Non-cash items for the nine months ended September 30, 2013 , consisted primarily of a stock-based compensation expense of $4.1 million and depreciation and amortization expense of $1.3 million . The significant items in the change in operating assets and liabilities include cash proceeds resulting from decreases in inventory of $2.3 million and an increase in accounts payable, accrued and other non-current liabilities of $2.8 million , as well as cash generated from a decrease in accounts receivable of $0.5 million . The decrease in inventory was as result of our continued focus on the management of inventory levels. The increase in accounts payable, accrued and other non-current liabilities was driven by the timing of invoice receipt and payments to vendors as well as higher accrued payroll related to performance-based compensation, while the decrease in accounts receivable is driven by strong cash collections throughout the period.

Net cash used in operating activities was $18.5 million during the nine months ended September 30, 2012 , and consisted of a net loss of $23.6 million and a net change in operating assets and liabilities of $0.3 million , offset in part by non-cash items of $5.4 million . Non-cash items for the nine months ended September 30, 2012 , consisted of a stock-based compensation expense of $3.9 million , depreciation and amortization expense of $1.2 million and a loss on disposal of property and equipment of $0.2 million . The significant items in the change in operating assets and liabilities include an increase in inventory of $3.2 million and an increase in accounts receivable of $2.1 million , offset by an increase of $5.3 million in accounts payable, accrued and other non-current

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liabilities. The increase in accounts receivable was attributed to a larger number of customers with credit terms during the first nine months of 2012 compared to the same period in prior year. The increase in inventory was mostly due to purchases of inventory components parts and finished goods to fulfill anticipated customer orders in the quarter and beyond. The increase in accounts payable and accrued liabilities resulted from higher accrued payroll related expenses driven by higher headcount and severance related expenses incurred during the first nine months of 2012 and accrued customer rebates that resulted from the sales and marketing program introduced during the third quarter of 2012, higher accrued advertising costs as well as higher legal costs.

Investing activities.  Net cash provided by investing activities was $3.5 million for the nine months ended September 30, 2013 , as compared to net cash used in investing activities of $45.7 million during the same period in 2012 . During the nine months ended September 30, 2013 , we received proceeds from the sale and maturity, net of purchases, of $3.8 million of short-term and long-term investments. During the nine months ended September 30, 2012 , we invested $44.8 million in short-term and long-term investments, net of proceeds from sales. Purchases of property and equipment amounted to $0.4 million and $0.8 million for the nine months ended September 30, 2013 and 2012 , respectively.

Financing activities.  Net cash provided by financing activities during the nine months ended September 30, 2013 , of $0.8 million consisted of proceeds received from the issuance of common stock upon the exercise of stock options, offset by tax payments related to shares withheld for vested restricted stock units. Net cash provided by financing activities during the nine months ended September 30, 2012 , of $2.5 million , consisted of $2.6 million proceeds received from the issuance of common stock upon the exercise of stock options and $0.2 million proceeds from the payment of the note receivable by a stockholder, offset in part by the repayment of notes payable of $0.3 million .

Our cash, cash equivalents and investments declined by $2.7 million during the nine months ended September 30, 2013 . Based on our current plans and market conditions, we believe that our existing cash, cash equivalents and investments will be sufficient to satisfy our anticipated cash requirements for at least the next twelve months. However, we cannot be certain that our planned levels of revenue, costs and expenses will be achieved. If our operating results fail to meet our expectations or if we fail to manage our inventory, accounts receivable or other assets, we could be required to seek additional funding through public or private financings or other arrangements. In such event, adequate funds may not be available when needed or may not be available on favorable or commercially acceptable terms, which could have a negative effect on our business and results of operations.

Contractual Obligations and Commitments

We have certain fixed contractual obligations and commitments that include operating lease obligations and purchase commitments. Changes in our business needs, fluctuating interest rates, and other factors may result in actual payments differing from the estimates. Our fixed contractual obligations and commitments were $5.2 million and $3.4 million at September 30, 2013 , and December 31, 2012 , respectively.

Massachusetts General Hospital Royalty Payments

In May 2005, we entered into an agreement with Massachusetts General Hospital, or MGH, to obtain an exclusive license to develop and commercialize the patent and the core technology that underlies our CoolSculpting system. As provided in the agreement, we are obligated to pay a 7% royalty on net sales of CoolSculpting.

Lease Commitments

We lease facilities with lease terms that expire at various dates through December 31, 2014. Rent expense for non-cancellable operating leases with scheduled rent increases is recognized on a straight-line basis over the lease term. Rent expense was $0.4 million and $1.0 million for the three and nine months ended September 30, 2013 , respectively, compared to $0.3 million and $0.9 million for the three and nine months ended September 30, 2012 , respectively.

Future minimum lease payments under the non-cancellable operating leases as of September 30, 2013 , are as follows (in thousands):

Year Ending December 31,
Amount
2013 (remaining 3 months)
346

2014
1,201

     Total future minimum lease payments
$
1,547



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Purchase Commitments

We had non-cancellable purchase obligations to contract manufacturers and suppliers for $3.6 million and $2.2 million at September 30, 2013 , and December 31, 2012 , respectively.

Product Warranty

Effective in the second quarter of 2013, we provide a standard limited warranty on our products of generally one year for both control units and applicators. Prior to this change, we provided a standard limited warranty on our products of generally three years for control units and one year for applicators, while for direct customers in Europe, we offered a one year standard warranty on control units.

We accrue for the estimated future costs of repair or replacement upon shipment. The warranty accrual is recorded to cost of revenue and is based upon historical and forecasted trends in the volume of product failures during the warranty period and the cost to repair or replace the equipment. We base product warranty costs on related freight, material, technical support labor, and overhead costs. The estimated product warranty costs are assessed by considering historical costs and applying the experienced failure rates to the outstanding warranty period for products sold. We exercise judgment in estimating the expected product warranty costs, using data such as the actual and projected product failure rates, and average repair costs, including freight, material, technical support labor, and overhead costs, for products returned under warranty.

The estimated product warranty accrual was as follows (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Balance at the beginning of the period
$
726

 
$
933

 
$
902

 
$
742

Accruals for warranties issued
45

 
135

 
142

 
633

Settlements of warranty claims
(6
)
 
(205
)
 
(279
)
 
(512
)
Balance at the end of the period
$
765

 
$
863

 
$
765

 
$
863


Legal Matters

On March 13, 2012 , an alleged purchaser of our publicly traded common stock, Ivan Marcano, filed a securities class action in the Superior Court of California, County of Alameda, entitled Marcano v. Nye, et al., Case No. RG12621290.  The complaint alleged that we made false and misleading statements or omitted to state facts necessary to make the disclosures not misleading in its Form S-1, and the amendments thereto, issued in connection with the our initial public offering.  The claims were asserted under Sections 11 and 15 of the Securities Act of 1933. On March 15, 2012 , April 3, 2012 , and May 24, 2012 , three additional and substantially similar lawsuits were filed in the same court, some adding our underwriters as defendants. All four cases were consolidated and a consolidated complaint was deemed operative. On August 24, 2012 , we filed a demurrer to the consolidated complaint.  Subsequently, Plaintiffs agreed to dismiss our outside directors and our underwriters from the litigation without prejudice. On November 9, 2012 , the court sustained our demurrer with leave to amend. Plaintiffs filed a second amended complaint on January 14, 2013 , again asserting claims under Sections 11 and 15 of the Securities Act of 1933. The second amended complaint sought compensatory damages and equitable relief on behalf of the class for an amount to be proven at trial. On February 25, 2013 , we filed a demurrer to the second amended complaint. On May 17, 2013 , the Court issued an order sustaining the demurrer without leave to amend and ordering the action dismissed. On June 7, 2013 , the Court entered a judgment dismissing the action with prejudice. Plaintiffs’ time in which to appeal the judgment has lapsed and the Court’s dismissal is final.


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Related Party Transactions

Notes Receivable from a Stockholder

In December 2007 , we issued 445,509 shares of our common stock to an executive in exchange for full recourse promissory notes in the aggregate amount of approximately $0.2 million . The promissory notes bore interest from the date of issuance until January 1, 2010 , at a rate of 4.72%  per annum compounded annually and last bore interest at a rate of 4.00%  per annum, and were collateralized by the related common stock and the executive’s assets. The executive separated from ZELTIQ on December 3, 2010 . The promissory notes were due and payable in full (including all accrued and unpaid interest) upon nine months following our initial public offering of our common stock. These notes receivable were related to a prior exercise of stock options and were recorded as a contra stockholders’ equity account.

In July 2012, the promissory notes were paid in full.

Brazilian Distribution Agreement

We entered into a distribution agreement with ADVANCE Medical, Inc. and its wholly-owned subsidiaries, or ADVANCE, dated March 18, 2011 , and amended on February 27, 2012 , and September 4, 2012 , appointing ADVANCE as the exclusive distributor of CoolSculpting in Brazil and Mexico. ADVANCE is required to purchase a minimum quantity of our products each calendar quarter throughout the term of the distribution agreement. Venrock, a principal stockholder of ZELTIQ, owns a significant equity interest in ADVANCE Medical, Ltd., the parent company of ADVANCE. Dr. Bryan E. Roberts, who is a member of our Board of Directors, is also a partner of Venrock Associates. The revenue recognized by us under this distribution agreement was $0.6 million and $1.4 million for the three and nine months ended September 30, 2013 , respectively, compared to $0.6 million and $1.9 million for the three and nine months ended September 30, 2012 , respectively. The accounts receivable balance under this distribution agreement was $83,000 and $0.1 million as of September 30, 2013 , and December 31, 2012 , respectively.

Recent Accounting Pronouncements

On February 5, 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This guidance is the culmination of the FASB's redeliberation on reporting reclassification adjustments from accumulated other comprehensive income. We adopted this guidance effective during the first quarter of 2013 and such adoption did not have a material impact on our consolidated financial statements.

Off-balance Sheet Arrangements

As of September 30, 2013 , and December 31, 2012 , we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

In the normal course of business, we enter into contracts that contain a variety of representations and warranties and provide for general indemnifications. Our exposure under these agreements is unknown because it involves claims that may be made against us in the future, but have not yet been made. To date, we have not paid any claims or been required to defend any action related to our indemnification obligations, and accordingly, we believe that the estimated fair value of these indemnification obligations is minimal and we have not accrued any amounts for these obligations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

For financial market risks related to changes in interest rates, inflation and foreign currency exchange rates, reference is made to Item 7A: “Quantitative and Qualitative Disclosures about Market Risk” contained in Part II of our Annual Report on Form 10-K for the year ended December 31, 2012 . Our exposure to market risk has not changed materially since December 31, 2012 .

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange

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Act of 1934, as amended. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2013 .

Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarterly period ended September 30, 2013 , that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information relating to “Legal Matters” set forth under Note 6 - Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q is incorporated herein by reference.

Item 1A. Risk Factors

Our operations and financial results are subject to various risks and uncertainties, including those described below, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business operations. We may make acquisitions and investments, which could put a strain on our resources, cause ownership dilution to our stockholders and adversely affect our financial results.

The risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission on March 13, 2013, have not changed significantly, other than as are marked with an asterisk (*), and the removal of the risk factor entitled “We have been named in litigation that may adversely affect our financial condition, results of operations and cash flows” because the lawsuit was dismissed, and are set forth below.

Risks Related to Our Business

We have limited operating experience and a history of net losses, and we may never achieve or maintain profitability.

We have a limited operating history, with our first commercial sales of CoolSculpting for the selective reduction of fat in the United States occurring in late 2010. We have incurred significant net losses since our inception, including net losses of approximately $30.1 million in 2012 and $9.6 million in 2011 . Our net loss for the nine months ended September 30, 2013 , was $13.9 million , and as of September 30, 2013 , we had an accumulated deficit of approximately $127.7 million . We will continue to incur significant expenses for the foreseeable future as we expand our sales and marketing, research and development, and clinical and regulatory activities. We may never generate sufficient revenues to achieve or sustain profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability. Further, because of our limited operating history and because the market for aesthetic products is rapidly evolving, we have limited insight into the trends or competitive products that may emerge and affect our business. We may make errors in predicting and reacting to relevant business trends, which could harm our business. We may not be able to successfully address any or all of these risks, and the failure to adequately do so could cause our business, results of operations, and financial condition to suffer.

We may not be able to correctly estimate or control our future operating expenses, which could lead to cash shortfalls.

Our operating expenses may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control. These factors include:

our commercialization strategy;
the time, resources, and expense required to develop and conduct clinical trials and seek additional regulatory clearances and approvals for additional treatment indications for CoolSculpting and for any additional products we may develop;
the costs of preparing, filing, prosecuting, defending, and enforcing patent claims and other patent related costs, including litigation costs and the results of such litigation;
any adverse events associated with CoolSculpting or product liability or other lawsuits related to our products and the costs associated with defending them or the results of such lawsuits;
the costs to attract and retain personnel with the skills required for effective operations; and
the costs associated with being a public company.

Further, our budgeted expense levels are based in part on our expectations concerning future revenues from CoolSculpting. We may be unable to reduce our expenditures in a timely manner to compensate for any unexpected shortfalls in revenue. Accordingly, a significant shortfall in market acceptance or demand for CoolSculpting could have an immediate and material adverse impact on our business and financial condition.


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Economic uncertainty has reduced and may continue to reduce patient demand for our products; if there is not sufficient patient demand for the procedures for which our products are used, practitioner demand for these systems could drop, resulting in unfavorable operating results.

The aesthetic industry in which we operate is particularly vulnerable to economic trends. The decision to undergo a procedure from our systems is driven by consumer demand. Procedures performed using our systems are elective procedures, the cost of which must be borne by the patient, and are not reimbursable through government or private health insurance. In times of economic uncertainty or recession, individuals often reduce the amount of money that they spend on discretionary items, including aesthetic procedures. The general economic difficulties being experienced and the lack of availability of consumer credit for some of our customers' patients are adversely affecting the market in which we operate.

If the economic hardships our customers' patients face continue or worsen, our business would be negatively impacted and our financial performance would be materially harmed in the event that any of the above factors discourage patients from seeking the procedures for which our products are used.

Due to a number of factors outside of our direct control, our financial results may fluctuate unpredictably, which could adversely affect our stock price .

Our limited operating history and the rapid evolution of the markets for medical technologies and aesthetic products make it difficult for us to predict our future performance. In addition, a number of factors, many of which are outside of our control, may contribute to fluctuations in our financial results, such as:

customer demand for purchasing CoolSculpting systems may vary from quarter to quarter;
the inability for customers to obtain any necessary financing;
changes in the length of the sales process;
performance of our international distributors;
media coverage of CoolSculpting and positive or negative patient experiences, the procedures or products of our competitors, or our industry;
our ability to maintain our current or obtain further regulatory clearances or approvals;
delays in, or failure of, product and component deliveries by our third-party contract manufacturers or suppliers;
seasonal or other variations in patient demand for aesthetic procedures;
introduction of new aesthetic procedures or products that compete with CoolSculpting; and
adverse changes in the economy that reduce patient demand for elective aesthetic procedures.

Fluctuations in our financial results could negatively affect our stock price.

We are dependent upon the success of CoolSculpting, which has a limited commercial history. If the market acceptance for CoolSculpting fails to grow significantly, our business and future prospects will be harmed.
 
We commenced commercial sales of CoolSculpting for the selective reduction of fat in the United States in late 2010, and expect that the revenues we generate from sales of our CoolSculpting system and from CoolSculpting consumable revenues will account for substantially all of our revenues for the next several years. Accordingly, our success depends on the continued and growing acceptance among customers and patients of CoolSculpting as a preferred aesthetic treatment for the selective reduction of fat. Although we have received FDA clearance to market CoolSculpting for the selective reduction of fat in the flanks and abdomen in the United States and are approved or are otherwise free to market CoolSculpting in numerous international markets, increased acceptance among customers and patients of CoolSculpting may not occur. We cannot assure you that demand for CoolSculpting will continue or grow among customers and patients. Because we expect to derive substantially all of our revenue for the foreseeable future from sales of CoolSculpting systems and from fees associated with each CoolSculpting procedure, any failure of this product to satisfy customer or patient demand will harm our business and future prospects.

Our ability to market CoolSculpting in the United States is limited to the non-invasive reduction of fat around the flanks and abdomen, and if we want to expand our marketing claims, we will need to obtain additional FDA clearances or approvals, which may not be granted.

We currently have FDA clearance to market CoolSculpting in the United States for the non-invasive reduction of fat around the flanks, an area commonly known as the “love handles” and for the abdomen area. This clearance restricts our ability to market or advertise CoolSculpting treatment for other specific body areas, which could limit customer and patient adoption of CoolSculpting. Developing and promoting new treatment indications and protocols and new treatment applicators for our CoolSculpting system are elements of our growth strategy, but we cannot predict when or if we will receive the clearances required to so implement

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those elements. In addition, we will be required to conduct additional clinical trials or studies to support our applications, which may be time-consuming and expensive, and may produce results that do not result in FDA clearances. In the event that we do not obtain additional FDA clearances, our ability to promote CoolSculpting in the United States will be limited. Because we anticipate that sales in the United States will account for substantially all of our revenues for the foreseeable future, ongoing restrictions on our ability to market CoolSculpting in the United States could harm our business and limit our revenue growth.

Customers must make significant capital expenditures to purchase our CoolSculpting systems, which makes it difficult to increase our customer base, and if we are not able to convince customers to make this capital expenditure, our ability to grow our business will be harmed.

Customers must make significant capital expenditures to purchase our CoolSculpting systems and our ability to increase the number of customers willing to make these significant capital expenditures and make CoolSculpting a significant part of their practices depends on the success of our sales and marketing programs. We must be able to demonstrate that the cost of our CoolSculpting system and the revenue that a customer can derive from performing CoolSculpting procedures are compelling when compared to the costs and revenues associated with alternative aesthetic treatments the customer may offer. In addition, alternative treatments may be invasive, minimally-invasive, or non-invasive and, we must, in some cases, overcome a bias against non-invasive aesthetic procedures for fat reduction, principally from plastic surgeons. Further, we believe our marketing programs, including our co-op customer marketing programs, will be critical in driving additional CoolSculpting procedures, but these programs require customer commitment and involvement to succeed. If we are unable to increase customer adoption and use of CoolSculpting, our financial performance will be adversely affected.

If there is not sufficient patient demand for CoolSculpting procedures, our financial results and future prospects will be harmed.

The CoolSculpting procedure is an elective procedure, the cost of which must be borne by the patient, and is not reimbursable through government or private health insurance. The decision to undergo a CoolSculpting procedure is thus driven by patient demand, which may be influenced by a number of factors, such as:

the success of our sales and marketing programs, including our co-op customer marketing initiatives, as to which we have limited experience;
the cost, safety, and effectiveness of CoolSculpting versus other aesthetic treatments;
the price of CoolSculpting relative to other aesthetic products and alternative treatments;
the willingness of patients to wait up to four months post-treatment to notice the aesthetic results of a CoolSculpting procedure;
the ability to obtain regulatory clearance to market CoolSculpting for additional treatment indications in the United States;
the adverse event profile of CoolSculpting, including warnings, side effects, and contraindications, which are subject to change;
the extent to which our customers recommend CoolSculpting to their patients;
our success in attracting consumers who have not previously purchased an aesthetic procedure;
the extent to which our CoolSculpting procedure satisfies patient expectations;
our ability to properly train our customers in the use of CoolSculpting such that their patients do not experience excessive discomfort during treatment or adverse side effects;
consumer sentiment about the benefits and risks of aesthetic procedures generally and CoolSculpting in particular;
the success of any direct-to-consumer marketing efforts we initiate; and
general consumer confidence, which may be impacted by economic and political conditions.