ZELTIQ
Zeltiq Aesthetics Inc (Form: 10-Q, Received: 04/30/2014 06:09:08)
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 March 31, 2014
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 April 24, 2014 , there were 37,402,021 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)
 
 
March 31,
2014
 
December 31,
2013
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
14,546

 
$
25,798

Short-term investments
18,442

 
18,840

Accounts receivable, net
12,318

 
10,221

Inventory
15,231

 
8,406

Prepaid expenses and other current assets
3,676

 
4,368

Total current assets
64,213

 
67,633

Long-term investments
8,234

 
11,442

Restricted cash
332

 
331

Property and equipment, net
2,340

 
2,158

Intangible asset, net
6,306

 
6,481

Other assets
103

 
9

Total assets
$
81,528

 
$
88,054

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
6,195

 
$
5,165

Accrued liabilities
17,127

 
18,364

Deferred revenue
2,532

 
1,674

Total current liabilities
25,854

 
25,203

Other non-current liabilities
204

 
275

Total liabilities
$
26,058

 
$
25,478

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 March 31, 2014, and December 31, 2013

 

Common stock, $0.001 par value: 500,000,000 shares authorized at March 31, 2014, and December 31, 2013; 37,361,229 and 37,038,374 shares issued and outstanding at March 31, 2014, and December 31, 2013, respectively
41

 
41

Additional paid-in capital
195,706

 
195,507

Accumulated other comprehensive income
119

 
87

Accumulated deficit
(140,396
)
 
(133,059
)
Total stockholders’ equity
55,470

 
62,576

Total liabilities and stockholders’ equity
$
81,528

 
$
88,054

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
 
March 31,
 
2014
 
2013
Revenue
$
30,975

 
$
19,982

Cost of revenue
9,016

 
7,348

Gross profit
21,959

 
12,634

Operating expenses:
 
 
 
Research and development
4,270

 
3,749

Sales and marketing
20,187

 
12,542

General and administrative
4,713

 
3,808

Total operating expenses
29,170

 
20,099

Loss from operations
(7,211
)
 
(7,465
)
Interest income, net
19

 
24

Other expense, net
(66
)
 
(34
)
Loss before provision for income taxes
(7,258
)
 
(7,475
)
Provision for income taxes
79

 
7

Net loss
$
(7,337
)
 
$
(7,482
)
Net loss per share, basic and diluted
$
(0.20
)
 
$
(0.21
)
Weighted average shares of common stock outstanding used in computing net loss per share, basic and diluted
37,215,697

 
35,890,084

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
 
March 31,
 
2014
 
2013
Net loss
$
(7,337
)
 
$
(7,482
)
Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments
30

 

Changes in unrealized gains (losses) on available-for-sale securities
2

 
(8
)
Other comprehensive income (loss), net of tax
32

 
(8
)
Comprehensive loss
$
(7,305
)
 
$
(7,490
)
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)
 
Three Months Ended
 
March 31,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(7,337
)
 
(7,482
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
455

 
428

Stock-based compensation
2,105

 
1,119

Deferred income tax provision (benefit)
30

 
(20
)
Amortization (accretion) of investment premium (discount), net
67

 
94

Provision for doubtful accounts receivable

 
25

Provision for excess and obsolete inventory
105

 
82

Loss on disposal and write-off of property and equipment
17

 
2

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(2,088
)
 
1,100

Inventory
(6,291
)
 
1,284

Prepaid expenses and other assets
570

 
(776
)
Deferred revenue, net of deferred costs
853

 
(359
)
Accounts payable, accrued and other non-current liabilities
(829
)
 
(2,506
)
Net cash used in operating activities
(12,343
)
 
(7,009
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of investments
(2,249
)
 
(7,319
)
Sale of investments
1,000

 
3,750

Proceeds from maturity of investments
4,791

 
4,448

Purchase of property and equipment
(559
)
 
(68
)
Change in restricted cash
(1
)
 
107

Net cash provided by investing activities
2,982

 
918

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of common stock upon exercise of stock options
640

 
68

Tax payments related to shares withheld for vested restricted stock units
(2,546
)
 
(7
)
Net cash (used in) provided by financing activities
(1,906
)
 
61

Effect of exchange rate on cash and cash equivalents
15

 

NET DECREASE IN CASH AND CASH EQUIVALENTS
(11,252
)
 
(6,030
)
CASH AND CASH EQUIVALENTS—Beginning of period
25,798

 
22,876

CASH AND CASH EQUIVALENTS—End of period
$
14,546

 
$
16,846

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 generally accepted accounting principles in the United States of America, or GAAP, and the applicable rules and regulations of the Securities and Exchange Commission, or 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, 2013 , 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 March 31, 2014 , results of operations for the three months ended March 31, 2014 and 2013 , comprehensive loss for the three months ended March 31, 2014 and 2013 , and cash flows for the three months ended March 31, 2014 and 2013 . The interim results for the three months ended March 31, 2014 , are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 , 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, 2013 .

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.

Based on an evaluation of economic facts and circumstances together with the functional currency analysis prescribed in Accounting Standards Codification Topic 830, Foreign Currency Matters , on October 1, 2013, the Company changed the functional and reporting currency of its foreign subsidiary from the U.S. Dollar to the British Pound. Such change did not have a material impact on the consolidated financial statements of the Company.

All assets and liabilities of these foreign operations are translated to U.S. Dollars at current period end exchange rates, and revenue and expenses are translated to U.S. Dollars using average exchange rates in effect during the period. The gains and losses from the foreign currency translation of this subsidiary's financial statements are included as a separate component of stockholders' equity under "Accumulated other comprehensive income". Gains or losses arising from currency exchange rate fluctuations on transactions denominated in a currency other than the local functional currency are included in other income (expense), net.

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.


7


Critical Accounting Policies

There have been no material changes to the Company’s critical accounting policies during the three months ended March 31, 2014 , as compared to the critical accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 .

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 March 31, 2014 .

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 March 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
Financial Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
402

 
$

 
$

 
$
402

Short-term investments:
 
 
 
 
 
 
 
U.S. Agency securities

 
8,747

 

 
8,747

U.S. Treasury

 
1,501

 

 
1,501

Corporate bonds

 
6,172

 

 
6,172

Commercial paper

 
1,000

 

 
1,000

Certificates of deposit
1,022

 

 

 
1,022

Long-term investments:
 
 
 
 
 
 
 
U.S. Agency securities

 
3,700

 

 
3,700

U.S. Treasury

 
1,012

 

 
1,012

Corporate bonds

 
2,777

 

 
2,777

Certificates of deposit
745

 

 

 
745

Total
$
2,169

 
$
24,909

 
$

 
$
27,078



8


 
As of December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
Financial Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
12,796

 
$

 
$

 
$
12,796

Short-term investments:
 
 
 
 
 
 

U.S. Agency securities

 
6,772

 

 
6,772

U.S. Treasury

 
1,001

 

 
1,001

Corporate bonds

 
8,870

 

 
8,870

Commercial paper

 
999

 

 
999

Certificates of deposit
1,198

 

 

 
1,198

Long-term investments:
 
 
 
 
 
 

U.S. Agency securities

 
6,956

 

 
6,956

U.S. Treasury

 
1,014

 

 
1,014

Corporate bonds

 
2,795

 

 
2,795

Certificates of deposit
677

 

 

 
677

Total
$
14,671

 
$
28,407

 
$

 
$
43,078


During the three months ended March 31, 2014 and 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 as of March 31, 2014 , and December 31, 2013 .

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 March 31, 2014 , are as follows (in thousands):
Short-term
 
 
 
 
 
 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. Agency securities
$
8,741

 
$
6

 
$

 
$
8,747

U.S. Treasury
1,500

 
1

 

 
1,501

Corporate bonds
6,171

 
2

 
(1
)
 
6,172

Commercial paper
1,000

 

 

 
1,000

Certificates of deposit
1,022

 

 

 
1,022

Total
$
18,434

 
$
9

 
$
(1
)
 
$
18,442

 
 
 
 
 
 
 
 
Long-term
 
 
 
 
 
 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. Agency securities
$
3,700

 
$
1

 
$
(1
)
 
$
3,700

U.S. Treasury
1,010

 
2

 

 
1,012

Corporate bonds
2,775

 
3

 
(1
)
 
2,777

Certificates of deposit
745

 

 

 
745

Total
$
8,230

 
$
6

 
$
(2
)
 
$
8,234



9


The Company's short-term and long-term investments as of December 31, 2013 , are as follows (in thousands):

Short-term
 
 
 
 
 
 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. Agency securities
$
6,771

 
$
2

 
$
(1
)
 
$
6,772

U.S. Treasury
1,000

 
1

 

 
1,001

Corporate bonds
8,867

 
3

 

 
8,870

Commercial paper
999

 

 

 
999

Certificates of deposit
1,198

 

 

 
1,198

Total
$
18,835

 
$
6

 
$
(1
)
 
$
18,840

 
 
 
 
 
 
 
 
Long-term
 
 
 
 
 
 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. Agency securities
$
6,957

 
$
2

 
$
(3
)
 
$
6,956

U.S. Treasury
1,013

 
1

 

 
1,014

Corporate bonds
2,790

 
5

 

 
2,795

Certificates of deposit
677

 

 

 
677

Total
$
11,437

 
$
8

 
$
(3
)
 
$
11,442


For each of the three months ended March 31, 2014 and 2013 , 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 March 31, 2014 , are as follows (in thousands):

 
March 31, 2014
 
Amortized Cost
 
Fair Value
Due in one year or less
$
18,434

 
$
18,442

Due in one year to five years
8,230

 
8,234

 
$
26,664

 
$
26,676


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 components of inventory consist of the following (in thousands):
 
 
March 31,
2014
 
December 31,
2013
Raw materials
$
8,575

 
$
4,520

Finished goods
6,656

 
3,886

          Total inventory
$
15,231

 
$
8,406


Property and equipment, net

Property and equipment, net comprised the following (in thousands):
 
 
March 31,
2014
 
December 31,
2013
Lab equipment, tooling and molds
$
2,330

 
$
2,071

Computer software
1,654

 
1,562

Computer equipment
809

 
801

Leasehold improvements
942

 
743

Furniture and fixtures
360

 
334

Vehicles
35

 
35

Total property and equipment
6,130

 
5,546

Less: Accumulated depreciation and amortization
(3,875
)
 
(3,594
)
Construction in progress
85

 
206

Property and equipment, net
$
2,340

 
$
2,158


Depreciation expense was $0.3 million for both the three months ended March 31, 2014 and 2013 .

Accrued Liabilities

The following table shows the components of accrued liabilities (in thousands):
 
 
March 31,
2014
 
December 31,
2013
Accrued payroll and employee related expenses
$
5,103

 
$
7,863

Accrued marketing expenses
4,089

 
3,739

Accrued royalty
2,122

 
2,458

Sales and other taxes payable
1,435

 
1,787

Accrued warranty
660

 
676

Accrued legal expenses
783

 
284

Other accrued liabilities
2,935

 
1,557

Total accrued liabilities
$
17,127

 
$
18,364


Product Warranty

The Company provides a standard limited warranty on its products of generally one year for both control units and applicators for its direct customers. For indirect customers in international markets, the Company provides a standard limited warranty on its products of generally three years for control units and one year for applicators.

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
 
March 31,
 
2014
 
2013
Balance at the beginning of the period
$
676

 
$
902

Accruals for warranties issued
39

 
134

Settlements of warranty claims
(55
)
 
(294
)
Balance at the end of the period
$
660

 
$
742


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):
 
 
March 31,
2014
 
December 31,
2013
Purchased technology
$
8,050

 
$
8,050

Less: Accumulated amortization
(1,744
)
 
(1,569
)
     Intangible asset, net
$
6,306

 
$
6,481


Amortization expense of the intangible asset was $0.2 million for both the three months ended March 31, 2014 and 2013 .

The total estimated annual future amortization expense of this intangible asset as of March 31, 2014 , is as follows (in thousands):

Fiscal Year
 
2014 (remaining 9 months)
$
525

2015
701

2016
701

2017
701

2018
701

Thereafter
2,977

Total
$
6,306



12


5. Related Party Transactions

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 which expires on December 31, 2018 . 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 $1.0 million for the three months ended March 31, 2014 , compared to $0.4 million for the three months ended March 31, 2013 . The accounts receivable balance under this distribution agreement was $0.4 million and $0.2 million as of March 31, 2014 , and December 31, 2013 , respectively.

6. Commitments and Contingencies

Lease Commitments

The Company occupies a facility in Pleasanton, California, a manufacturing facility in Dublin, California, and a warehouse space in Livermore, California, all of which are under leases that extend through December 2014 . The Company is currently in the process of renegotiating lease terms for these facilities. The Company also occupies office and warehouse space in Gatwick, United Kingdom, under a lease which extends through December 2018 , as well as office space in Taipei, Taiwan, under a lease which extends through August 2014 , and Seoul, South Korea under a lease which extends through October 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 for the three months ended March 31, 2014 , compared to $0.3 million for the three months ended March 31, 2013 .

Future minimum lease payments under the non-cancellable operating leases as of March 31, 2014 , are as follows (in thousands):

Year Ending December 31,
Amount
2014 (remaining 9 months)
$
935

2015
31

2016
62

2017
62

2018
62

     Total future minimum lease payments
$
1,152


Purchase Commitments

The Company had non-cancellable purchase obligations to contract manufacturers and suppliers for $6.6 million and $6.0 million at March 31, 2014 , and December 31, 2013 , respectively.

Unrecognized Tax Benefits

The Company's gross liability for unrecognized tax benefits totaled $38,000 , including estimated interest and penalties, as of March 31, 2014 , and is classified in long-term income taxes payable. The Company is unable to make a reasonably reliable estimate of the timing of payments in individual years due to uncertainties in the timing of tax audits, if any, or their outcomes.


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.

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 and Separation Agreements

Effective December 3, 2013 , the Company's Chief Scientific Officer and Senior Vice President of Clinical entered into a separation agreement with the Company. As a result of this separation agreement, the Company incurred $0.3 million in termination benefits and $0.7 million in costs related to the modification of the employee's stock-based compensation, which were recorded during the year ended December 31, 2013 . The amount outstanding related to this separation agreement was $0.2 million as of March 31, 2014 .

No similar costs were incurred during the three months ended March 31, 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, 2013
1,086,737

 
3,598,385

 
$
5.36

Additional shares reserved
1,851,794

 

 

Options granted
(75,000
)
 
75,000

 
20.68

Restricted stock units granted
(193,800
)
 

 

Options exercised

 
(138,109
)
 
20.33

Options canceled
936

 
(936
)
 
7.59

Restricted stock units canceled
50,850

 

 

Restricted stock units withheld for tax
134,836

 

 

Balance, March 31, 2014
2,856,353

 
3,534,340

 
$
5.72


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, 2013
1,906,696

 
$
5.60

Restricted stock units granted
193,800

 
20.63

Restricted stock units released
(319,582
)
 
4.62

Restricted stock units canceled
(50,850
)
 
5.98

Balance, March 31, 2014
1,730,064

 
$
7.45


During the three months ended March 31, 2014 , 319,582 shares subject to previously granted restricted stock units vested. A majority of these vested restricted stock units were net share settled. During the three months ended March 31, 2014 , the Company withheld 134,836 shares 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 months ended March 31, 2013 , 27,161 shares vested subject to previously granted restricted stock units. A majority of these vested restricted stock units were net share settled. During the three months ended March 31, 2013 , the Company withheld 1,970 shares 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.

Subsequently, the Company remitted cash to the appropriate taxing authorities. Total payments for employee's tax obligations to the relevant taxing authority were $2.5 million for the three months ended March 31, 2014 . Total payments for employee's tax obligations to the relevant taxing authority were not material for the three months ended March 31, 2013 . The payments were for taxes 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
 
March 31,
 
2014
 
2013
Cost of revenue
$
93

 
$
46

Research and development
206

 
198

Sales and marketing
936

 
173

General and administrative
870

 
702

Total stock-based compensation
$
2,105

 
$
1,119


As of March 31, 2014 , the total unrecognized compensation costs related to outstanding stock options, awards and employee stock purchases was $15.0 million , which is expected to be recognized using the straight-line attribution method over 2.5 years .

Performance-Based Awards

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 these stock options and restricted stock units was $0.5 million for the three months ended March 31, 2014 , compared to $0.2 million for the three months ended March 31, 2013 .

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
 
March 31,
 
2014
 
2013
Expected term (in years)
4.4

 
4.8

Expected volatility
43
%
 
52
%
Risk-free interest rate
1.11
%
 
0.91
%
Expected dividend yield
%
 
%

During the three months ended March 31, 2014 , the Company granted 70,000 stock options to employees with a weighted-average grant date fair value of $7.69 per share. During the three months ended March 31, 2013 , the Company granted 90,000 stock options to employees with a weighted-average grant date fair value of $1.78 per share.

During the three months ended March 31, 2014 , the Company granted 183,800 restricted stock units to employees with a weighted-average grant date fair value of $20.80 per share. During the three months ended March 31, 2013 , the Company granted 754,050 restricted stock units to employees with a weighted-average grant date fair value of $4.00 per share.

As of March 31, 2014 , 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 .


16


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 year ended December 31, 2013 , the Company granted stock-based awards to a non-employee which vest over 2 years . Additionally, during the three months ended March 31, 2014 , the Company granted additional stock-based awards to a non-employee which will vest over 2 years . Stock-based compensation expense related to non-employee grants was $0.1 million for the three months ended March 31, 2014 .

Stock-based compensation expense for non-employees was insignificant for the three months ended March 31, 2013 .

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 stock options, restricted stock units and common stock issuable pursuant to the ESPP. 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
 
March 31,
 
2014
 
2013
Historical net loss per share:
 
 
 
Numerator
 
 
 
Net loss (in thousands)
$
(7,337
)
 
$
(7,482
)
Denominator
 
 
 
Weighted average shares of common stock outstanding used in computing net loss per share - basic and diluted
37,215,697

 
35,890,084

Basic and diluted net loss per share
$
(0.20
)
 
$
(0.21
)

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
 
March 31,
 
2014
 
2013
Options to purchase common stock
3,534,340

 
3,115,963

Restricted stock units
1,730,064

 
1,056,600

Common stock issuable pursuant to the ESPP

 
11,736

Total
5,264,404

 
4,184,299


9. Income Taxes

The Company recorded an income tax provision of $0.1 million for the three months ended March 31, 2014 , compared to an income tax provision of $7,000 for the three months ended March 31, 2013 . The income tax provision for the three months ended March 31, 2014 and 2013 , reflects income tax expense in certain non-U.S. and certain state jurisdictions. The Company continues to maintain a valuation allowance for its U.S. federal and state deferred tax assets.


17


At March 31, 2014 , the Company had $3.0 million of unrecognized tax benefits, of which $38,000 , 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 utilization of the net operating loss ("NOL") carryforwards is subject to annual limitations under Section 382 of the Internal Revenue Code. Section 382 imposes limitations on a corporation’s ability to utilize its NOL carryforwards if it experiences an “ownership change.” In general terms, an ownership change results from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50% over a three-year period. Once an ownership change is deemed to have occurred under Section 382, a limitation on the annual utilization of NOL carryforwards is imposed and, therefore, a portion of the tax loss carryforwards would be subject to the limitation under Section 382. The Company assessed the application of Section 382 during the first quarter of 2014 and concluded that an ownership change had occurred. The annual limitations under Section 382 are not expected to adversely impact the Company's ability to utilize its net operating losses prior to their expiration.

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  March 31, 2014 , 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
 
March 31,
 
2014
 
2013
North America
$
22,787

 
$
16,617

International
8,188

 
3,365

     Total
$
30,975

 
$
19,982


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 $20.9 million for the three months ended March 31, 2014 , compared to $16.0 million for the three months ended March 31, 2013 .

The following table sets forth revenue by product expressed as dollar amounts (in thousands):
 
 
Three Months Ended
 
March 31,
 
2014
 
2013
System revenue
$
14,461

 
$
11,072

Consumable revenue
16,514

 
8,910

     Total
$
30,975

 
$
19,982


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 and analysis 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, 2013 . 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 cycles in the form of consumable procedure packs to our customers. Our CoolSculpting system comprises a CoolSculpting control unit and our CoolSculpting applicators which are designed to allow a physician to treat a different size and shape fat bulge. With the launch of our CoolSmooth applicator in April 2014, we now offer five CoolSculpting applicators for use with our CoolSculpting system.
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 the abdomen area. Most recently, in April 2014, CoolSculpting was cleared by the FDA for treatment of the thigh area. We may seek additional regulatory clearances from the FDA to expand our United States marketed indications for CoolSculpting to areas on the body other than the flanks, abdomen and thighs. 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 back and chest, in addition to the flanks, abdomen and thighs.
In the United States and related territories, as well as 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 markets in Asia and Europe. Revenue from markets outside of North America accounted for 26% of our total revenue for the three months ended March 31, 2014 , compared to 17% of our total revenue for the three months ended March 31, 2013 .

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 $31.0 million for the three months ended March 31, 2014 , compared to $20.0 million for the three months ended March 31, 2013 .

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, as well as purchase additional applicators, or add-on applicators, for existing systems. 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 47% of our total revenue for the three months ended March 31, 2014 , compared to 55% of our total revenue for the three months ended March 31, 2013 . Our worldwide installed base grew by 48% from 1,595 units as of March 31, 2013 , to 2,354 units as of March 31, 2014 .

Consumable revenue.  We generate consumable revenue through sales of cycles in the form of consumable 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 customers to perform a fixed number of CoolSculpting procedures, or

19

Table of Contents

cycles. Consumable revenue accounted for 53% of our total revenue for the three months ended March 31, 2014 , compared to 45% of our total revenue for the three months ended March 31, 2013 . We shipped 126,059 CoolSculpting revenue cycles to our customers during the three months ended March 31, 2014 , compared to 67,928 CoolSculpting revenue cycles during the three months ended March 31, 2013 .

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 targeted 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 patients seeking treatment and the availability of our customers 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, 2013 .

Our critical accounting policies have not materially changed during the three months ended   March 31, 2014 . Furthermore, the preparation of our consolidated financial statements is in conformity with generally accepted accounting principles in the United States of America, or GAAP. The preparation of our consolidated financial statement requires management to make judgments and estimates 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) accruals for customer programs, including cooperative marketing arrangements and customer incentive programs, (3) investments, including the fair value of such investments, (4) warranty accruals, (5) valuation and recognition of stock-based compensation, and (6) 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 Policies and Estimates” in our Annual Report on Form 10-K for the year ended  December 31, 2013 .

Results of Operations

Revenue (in thousands, except for percentages):

 
Three Months Ended
 
March 31,
 
2014
 
2013
 
$ Change
 
% Change
System revenue
$
14,461

 
$
11,072

 
$
3,389

 
31
%
Consumable revenue
16,514

 
8,910

 
7,604

 
85
%
Total revenue
$
30,975

 
$
19,982

 
$
10,993

 
55
%

20

Table of Contents


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, and an increase in our installed base of CoolSculpting systems.

System revenue.  We experienced incremental growth in system revenue for the three months ended March 31, 2014 , as compared to the same period in 2013 , as a result of increased system sales in both North America and our International markets due to the reasons stated above while maintaining a consistent average selling price across all regions. Overall, we placed 179 systems in the first quarter of 2014 as compared to 112 systems in the first quarter of 2013. The incremental quarter over quarter revenue resulting from system placements was offset in part by increased sales to existing customers in the first quarter of 2013 of our CoolFit and CoolCurve+ applicators, which were launched in mid-2012 and the first quarter of 2013, respectively, as our customers looked to optimize their existing system to fit different body shapes and sizes.  The revenue impact of these incremental applicator purchases by our existing customers in the first quarter of 2014 was less significant than in the prior year as these products are now included in the standard system bundle.

Consumable revenue.  The increase in consumable revenue was primarily due to the significant growth of our worldwide installed base of CoolSculpting systems and an increased number of consumable procedure packs shipped to our customers driven by our targeted marketing programs. The average selling price for the consumable procedures packs, which do not tend to fluctuate significantly, remained consistent across both periods. Additionally, during the first quarter of 2014 we discontinued our practice of providing rebates to our customers associated with the Crystal Rewards Program, our customer loyalty program related to consumable purchases. These rebates reduced consumable revenue in periods prior to this program change.

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

 
Three Months Ended
 
March 31,
 
2014
 
2013
 
$ Change
 
% Change
Cost of revenue
$
9,016

 
$
7,348

 
$
1,668

 
23
%
% of total revenue
29
%
 
37
%
 
 
 
 
Gross profit
$
21,959

 
$
12,634

 
$
9,325

 
74
%
Gross profit %
71
%
 
63
%
 
 
 
 

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 months ended March 31, 2014 , as compared to the same period in 2013, was attributable to consumable procedure packs, which carry a higher margin than our systems, increased in the first quarter of 2014 compared to the first quarter of 2013 on both an overall basis and as a percentage of overall sales. Additionally, the increase in gross profit as a percentage of revenue is attributable to our continued high rate of new system placements combined with 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.
 

21

Table of Contents

Operating Expenses (in thousands, except for percentages):

 
Three Months Ended
 
March 31,
 
2014
 
2013
 
$ Change
 
% Change
Operating expenses
 
 
 
 
 
 
 
Research and development
$
4,270

 
$
3,749

 
$
521

 
14
%
% of total revenue
14
%
 
19
%
 
 
 
 
Sales and marketing
$
20,187

 
$
12,542

 
$
7,645

 
61
%
% of total revenue
65
%
 
63
%
 
 
 
 
General and administrative
$
4,713

 
$
3,808

 
$
905

 
24
%
% of total revenue
15
%
 
19
%
 
 
 
 
Total operating expenses
$
29,170

 
$
20,099

 
$
9,071

 
45
%

Research and development.  Research and development expenses increased for the three months ended March 31, 2014 , compared to the same period in 2013, primarily due to a $0.3 million increase in payroll related costs attributed to higher headcount and an increase in performance-based compensation, as well as a $0.1 million increase in consulting, development, materials 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 March 31, 2014 , compared to the same period in 2013, primarily due to the significant increase in headcount attributable to our sales force, which increased by nearly half, as we continue to expand into new and existing markets. This growth resulted in a $2.3 million increase in payroll related costs resulting from higher headcount and an increase in performance-based compensation resulting from revenue growth, increased stock-based compensation expense of $0.8 million attributed to new grants to existing and new employees, and $0.8 million of travel and related expenses associated with sales efforts in the normal course of business as well as the training of new and existing members of our sales force. We also experienced increased costs of $3.0 million associated with advertising, public relations and collateral production expenses incurred in conjunction with our sales and marketing initiatives. These costs were related to brand development as well as our cooperative marketing arrangements and customer incentive programs, which allows our customers to receive partial reimbursement for qualifying advertising expenditures which promote our product and brand.

General and administrative.  General and administrative expenses increased for the three months ended March 31, 2014 , compared to the same period in 2013, primarily due to a $0.6 million increase in payroll related costs resulting from higher headcount in certain functions to support growth in our business, as well as a $0.3 million increase in professional service fees associated with the growth of our business as well as our expansion into international markets.

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

 
Three Months Ended
 
March 31,
 
2014
 
2013
 
$ Change
 
% Change
Interest income, net
$
19

 
$
24

 
$
(5
)
 
(21
)%
% of total revenue
 %
 
 %
 
 
 
 
Other expense, net
$
(66
)
 
$
(34
)
 
$
(32
)
 
94
 %
% of total revenue
 %
 
 %
 
 
 
 

Interest income, net.  For both the three months ended March 31, 2014 and 2013 , 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. The decrease in interest income is attributable to a decrease in our cash, cash equivalents and investments.


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Table of Contents

Other expense, net. The increase in other expense in three months ended March 31, 2014 , compared to the same period in 2013 , was primarily a result of an unfavorable change in foreign exchange rates.

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 March 31, 2014 , and December 31, 2013 (in thousands):

 
March 31,
 
December 31,
 
2014
 
2013
Cash and cash equivalents
$
14,546

 
$
25,798

Short-term investments
18,442

 
18,840

Long-term investments
8,234

 
11,442

Total
$
41,222

 
$
56,080

 
 
 
 
Working capital
$
38,359

 
$
42,430


Summary Statement of Cash Flows

The following table summarizes our cash flows for the three months ended March 31, 2014 and 2013 (in thousands):
 
 
Three Months Ended
 
March 31,
 
2014
 
2013
Net cash used in operating activities
$
(12,343
)
 
$
(7,009
)
Net cash provided by investing activities
2,982

 
918

Net cash (used in) provided by financing activities
(1,906
)
 
61

Effect of exchange rate on cash and cash equivalents
15

 

Net decrease in cash and cash equivalents
$
(11,252
)
 
$
(6,030
)

Cash Flows for the Three Months Ended March 31, 2014 and 2013

Operating activities.  Net cash used in operating activities was $12.3 million during the three months ended March 31, 2014 , and consisted of a net loss of $7.3 million and a net change in operating assets and liabilities of $7.8 million , offset by non-cash items of $2.8 million . Non-cash items for the three months ended March 31, 2014 , consisted primarily of a stock-based compensation expense of $2.1 million and depreciation and amortization expense of $0.5 million . The significant items in the change in operating assets and liabilities include cash used resulting from increases in inventory of $6.3 million and an increase in accounts receivable of $2.1 million . We experienced an increase in inventory as we continued to build inventory to support expected customer demand, as well as due to an increase in purchases of materials in advance of the introduction of our recently announced CoolSmooth applicator, which we have begun shipping to customers in the second quarter of 2014. The increase in accounts receivable is a function of the increase in sales as well as timing of payment receipts from customers.

Net cash used in operating activities was $7.0 million during the three months ended March 31, 2013, and consisted of a net loss of $7.5 million and a net change in operating assets and liabilities of $1.2 million, offset by non-cash items of $1.7 million. Non-cash items for the three months ended March 31, 2013, consisted primarily of a stock-based compensation expense of $1.1 million and depreciation and amortization expense of $0.4 million. The significant items in the change in operating assets and liabilities include cash used resulting from a decrease in accounts payable, accrued and other non-current liabilities of $2.5 million, an increase in prepaid expenses and other assets of $0.8 million and a decrease in deferred revenue of $0.4 million, offset in part by cash proceeds resulting from decreases in inventory of $1.3 million and accounts receivable of $1.1 million. The decrease in accounts payable and accrued liabilities resulted primarily from reductions in inventory purchases and our continued focus on

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cost controls and reductions, offset in part by increased accruals for sales and marketing expenses during the first three months of 2013 driven by new customer incentive and marketing programs designed to drive revenue growth. The decrease in inventory was primarily attributable to increased revenue while the decrease in accounts receivable was driven by an increase in credit card transactions with customers at the end of the quarter.

Investing activities.  Net cash provided by investing activities was $3.0 million for the three months ended March 31, 2014 , as compared to net cash provided by investing activities of $0.9 million during the same period in 2013 . During the three months ended March 31, 2014 , we received proceeds from the sale and maturity, net of purchases, of $3.5 million of short-term and long-term investments. During the three months ended March 31, 2013 , we received proceeds from the sale and maturity, net of purchases, of $0.9 million of short-term and long-term investments. Purchases of property and equipment amounted to $0.6 million and $0.1 million for the three months ended March 31, 2014 and 2013 , respectively.

Financing activities.  Net cash used in financing activities during the three months ended March 31, 2014 , of $1.9 million consisted of tax payments related to shares withheld for vested restricted stock units of $2.5 million , offset in part by proceeds received from the issuance of common stock upon the exercise of stock options of $0.6 million . Net cash provided by financing activities during the three months ended March 31, 2013 , of $0.1 million consisted of proceeds received from the issuance of common stock upon the exercise of stock options, offset in part by tax payments related to shares withheld for vested restricted stock units.

Our cash, cash equivalents and investments declined by $14.9 million during the three months ended March 31, 2014 . We expect to continue to invest in our research and development efforts, as well as in our sales and marketing organization, to support our current and expected growth and initiatives. 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 $7.7 million and $7.5 million at March 31, 2014 , and December 31, 2013 , 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. We are obligated to pay a 7% royalty on net sales, as defined in the agreement, of CoolSculpting systems, applicators and procedure packs.

Lease Commitments

We lease facilities with lease terms that expire at various dates primarily 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 for the three months ended March 31, 2014 , compared to $0.3 million for the three months ended March 31, 2013 .

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Future minimum lease payments under the non-cancellable operating leases as of March 31, 2014 , are as follows (in thousands):

Year Ending December 31,
Amount
2014 (remaining 9 months)
$
935

2015
31

2016
62

2017
62

2018
62

     Total future minimum lease payments
$
1,152


Purchase Commitments

We had non-cancellable purchase obligations to contract manufacturers and suppliers for $6.6 million and $6.0 million at March 31, 2014 , and December 31, 2013 , respectively.

Unrecognized Tax Benefits

Our gross liability for unrecognized tax benefits totaled $38,000 , including estimated interest and penalties, as of March 31, 2014 , and is classified in long-term income taxes payable. We are unable to make a reasonably reliable estimate of the timing of payments in individual years due to uncertainties in the timing of tax audits, if any, or their outcomes.

Product Warranty

The estimated product warranty accrual was as follows (in thousands):
 
 
Three Months Ended
 
March 31,
 
2014
 
2013
Balance at the beginning of the period
$
676

 
$
902

Accruals for warranties issued
39

 
134

Settlements of warranty claims
(55
)
 
(294
)
Balance at the end of the period
$
660

 
$
742


Related Party Transactions

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 which requires on December 31, 2018. 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 $1.0 million for the three months ended March 31, 2014 , compared to $0.4 million for the three months ended March 31, 2013 . The accounts receivable balance under this distribution agreement was $0.4 million and $0.2 million as of March 31, 2014 , and December 31, 2013 , respectively.



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Off-balance Sheet Arrangements

As of March 31, 2014 , and December 31, 2013 , 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.

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, 2013 . Our exposure to market risk has not changed materially since December 31, 2013 .

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 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 March 31, 2014 .

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 March 31, 2014 , 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.

The risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2013 , filed with the Securities and Exchange Commission on February 26, 2014, have not changed significantly, other than as are marked with an asterisk (*), 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 $19.3 million in 2013 and $30.1 million in 2012. Our net loss for the three months ended March 31, 2014 , was $7.3 million , and as of March 31, 2014 , we had an accumulated deficit of approximately $140.4 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 revenue 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 revenue 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:

quarter to quarter variation in customer demand for purchasing CoolSculpting systems;
the inability for our 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 revenue we generate from sales of our CoolSculpting system and CoolSculpting consumables will account for substantially all of our revenue for at least 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, abdomen and thighs 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 cycle, any failure of this product to satisfy customer or patient demand will harm our business and future prospects.


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We have limited experience with our direct sales and marketing force and any failure to build and manage our direct sales and marketing force effectively could have a material adverse effect on our business.

We rely on a direct sales force to sell CoolSculpting in the United States, Canada and certain markets in Europe. To meet our anticipated sales objectives, we expect to grow our direct sales and marketing organization in these countries significantly over the next several years and intend to opportunistically build a direct sales and marketing force in certain international markets. There are significant risks involved in building and managing our sales and marketing organization, including risks related to our ability to:

hire qualified individuals as needed;
generate sufficient leads within our target customer group for our sales force;
provide adequate training for the effective sale and marketing of CoolSculpting;
retain and motivate our direct sales and marketing professionals; and
effectively oversee geographically dispersed sales and marketing teams.

Our failure to adequately address these risks could have a material adverse effect on our ability to increase sales and use of our CoolSculpting systems, which would cause our revenue to be lower than expected and harm our results of operations. In addition, as we transition to direct sales in certain international markets, consistent with our sales strategy, the transition may result in a slow-down of growth or even a reduction in sales in those markets during the transition process as our distributors anticipate losing the ability to sell our products. Furthermore, our transition to direct sales in certain international markets could impact the performance of distributors in otherwise unaffected international markets as distributors may anticipate that their territories may be transitioned in the future.

Our ability to market CoolSculpting in the United States is limited to the non-invasive reduction of fat around the flanks, abdomen and thighs, 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”, for the abdomen area and for the thigh 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 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 a substantial majority of our revenue 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 cycle are compelling when compared to the cost and revenue associated with alternative aesthetic treatments our 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-operative marketing strategy with individual practices, will be critical in driving additional CoolSculpting procedures, but these programs require customers commitment and involvement to succeed. If we are unable to increase customer adoption and use of CoolSculpting, our financial performance will be adversely affected.


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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-operative marketing strategy with individual practices, 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.

Our success depends in part upon patient satisfaction with the effectiveness of CoolSculpting.

To generate repeat and referral business, patients must be satisfied with the effectiveness of CoolSculpting. Our clinical studies demonstrate that a single CoolSculpting procedure noticeably and measurably reduces the fat layer within a treated fat bulge without requiring diet or exercise. However, we designed CoolSculpting to address the aesthetic concerns of individuals who have stubborn fat bulges. Although there are no technical or regulatory restrictions on the use of CoolSculpting based on patient weight, we believe patients who are significantly obese and who do not have specific fat bulges but require significant fat reduction to achieve aesthetic results are better candidates for invasive and minimally-invasive procedures not offered by us. In addition, results obtained from a CoolSculpting procedure occur gradually over a period of two to four months after treatment and patient perception of their results may vary. Although we train our customers to select the appropriate patient candidates for a CoolSculpting procedure, explain to their patients the time period over which the results from a CoolSculpting procedure will occur, and take before and after photographs of a patient, our customers may not select appropriate patient candidates or CoolSculpting may produce results that may not meet patients' expectations. If patients are not satisfied with the long term aesthetic benefits or safety of CoolSculpting, or feel that it is too expensive for the results obtained, our reputation and future sales will suffer. As market experience of CoolSculpting increases and more procedures are performed, we may learn more about the risk profile of the CoolSculpting system and receive reports of new side effects. For example, we have received reports of rare side effects, including late-onset pain, subcutaneous induration, which is hardening of normally soft tissue under the skin, hernia, and paradoxical hyperplasia, which is unusually enlarged tissue volume in the treatment area.

To market and sell CoolSculpting in markets outside of North America, we mainly depend on third-party distributors.

We currently depend on third-party distributors to sell, market, and service our CoolSculpting systems in certain markets outside of North America and to train our customers in these markets. We may need to engage additional third-party distributors to expand in new markets outside of North America. We are subject to a number of risks associated with our dependence on these third parties, including:

we lack day-to-day control over the activities of third-party distributors;
third-party distributors may not commit the necessary resources to market, sell, and service our systems to the level of our expectations;
third-party distributors may not be as selective as we would be in choosing customers to purchase CoolSculpting systems or as effective in training customers in marketing and patient selection;
third-party distributors may terminate their arrangements with us on limited, or no, notice or may change the terms of these arrangements in a manner unfavorable to us; and
disagreements with our distributors could require or result in costly and time-consuming litigation or arbitration which we could be required to conduct in jurisdictions with which we are not familiar.


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If we fail to establish and maintain satisfactory relationships with our third-party distributors, our revenue and market share may not grow as anticipated, and we could be subject to unexpected costs, each of which would harm our results of operations and financial condition.

To successfully market and sell CoolSculpting in markets outside of North America, we must address many issues with which we have limited experience.

We believe that a significant percentage of our business will continue to come from sales in markets outside of North America through increased penetration in countries where we currently market and sell CoolSculpting directly and through our third-party distributor network, combined with expansion into new international markets. However, international sales are subject to a number of risks, including:

difficulties in staffing and managing our international operations;
increased competition as a result of more products and procedures receiving regulatory approval or otherwise free to market in international markets;
longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
reduced or varied protection for intellectual property rights in some countries;
export restrictions, trade regulations, and foreign tax laws;
fluctuations in currency exchange rates;
foreign certification and regulatory clearance or approval requirements;
difficulties in developing effective marketing campaigns in unfamiliar foreign countries;
customs clearance and shipping delays;
political, social, and economic instability abroad, terrorist attacks, and security concerns in general;
preference for locally produced products;
potentially adverse tax consequences, including the complexities of foreign value-added tax systems, tax inefficiencies related to our corporate structure, and restrictions on the repatriation of earnings;
the burdens of complying with a wide variety of foreign laws and different legal standards; and
increased financial accounting and reporting burdens and complexities.

If one or more of these risks were realized, it could require us to dedicate significant financial and management resources which could negatively affect our financial results.

Our inability to effectively compete with our competitors may prevent us from achieving significant market penetration or improving our operating results.

The medical technology and aesthetic product markets are highly competitive and dynamic, and are characterized by rapid and substantial technological development and product innovations. Demand for CoolSculpting could be limited by the products and technologies offered by our competitors, including newly announced products and technologies, whether or not effective. We designed CoolSculpting to address the aesthetic concerns of individuals who have stubborn fat bulges. Patients who are obese and who do not have specific fat bulges but require significant fat reduction to achieve aesthetic results are candidates for invasive and minimally-invasive procedures, such as liposuction and laser-assisted liposuction. Patients who do not require significant fat reduction to achieve meaningful aesthetic results explore non-invasive fat reduction and body contouring procedures to avoid the pain, expense, downtime, and surgical risks associated with invasive and minimally-invasive procedures. In the United States, the FDA has cleared the marketing of a laser energy-based product for body contouring. The laser energy-based product, marketed by Erchonia Corporation, is used to perform a non-invasive procedure reported to be safe and easy to perform, without causing patient pain. In September 2011, the FDA cleared the marketing of an ultrasound energy-based product for body contouring offered by Solta Medical, Inc. This ultrasound energy-based product utilizes heat to non-invasively eliminate fat cells in a single procedure. We believe that the marketing of this product extended the sales cycle for CoolSculpting beginning in 2013 and may continue to have an impact on our sales in the future. The timing of, and publicity around, the introduction of such products or other technologies is outside our control, and may have an adverse impact on our sales and the rate at which practices purchase Coolsculpting systems and/or cycles in the form of consumable procedure packs.

Due to less stringent regulatory requirements, there are many more aesthetic products and procedures available for use in international markets than are approved for use in the United States. For example, multiple ultrasound based products have been cleared for marketing outside the United States. There are also fewer limitations on the claims our competitors in international markets can make about the effectiveness of their products and the manner in which they can market them. As a result, we face more competition in these markets than in the United States.


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We also compete generally against medical technology and aesthetic companies, including those offering products and technologies unrelated to fat reduction, for customer resources and mind share. Some of our competitors have a broad range of product offerings, large direct sales forces, and long-term customer relationships with our target customers, which could inhibit our market penetration efforts. Our potential customers also may need to recoup the cost of expensive products that they have already purchased from our competitors, and thus they may decide to delay purchasing, or not to purchase, our CoolSculpting system.

Many of our competitors are large, experienced companies that have substantially greater resources and brand recognition than we do. Competing in the medical technology and aesthetic markets could result in price-cutting, reduced profit margins, and limited market share, any of which would harm our business, financial condition, and results of operations.

*Third parties may attempt to produce counterfeit versions of our products and may harm our ability to collect revenue from sales of our CoolSculpting systems or consumables, negatively affect our reputation, or harm patients and subject us to product liability.

Third parties may seek to develop counterfeit CoolCards and procedure packs that are compatible with our CoolSculpting system and available to practitioners at lower prices than our own. If security features incorporated into the design of our CoolSculpting system are unable to prevent the introduction of counterfeit CoolCards, we may not be able to monitor the number of procedures performed using our CoolSculpting system. Practitioners may be able to make unauthorized use of our CoolSculpting system and our ability to collect fees from sales of consumables may be compromised. Consumable revenue accounts for a significant portion of our revenue, and an inability to collect fees from the sale of consumables in the future would have a material adverse effect on our results of operations.

In addition, if counterfeit products are used with or in place of our own, we could be subject to product liability lawsuits resulting from the use of damaged or defective goods and suffer damage to our reputation. Furthermore, our competitors may design and manufacture systems that we believe infringe our proprietary rights, which would compete against our CoolSculpting systems and impair our ability to sell our CoolSculpting systems in jurisdictions in which our proprietary rights are not upheld.

For example, in January 2013, the Mercantile Court in Spain rendered its ruling on the merits of Massachusetts General Hospital's, or MGH, and our request for a permanent injunction against Clinipro's LipoCryo device based on Clinipro's infringement of two European patents owned by MGH and globally licensed exclusively to us. While the Mercantile Court had earlier granted in 2012 MGH's and our request for a preliminary injunction, the Court, in the January 2013 ruling, denied the request for a permanent injunction. The Mercantile Court's ruling affects only Clinipro's activities in Spain and we have appealed the ruling. Further, although we and MGH did prevail against Clinipro in a patent infringement case in France, holding that an MGH patent exclusively licensed to us is valid and enforceable and enjoining Clinpro and its distributors from selling LipoCryo in France, Clinipro has appealed that ruling, and there is no assurance that Clinipro will not prevail.

Additionally, counterfeit products may be used with or in place of our own. Such products may be promoted in a way that misleads consumers into believing they are affiliated with us and we could be subject to product liability lawsuits resulting from the use of damaged or defective goods and suffer damage to our reputation.

We have limited experience in manufacturing our CoolSculpting system, and if we are unable to manufacture our CoolSculpting system in high-quality commercial quantities successfully and consistently to meet demand, our growth will be limited.

Our CoolSculpting system consists of a CoolSculpting control unit and our CoolSculpting applicators. Our CoolSculpting procedure packs are composed of 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. Prior to the second quarter of 2013, we manufactured our CoolSculpting system and related procedure packs through a combination of direct manufacturing and third-party contract manufacturers. During the second quarter of 2013, we fully in-sourced the manufacturing of our CoolSculpting system. CoolGels and CoolLiners continue to be manufactured through third-party contract manufacturers. To manufacture our CoolSculpting system in the quantities that we believe will be required to meet anticipated market demand, we will need to increase manufacturing capacity, which will involve significant challenges and may require additional regulatory approvals. In addition, the development of these manufacturing capabilities will require us to invest substantial additional funds and hire and retain the technical personnel who have the necessary manufacturing experience. We may not successfully complete any required increase to existing manufacturing processes in a timely manner, or at all.

If there is a disruption to our manufacturing operations, we will have no other means of producing our CoolSculpting systems until we restore the affected facilities or develop alternative manufacturing facilities or methods, including potentially re-outsourcing our manufacturing operations. Additionally, any damage to or destruction of our facilities or equipment may significantly impair our ability to manufacture CoolSculpting systems on a timely basis.

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If we are unable to produce CoolSculpting systems in sufficient quantities to meet anticipated customer demand, our revenue, business, and financial prospects would be harmed. The lack of experience we have in producing commercial quantities of our CoolSculpting system may also result in quality issues, and result in product recalls. Manufacturing delays related to quality control could negatively impact our ability to bring our CoolSculpting system and procedure packs to market, harm our reputation, and decrease our revenue. Any recall could be expensive and generate negative publicity, which could impair our ability to market our CoolSculpting system and further affect our results of operations.

We outsource the manufacturing of key components to third-party contract manufacturers.

CoolGels and CoolLiners are manufactured by third-party contract manufacturers. If the operations of third-party contract manufacturers are interrupted or if they are unable to meet our delivery requirements due to capacity limitations, regulatory problems or other constraints, we may be limited in our ability to fulfill new customer orders or to repair equipment at current customer sites. Any change to another contract manufacturer would likely entail significant delay, require us to devote substantial time and resources, and could involve a period in which our products could not be produced in a timely or consistently high-quality manner, any of which could harm our reputation and results of operations.

Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to supply shortages and price fluctuations, which could harm our business.

Our CoolSculpting system contains two critical components, the integrated circuit contained in the CoolSculpting control unit and the CoolCard, which is supplied by a company in Japan, and the connector that attaches our applicators to the control unit, which is supplied by a separate company in the United States. The single source suppliers of these two critical components may not be replaced without significant effort and delay in production. We do not have supply agreements with the suppliers of these critical components beyond purchase orders. However, we attempt to maintain a safety stock inventory for these critical components equal to one year of forecasted part requirements of the integrated circuit and one month of connectors in finished assemblies, as well as at least three months' supply of connectors to support open purchase orders. Such forecasted amounts may be inaccurate and we may experience shortages as a result of serious supply problems or longer lead times with these suppliers as well as an increased demand for our products. In addition, several other non-critical components and materials that compose our CoolSculpting system are currently supplied by a single supplier or a limited number of suppliers. In many of these cases, we have not yet qualified alternate suppliers and rely upon purchase orders, rather than long-term supply agreements. A supply interruption or an increase in demand beyond our current suppliers' capabilities could harm our ability to manufacture our CoolSculpting system until new sources of supply are identified and qualified. Our reliance on these suppliers subjects us to a number of risks that could harm our business, including:

interruption of supply resulting from modifications to or discontinuation of a supplier's operations;
delays in product shipments resulting from uncorrected defects, reliability issues, or a supplier's variation in a component;
a lack of long-term supply arrangements for key components with our suppliers;
inability to obtain adequate supply in a timely manner, or to obtain adequate supply on commercially reasonable terms;
difficulty and cost associated with locating and qualifying alternative suppliers for our components in a timely manner;
production delays related to the evaluation and testing of products from alternative suppliers, and corresponding regulatory qualifications;
delay in delivery due to our suppliers prioritizing other customer orders over ours;
damage to our brand reputation caused by defective components produced by our suppliers;
increased cost of our warranty program due to product repair or replacement based upon defects in components produced by our suppliers; and
fluctuation in delivery by our suppliers due to changes in demand from us or their other customers.

Any interruption in the supply of components or materials, or our inability to obtain substitute components or materials from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers, which would have an adverse effect on our business.

Recent regulations related to conflict minerals could adversely impact our business.
 
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of tin, tantalum, tungsten and gold, known as conflict minerals, originating from the Democratic Republic of Congo, or DRC, and adjoining countries. As a result, in August 2012 the United States Security and Exchange Commission, or SEC, adopted annual disclosure and reporting requirements for public companies that use conflict minerals mined from the DRC and adjoining countries in their products. We have determined that we use at least one of these conflict minerals in the

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manufacture of our CoolSculpting system, although we have not yet determined the source of the minerals that we use. These new disclosure requirements require us to use diligent efforts to determine which conflict minerals we use and the source of those conflict minerals. The first report in which we will disclose the results of our findings is due on May 31, 2014 for the 2013 calendar year. There are and will be costs associated with complying with these disclosure requirements, including those costs incurred in conducting diligent efforts to determine which conflict minerals we use and the sources of conflict minerals used in our CoolSculpting system and related consumables. Further, the implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in our CoolSculpting system and related consumables. As there may be only a limited number of suppliers offering conflict free minerals, we cannot be sure that we will be able to obtain necessary conflict free conflict minerals in sufficient quantities or at competitive prices. In addition, we may face reputational challenges if we determine that our CoolSculpting system and/or related consumables contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in our CoolSculpting system and related consumables through the procedures we may implement. If we determine it is necessary to redesign our CoolSculpting system and/or related consumables to not use conflict minerals, we would incur costs associated with doing so.

We forecast sales to determine requirements for components and materials used in our CoolSculpting system, and if our forecasts are incorrect, we may experience delays in shipments or increased inventory costs.

We keep limited materials, components, and finished products on hand. To manage our operations with our third-party contract manufacturers and suppliers, we forecast anticipated product orders and material requirements to predict our inventory needs and enter into purchase orders on the basis of these requirements. Several components of our CoolSculpting system require an order lead time of six months or more. Our limited historical commercial experience and growth may not provide us with enough data to consistently and accurately predict future demand. If our business expands, and our demand for components and materials increases beyond our estimates, our contract manufacturers and suppliers may be unable to meet our demand. In addition, if we underestimate our component and material requirements, we may have inadequate inventory, which could interrupt, delay, or prevent delivery of our CoolSculpting system to our customers. In contrast, if we overestimate our component and material requirements, we may have excess inventory, which would increase our expenses. Any of these occurrences would negatively affect our financial performance and the level of satisfaction our customers have with our business.

There exists a potential for misuse of our CoolSculpting system, which could harm our reputation and our business.

Under state law in the United States, our customers can generally allow nurse practitioners, technicians, and other non-physicians to perform CoolSculpting procedures under their direct supervision. Similarly, in markets outside of the United States, our customers can allow non-physicians to perform CoolSculpting procedures under their supervision. Although we and our distributors provide training on the use of CoolSculpting systems, we do not supervise the procedures performed with our CoolSculpting system, nor can we be assured that direct physician supervision of procedures occurs according to our recommendations. The potential misuse of our CoolSculpting system by physicians and non-physicians may result in adverse treatment outcomes, which could harm our reputation and expose us to costly product liability litigation.

Product liability suits could be brought against us due to defective design, labeling, material, workmanship, or misuse of our CoolSculpting system, or unanticipated adverse events, and could result in expensive and time-consuming litigation, payment of substantial damages, an increase in our insurance rates and substantial harm to our reputation.

If our CoolSculpting system is defectively designed, manufactured, or labeled, contains defective components, or is misused, we may become subject to substantial and costly litigation by our customers or their patients. Misusing our CoolSculpting system or failing to adhere to operating guidelines can cause skin damage and underlying tissue damage and, if our operating guidelines are found to be inadequate, we may be subject to liability. Furthermore, if a patient is injured in an unexpected manner after undergoing a CoolSculpting procedure, even if the procedure was performed in accordance with our operating guidelines, we may be subject to product liability claims. We may also be subject to additional liability from claims related to known rare side effects such as late-onset pain, subcutaneous induration, hernia, and paradoxical hyperplasia. Product liability claims could divert management attention from our core business, be expensive to defend, and result in sizable damage awards against us. We currently have product liability insurance, but it may not be adequate to cover us against potential liability and it may be subject to material deductibles. In addition, we may not be able to maintain insurance in amounts or scope sufficient to provide us with adequate coverage against all potential liabilities. Any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage, could harm our reputation in the industry, and could reduce product sales. Product liability claims in excess of our insurance coverage, as well as deductibles under insurance policies, would be paid out of cash reserves, harming our financial condition and reducing our operating results.


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Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

We rely on networks, information management software and other technology, or information systems, including the Internet and third-party hosted services, to support a variety of business processes and activities, including procurement and supply chain, manufacturing, distribution, invoicing, order processing and collection of payments. We use information systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. In addition, we depend on information systems for digital marketing activities and electronic communications among our locations around the world and between company personnel as well as customers and suppliers. Because information systems are critical to many of our operating activities, our business processes may be impacted by system shutdowns or service disruptions. These disruptions may be caused by failures during routine operations such as system upgrades or user errors, as well as network or hardware failures, malicious or disruptive software, computer hackers, geopolitical events, natural disasters, failures or impairments of telecommunications networks, or other catastrophic events. These events could result in unauthorized disclosure of material confidential information. If our information systems suffer severe damage, disruption or shutdown and our business continuity plans do not effectively resolve the issues in a timely manner, we could experience delays in reporting our financial results and we may lose revenue and profits as a result of our inability to timely manufacture, distribute, invoice and collect payments. Misuse, leakage or falsification of information could result in a violation of data privacy laws and regulations and damage our reputation and credibility, and could expose us to liability. We may also be required to spend significant financial and other resources to remedy the damage caused by a security breach or to repair or replace networks and information systems.

Like most major corporations, our information systems are a target of attacks. Although the disruptions to our information systems that we have experienced to date have not had a material effect on our business, financial condition or results of operations, there can be no assurance that such disruptions will not have a material adverse effect on us in the future.
 
We have increased the size of our company significantly and over a short period, and difficulties managing our growth could adversely affect our business, operating results, and financial condition.

We have increased our headcount from 208 at January 1, 2013, to 331 at March 31, 2014 , and plan to continue to hire a substantial number of additional employees as we increase our commercialization and sales activities for CoolSculpting. This growth has placed and may continue to place a strain on our management and our administrative, operational, and financial infrastructure. Our ability to manage our operations and growth requires the continued improvement of our operational, financial and management controls, reporting systems, and procedures, particularly to meet the reporting requirements of the Securities Exchange Act of 1934. If we are unable to manage our growth effectively or if we are unable to attract additional highly qualified personnel, our business, operating results, and financial condition may be harmed.

We depend on skilled and experienced personnel to operate our business effectively. If we are unable to recruit, hire, and retain these employees, our ability to manage and expand our business will be harmed, which would impair our future revenue and profitability.

Our success largely depends on the skills, experience, and efforts of our executive officers and other key employees. We do not have employment contracts with any of our executive officers or other key employees that require these officers to stay with us for any period of time. Any of our executive officers and other key employees may terminate their employment with us at any time. The loss of any of our executive officers and other key employees could weaken our management expertise and harm our business operations.

In addition, our ability to retain our skilled employees and our success in attracting and hiring new skilled employees will be a critical factor in determining whether we will be successful in the future. We may not be able to meet our future hiring needs or retain our existing employees. We will face significant challenges and risks in hiring, training, managing, and retaining sales and marketing, product development, financial reporting, and regulatory compliance employees, many of whom are geographically dispersed. Failure to attract and retain personnel, particularly our sales and marketing, product development, financial reporting, and regulatory compliance personnel, would materially harm our ability to compete effectively and grow our business.
 
We may need to raise additional funds in the future, and such funds may not be available on a timely basis, or at all.

Until such time, if ever, as we can achieve positive cash flows from sales of our CoolSculpting system and from sales of cycles in the form of consumable procedure packs, we will be required to finance our operations with our cash resources. We may need to raise additional funds in the future to support our operations. We cannot be certain that additional capital will be available as needed on acceptable terms, or at all. If we require additional capital at a time when investment in our company, in medical

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technology or aesthetic product companies or the marketplace in general is limited, we may not be able to raise such funds at the time that we desire, or at all. If we do raise additional funds through the issuance of equity or convertible securities, the percentage ownership of holders of our common stock could be significantly diluted and these newly issued securities may have rights, preferences, or privileges senior to those of holders of our common stock. If we obtain debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, and the terms of the debt securities issued could impose significant restrictions on our operations. If we raise additional funds through collaborations and licensing arrangements, we could be required to relinquish significant rights to our technologies and products, or grant licenses on terms that are not favorable to us.

If we fail to manage our exposure to global financial and securities market risk successfully, our operating results and financial statements could be materially impacted.

The primary objective of most of our investment activities is to preserve principal. To achieve this objective, a majority of our marketable investments are investment grade, liquid, fixed-income securities and money market instruments denominated in U.S. dollars. If the carrying value of our investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, we will be required to write down the value of our investments, which could materially harm our results of operations and financial condition. Moreover, the performance of certain securities in our investment portfolio correlates with the credit condition of the U.S. financial sector. In our current unstable credit environment, we might incur significant realized, unrealized or impairment losses associated with these investments.

Our ability to use net operating losses and tax credit carryforwards to offset future tax liabilities may be limited.

We have substantial federal net operating loss carryforwards, or NOLs, and state and federal tax credit carryforwards. A lack of future taxable income would adversely affect our ability to utilize these NOLs and tax credit carryforwards. In addition, under Section 382 of the U.S. Internal Revenue Code, or the Code, a corporation that experiences a more-than 50% ownership change over a three-year testing period is subject to limitations on its ability to utilize its pre-change NOLs and tax credit carryforwards to offset future taxable income. Future changes in our stock ownership, many of the causes of which are outside of our control, could result in an ownership change under Section 382 of the Code. Our NOLs and tax credit carryforwards may also be impaired under state law. As a result of these limitations, we may not be able to utilize a material portion of the NOLs and tax credit carryforwards.

Risks Related to Regulation

The regulatory clearance and approval process is expensive, time-consuming, and uncertain, and the failure to obtain and maintain required regulatory clearances and approvals could prevent us from commercializing our CoolSculpting system and any future products we develop.

We are investing in the research and development of new products and procedures based on our proprietary controlled cooling technology platform. Our products are subject to 510(k) clearance by the FDA prior to their marketing for commercial use in the United States, and to any approvals required by foreign governmental entities prior to their marketing outside the United States. In addition, if we make any changes or modifications to our CoolSculpting system that could significantly affect its safety or effectiveness, or would constitute a change in its intended use, we may be required to submit a new application for 510(k) clearance, premarketing approval or foreign regulatory approvals. For example, we will be required to submit new 510(k) applications to expand our ability to market CoolSculpting for use on other areas of the body beyond the flanks, abdomen and thighs.

The 510(k) clearance processes, as well as the process for obtaining foreign approvals, can be expensive, time-consuming, and uncertain. We anticipate that the direct clinical costs to support a 510(k) application for an additional indication for CoolSculpting will range from $0.25 million to $0.5 million. In addition to the time required to conduct clinical trials, it generally takes from four to twelve months from submission of an application to obtain 510(k) clearance; however, it may take longer, and 510(k) clearance may never be obtained. Delays in receipt of, or failure to obtain, clearances or approvals for any product enhancements or new products we develop would result in delayed, or no, realization of revenue from such product enhancements or new products and in substantial additional costs which could decrease our profitability.

In addition, we are required to continue to comply with applicable FDA and other regulatory requirements once we have obtained clearance or approval for a product. There can be no assurance that we will successfully maintain the clearances or approvals we have received or may receive in the future. Our clearances can be revoked if safety or effectiveness problems develop. Any failure to maintain compliance with FDA and applicable international regulatory requirements could harm our business, financial condition, and results of operations.


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We will be subject to significant liability if we are found to have improperly promoted CoolSculpting for off-label uses.

The FDA strictly regulates the promotional claims that may be made about FDA-cleared products. In particular, a product may not generally be promoted for uses that are not cleared or approved by the FDA as reflected in the product's labeling. Our current FDA labeling only permits marketing CoolSculpting in the United States for use on the flanks, for the abdomen and for the thigh area, and restricts us from promoting it for use on other parts of the body. The FDA does not regulate the practice of medicine however, and, we are aware that CoolSculpting is used by our customers on other parts of the body. If we are found to have inappropriately promoted such off-label uses, we may become subject to significant liability. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and entered agreements with several companies that require cumbersome reporting and oversight of sales and marketing practices. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed.

CoolSculpting may cause or contribute to adverse medical events that we are required to report to the FDA and if we fail to do so, we could be subject to sanctions that would materially harm our business.

Rare side effects have been reported after receiving CoolSculpting treatments, such as late-onset pain, subcutaneous induration, hernia, and paradoxical hyperplasia. There may be other new side effects that are reported to us as use of CoolSculpting increases. We may need to update our labeling, or take other regulatory action, in response to adverse event reports. In addition, FDA regulations require that we report certain information about adverse medical events if our medical devices may have caused or contributed to those adverse events, or if our device has malfunctioned. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events we become aware of within the prescribed timeframe. We may also fail to appreciate that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of our products. If we fail to comply with our reporting obligations, the FDA could take action including criminal prosecution, the imposition of civil monetary penalties, revocation of our device clearance or approval, seizure of our products, or delay in approval or clearance of future products.

We are currently, and in the future our contract manufacturers may be, subject to various governmental regulations related to the manufacturing of CoolSculpting, and we may incur significant expenses to comply with, experience delays in our product commercialization as a result of, and be subject to material sanctions if we or our contract manufacturers violate these regulations.

Our manufacturing processes and facilities are required to comply with the FDA's Quality System Regulation, or QSR, which covers the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage, and shipping of our devices. Although we believe we are compliant with the QSRs, the FDA enforces the QSR through periodic announced or unannounced inspections of manufacturing facilities. We have been, and anticipate in the future being, subject to such inspections, as well as to inspections by other federal and state regulatory agencies.

Failure to comply with applicable FDA requirements, or later discovery of previously unknown problems with our products or manufacturing processes, including our failure or the failure of one of our third-party contract manufacturers to take satisfactory corrective action in response to an adverse QSR inspection, can result in, among other things:

administrative or judicially-imposed sanctions;
injunctions or the imposition of civil penalties;
recall or seizure of our products;
total or partial suspension of production or distribution;
the FDA's refusal to grant pending future clearance or pre-market approval for our products;
withdrawal or suspension of marketing clearances or approvals;
clinical holds;
warning letters;
refusal to permit the import or export of our products; and
criminal prosecution of us or our employees.

Any of these actions, in combination or alone, could prevent us from marketing, distributing, or selling our products and would likely harm our business.

We could have to issue a correction or removal to reduce a risk to health posed by our device or to remedy a violation which may present a risk to health. In addition, a product defect or regulatory violation could lead to a government-mandated or voluntary recall by us. The FDA could request that we initiate a voluntary recall if a product was defective or presented a risk of injury or

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gross deception. The FDA could order a recall if there is a reasonable probability that our product would cause serious adverse health consequences or death. Regulatory agencies in other countries have similar authority to recall devices because of material deficiencies or defects in design or manufacture that could endanger health. Any recall would divert management attention and financial resources, could cause the price of our shares of common stock to decline and expose us to product liability or other claims, including contractual claims from parties to whom we sold products and harm our reputation with customers. A recall involving our CoolSculpting system would be particularly harmful to our business and financial results and, even if we remedied a particular problem, would have a lasting negative effect on our reputation and demand for our products.

Legislative or regulatory healthcare reforms may make it more difficult and costly for us to obtain regulatory clearance or approval of our products and to produce, market, and distribute our products after clearance or approval is obtained.

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory clearance or approval, manufacture, and marketing of regulated products or the reimbursement thereof.

In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. For example, in the future, the FDA may require more burdensome premarket approval of our procedures rather than the 510(k) clearance process we have used to date and anticipate primarily using in the future. Our CoolSculpting Platform is also subject to state regulations which are, in many instances, in flux. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of our products. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require:

changes to manufacturing methods;
recall, replacement, or discontinuance of certain products;
additional record keeping; and,
additional warnings.

Each of these would likely entail substantial time and cost and could materially harm our financial results. In addition, delays in receipt of or failure to receive regulatory clearances or approvals for our new products would harm our business, financial condition, and results of operations.

Federal and state governments in the United States are also undertaking efforts to control growing health care costs through legislation, regulation, and voluntary agreements with medical care providers, and third-party payers. In March 2010, Congress enacted comprehensive health care reform legislation known as the Patient Protection and Affordable Care Act of 2010, or PPACA. Among other things, PPACA established the framework for new regulatory mandates and other measures designed to constrain medical costs. PPACA also established significant taxes on medical technology manufacturers that are expected to result in significant cost to the medical technology industry. PPACA imposes a 2.3% excise tax on certain sales of medical devices by manufacturers in the United States. There is no exemption for small companies, and we began paying the tax in 2013. We expect compliance with PPACA to continue to impose significant administrative and financial burdens on us, which may harm our results of operations.

We may be subject to various federal and state laws pertaining to health care marketing and promotional practices and other business practices, and any violations by us of such laws could result in fines or other penalties.

State and federal authorities have targeted medical technology companies for alleged violations of laws and regulations, based on off-label marketing schemes and other improper promotional practices. Companies targeted in such prosecutions have paid substantial fines in the hundreds of millions of dollars or more, have been forced to implement extensive corrective action plans, and have often become subject to consent decrees severely restricting the manner in which they conduct their business. If we become the target of such an investigation or prosecution based on our marketing and promotional practices, we could face similar sanctions which would materially harm our business.

Also, the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Some of our distribution partners are located in parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We cannot assure you that our internal control policies and procedures will protect us from reckless or negligent acts committed by our employees, distributors, partners, or agents. Violations of these laws, or allegations of such violations, could result in fines, penalties, or prosecution and have a negative impact on our business, results of operations and reputation.


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We are subject to numerous environmental, health and safety laws and regulations, and must maintain licenses or permits, and non-compliance with these laws, regulations, licenses, or permits may expose us to significant costs or liabilities.

We are subject to numerous foreign, federal, state, and local environmental, health and safety laws and regulations relating to, among other matters, safe working conditions and environmental protection, including those governing the generation, storage, handling, use, transportation, and disposal of hazardous or potentially hazardous materials. Some of these laws and regulations require us to obtain licenses or permits to conduct our operations. Environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. If we violate or fail to comply with these laws, regulations, licenses, or permits, we could be fined or otherwise sanctioned by regulators. We cannot predict the impact on our business of new or amended laws or regulations or any changes in the way existing and future laws and regulations are interpreted or enforced, nor can we ensure we will be able to obtain or maintain any required licenses or permits.

Risks Related to Our Intellectual Property

If we are unable to obtain, maintain, and enforce intellectual property protection covering our CoolSculpting system and any future products we develop, others may be able to make, use, or sell products substantially the same as ours, which could adversely affect our ability to compete in the market.

Our commercial success is dependent in part on obtaining, maintaining, and enforcing our intellectual property rights, including our patents and the patents we exclusively license. If we are unable to obtain, maintain, and enforce intellectual property protection covering our CoolSculpting system and any other products we develop, others may be able to make, use, or sell products that are substantially the same as ours without incurring the sizable development and licensing costs that we have incurred, which would adversely affect our ability to compete in the market.

We seek to obtain and maintain patents and other intellectual property rights to restrict the ability of others to market products that compete with our products. As of March 31, 2014 , our patent portfolio comprised 94 issued patents and 108 pending patent applications, each of which we own solely or license exclusively. However, patents may not be issued on any pending or future patent applications we file and, moreover, issued patents owned or licensed to us now or in the future may be found by a court to be invalid or otherwise unenforceable. Also, even if our patents are determined by a court to be valid and enforceable, they may not drafted or interpreted sufficiently broadly to prevent others from marketing products and services similar to ours or designing around our patents, and they may not provide us with freedom to operate unimpeded by the patent rights of others.

We have a number of foreign patents and applications, and expect to continue to pursue patent protection in the jurisdictions in which we do or intend to business. However, the laws of some foreign jurisdictions do not protect intellectual property rights to the same extent as laws in the United States, and many companies have encountered significant difficulties in obtaining, protecting, and defending such rights in foreign jurisdictions. If we encounter such difficulties or we are otherwise precluded from effectively protecting our intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed.

The patent positions of medical technology companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in patents in these fields has emerged to date in the United States or in many foreign jurisdictions. Both the U.S. Supreme Court and the Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. Similarly, foreign courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. In addition, the U.S. Congress is currently considering legislation that would change provisions of the patent law. We cannot predict future changes U.S. and foreign courts may make in the interpretation of patent laws or changes to patent laws which might be enacted into law by U.S. and foreign legislative bodies. Those changes may materially affect our patents, our ability to obtain patents or the patents and applications of our collaborators and licensors.

Future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage, which could adversely affect our financial condition and results of operations. For example:

others may be able to make systems or devices that are similar to ours but that are not covered by the claims of our patents;
others may assert that our licensors or we were not the first to make the inventions covered by our issued patents or pending patent applications;
our pending patent applications may not result in issued patents;
our issued patents may not provide us with any competitive advantages or may be held invalid or unenforceable as a result of legal challenges by third parties;

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the claims of our issued patents or patent applications when issued may not cover our CoolSculpting system or the future products we develop;
there may be dominating patents relevant to our controlled cooling technology of which we are not aware;
there may be prior public disclosures that could invalidate our inventions or parts of our inventions of which we are not aware;
the laws of foreign countries may not protect our proprietary rights to the same extent as the laws of the United States; and
we may not develop additional proprietary technologies that are patentable.

From time to time, we analyze our competitors' products and services, and may in the future seek to enforce our patents or other rights to counter perceived infringement. However, infringement claims can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that the patent we seek to enforce is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that the patent in question does not cover the technology in question. An adverse result in any litigation could put one or more of our patents at risk of being invalidated or interpreted narrowly. Similarly, some of our competitors may be able to devote significantly more resources to intellectual property litigation, and may have significantly broader patent portfolios to assert against us if we assert our rights against them. Finally, because of the substantial discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be disclosed or otherwise compromised during this type of litigation.

For example, in January 2013, the Mercantile Court in Spain rendered its ruling on the merits of Massachusetts General Hospital's, or MGH, and our request for a permanent injunction against Clinipro's LipoCryo device based on Clinipro's infringement of two European patents owned by MGH and globally licensed exclusively to us. While the Mercantile Court had earlier granted in 2012 MGH's and our request for a preliminary injunction, the Court, in a January ruling, denied the request for a permanent injunction. The Mercantile Court's ruling affects only Clinipro's activities in Spain and we have appealed the ruling. Further, although we and MGH did prevail against Clinipro in a patent infringement case in France, holding that an MGH patent exclusively licensed to us is valid and enforceable and enjoining Clinpro and its distributors from selling LipoCryo in France, there is no assurance that Clinipro will not appeal that ruling or, if it does so, that it will not prevail.

We rely on a license relationship with Massachusetts General Hospital for much of our core intellectual property, and this arrangement could restrict the scope and enforcement of our intellectual property rights and limit our ability to successfully commercialize our products.

We have exclusively licensed certain intellectual property from the General Hospital Corporation, a not-for-profit Massachusetts Corporation, which owns and operates MGH related to our CoolSculpting system. We rely on MGH to file and prosecute patent applications and maintain patents and otherwise protect the intellectual property we license. We have not had and do not have primary control over these activities for certain of our patents or patent applications and other intellectual property rights we license, and therefore cannot guarantee that these patents and applications will be prosecuted or immediately enforced in a manner consistent with the best interests of our business. We cannot be certain that such activities by third parties have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents and other intellectual property rights. Additionally, we cannot control the publication or other disclosures of research carried out by MGH relating to technology that could otherwise prove patentable.

Pursuant to the terms of the license agreement with MGH, MGH has the right to control enforcement of our licensed patents or defense of any claims asserting the invalidity of these patents. Even if we are permitted to pursue such enforcement or defense, we will require the cooperation of MGH, and cannot guarantee that we would receive it. We cannot be certain that MGH will allocate sufficient resources or prioritize its or our enforcement of such patents or defense of such claims to protect our interests in the licensed patents. If we cannot obtain patent protection, or enforce existing or future patents against third parties, our competitive position and our financial condition could suffer.

We are exploring additional uses of our proprietary controlled cooling technology platform for the dermatology, plastic surgery, and aesthetic markets. We also plan to explore potential therapeutic uses for our platform technology, either directly or through collaborative arrangements with strategic partners. Although MGH cannot restrict our future product development efforts, the terms of our license agreement with MGH may require us to pay MGH a royalty of up to 7% of net sales of future products we develop or that may be developed by our strategic partners. Whether we are required to pay a royalty will depend on whether our future products incorporate the intellectual property we licensed from MGH. Any royalty we are required to pay will reduce our income from sales of such future products and may make it more difficult for us to successfully commercialize these products directly or through a strategic partner.


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If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.

We rely on trade-secret protection to protect our interests in proprietary know-how and for processes for which patents are difficult or impossible to obtain or enforce. We may not be able to protect our trade secrets adequately. We have limited control over the protection of trade secrets used by our third-party contract manufacturers and suppliers. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors and outside scientific advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third-party illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. We rely, in part, on non-disclosure and confidentiality agreements with our employees, consultants and other parties to protect our trade secrets and other proprietary technology. These agreements may be breached and we may not have adequate remedies for any breach. Moreover, others may independently develop equivalent proprietary information, and third parties may otherwise gain access to our trade secrets and proprietary knowledge. We may now or in the future incorporate open source software in our products' firmware. Open source software licenses can be ambiguous, and there is a risk that these licenses could be construed to require us to disclose or publish, in source code form, some or all of our proprietary firmware code. Any disclosure of confidential information into the public domain or to third parties could allow our competitors to learn our trade secrets and use the information in competition against us, which could adversely affect our competitive advantage.

Our CoolSculpting system and any future products or services we develop could be alleged to infringe patent rights of others, which may require costly litigation and, if we are not successful, could cause us to pay substantial damages or limit our ability to commercialize our products.

Our commercial success depends on our ability to develop, manufacture, and market our CoolSculpting system and use our proprietary controlled cooling technology without infringing the patents and other proprietary rights of third parties. As the medical technology and aesthetic product industries expand and more patents are issued, the risk increases that there may be patents issued to third parties that relate to our products and technology of which we are not aware or that we must challenge to continue our operations as currently contemplated. Our products may infringe or may be alleged to infringe these patents.

In addition, because patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing (or, in some cases, are not published until they issue as patents) and because publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our issued patents or our pending applications. Another party may have filed, and may in the future file, patent applications covering our products or technology similar to ours. Any such patent application may have priority over our patent applications or patents, which could further require us to obtain rights to issued patents covering such technologies. If another party has filed a U.S. patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the Patent and Trademark Office, or PTO, to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful if the other party had independently arrived at the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position with respect to such inventions.

There is substantial litigation involving patent and other intellectual property rights in the medical technology and aesthetic industries generally. If a third party claims that we or any collaborator infringes its intellectual property rights, we may face a number of issues, including, but not limited to:
 
infringement and other intellectual property claims which, regardless of merit, may be expensive and time-consuming to litigate and may divert our management's attention from our core business;
substantial damages for infringement, which we may have to pay if a court decides that the product at issue infringes on or violates the third party's rights, and if the court finds that the infringement was willful, we could be ordered to pay treble damages and the patent owner's attorneys' fees;
a court prohibiting us from selling or licensing our products unless the third party licenses its product rights to us, which it is not required to do at a commercially reasonable price or at all;
if a license is available from a third party, we may have to pay substantial royalties, upfront fees or grant cross-licenses to intellectual property rights for our products; and
redesigning our products or processes so they do not infringe, which may not be possible at all or may require substantial monetary expenditures and time, during which our products may not be available for sale.

Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their

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normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Finally, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.

Our intellectual property rights will further be affected in ways that are difficult to anticipate by the provisions of the America Invents Act (2011).

Enacted in September 2011, the America Invents Act, or AIA, is the first major overhaul of the U.S. patent system since 1952, and includes a number of changes to established practices, which came into effect between September 2011 and March 2013. The most significant changes include the transition to a modified first-to-file system, the availability of new post-grant review for issued patents, various procedural changes including the third-party submission of prior art and the availability of derivation proceedings and supplemental examination, and an expanded prior commercial user rights defense to a claim of patent infringement. The scope of these changes and the lack of experience with their practical implementation, suggest a transitional period with some uncertainty over the next few years. Several provisions of the AIA will likely be tested in U.S. federal courts over time.

The changes to the U.S. patent system in the AIA will have an impact on our intellectual property rights and how business is conducted in general. For example, the recently implemented modified first-to-file system places a premium on filing as early as possible and appears to increase what is available as prior art, by changing the applicable definitions. In particular, the grace period in the year prior to the filing date is now limited to an inventor’s own publications, and third party publications occurring after a publication by the inventor. For patent applications filed on or after March 16, 2013, we may expect post-grant review challenges initiated up to nine months after the corresponding patent issues.
 
While the AIA was intended to make the resolution of intellectual property disputes easier and less expensive, we may in the future have to prove that we are not infringing patents or we may be required to obtain licenses to such patents. However, we do not know whether such licenses will be available on commercially reasonable terms, or at all. Prosecution of patent applications, post-grant opposition proceedings, and litigation to establish the validity and scope of patents, to assert patent infringement claims against others and to defend against patent infringement claims by others will be expensive and time-consuming. There can be no assurance that, in the event that claims of any of our owned or licensed patents are challenged by one or more third parties, any court or patent authority ruling on such challenge will determine that such patent claims are valid and enforceable. An adverse outcome in such litigation or post grant proceeding could cause us to lose exclusivity relating to the subject matter delineated by such patent claims and may have a material adverse effect on our business. If a third party is found to have rights covering products or processes used by us, we could be forced to cease using the products or processes covered by the disputed rights, be subject to significant liabilities to such third party and/or be required to license technologies from such third party.

Risks Related to Our Common Stock

Our stock price has been and will likely continue to be volatile.

Our stock price is volatile and from October 19, 2011, the first day of trading of our common stock, to April 24, 2014 , our stock has had low and high sales prices per share in the range from $3.20 to $24.79 per share. Among the factors that may cause the market price of our common stock to fluctuate are the risks described in this “Risk Factors” section and other factors, including:

fluctuations in our operating results or the operating results of our competitors;
changes in estimates of our financial results or recommendations or cessation of coverage by securities analysts;
changes in the estimates of the future size and growth rate of our market opportunity;
changes in accounting principles or changes in interpretations of existing principles, which could affect our financial results;
conditions and trends in the markets we serve;
changes in general economic, industry, and market conditions;
success of competitive technologies and procedures;
changes in our pricing policies;
announcements of significant new technologies, procedures, or acquisitions by us or our competitors;
changes in legislation or regulatory policies, practices or actions;
the commencement or outcome of litigation involving our company, our general industry or both;
recruitment or departure of our executives and other key employees;
changes in our capital structure, such as future issuances of securities or the incurrence of debt;
actual or expected sales of our common stock by the holders of our common stock; and
the trading volume of our common stock.


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In addition, the stock market in general and the market for medical technology and aesthetic product companies in particular may experience a loss of investor confidence. The stock markets recently have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our common stock. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class-action litigation. Further, class-action litigation, even if unsuccessful, could be costly to defend and divert management's attention and resources, which could further materially harm our financial condition and results of operations.

The requirements of being a public company may strain our resources, divert management's attention, and affect our ability to attract and retain qualified board members.

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act, the listing requirements of the securities exchange on which we trade and other applicable federal and state securities rules and regulations. Compliance with these rules and regulations has increased our legal and financial compliance costs, made some activities more difficult, time-consuming, or costly and increased demand on our business systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results.

As a public company in the United States, we and our independent registered public accounting firm are required pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, to furnish a report, among other things, on the effectiveness of our internal control over financial reporting. These controls may become inadequate because of changes in conditions or the degree of compliance with these policies or procedures may deteriorate and weaknesses in our internal control over financial reporting may be discovered. In the event that we are not able to demonstrate compliance with Section 404 in a timely manner, or are unable to produce timely or accurate financial statements, we may be subject to sanctions or investigations by regulatory authorities such as the SEC and the securities exchange on which we trade and investors may lose confidence in our operating results, which would have a material adverse effect on our business and on the price of our common stock and our ability to access the capital markets.

In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management's time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

Our financial controls and procedures may not be sufficient to ensure timely and reliable reporting of financial information, which, as a public company, could materially harm our stock price and the listing of our common stock on the NASDAQ Global Select Market.

We cannot assure you that our finance department has or will maintain adequate resources to ensure that we will not have any future material weakness in our system of internal controls. The effectiveness of our controls and procedures may in the future be limited by a variety of factors, including:

faulty human judgment and simple errors, omissions or mistakes;
fraudulent action of an individual or collusion of two or more people;
inappropriate management override of procedures; and
the possibility that any enhancements to controls and procedures may still not be adequate to assure timely and accurate financial control.

If we fail to have effective controls and procedures for financial reporting in place, we could be unable to provide timely and accurate financial information and be subject to de-listing on the NASDAQ Global Select Market, SEC investigation, and civil or criminal sanctions.


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We do not currently intend to pay dividends on our common stock.

We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. We currently intend to invest our future earnings, if any, to fund the development and growth of our business. The payment of dividends will be at the discretion of our Board of Directors and will depend on our results of operations, capital requirements, financial condition, future prospects, restrictions imposed by applicable law, any limitations on payments of dividends present in any debt agreements we may enter into and other factors our Board of Directors may deem relevant. If we do not pay dividends, your ability to achieve a return on our common stock will depend on any future appreciation in the market price of our common stock. There is no guarantee that our common stock will appreciate in value or even maintain the price at which our holders have purchased their common stock.

Our directors, executive officers, and entities with which they are affiliated hold a significant portion of our common stock, which may lead to conflicts of interest with other stockholders over corporate transactions and other corporate matters.
Our directors, executive officers, and entities with which they are affiliated beneficially own approximately 25% of our outstanding common stock as of April 24, 2014 . This concentration of ownership may not be in the best interests of our other stockholders. We are not aware of any stockholder or voting agreements or understandings between or among our directors, officers, or holders of our outstanding common stock currently in place. However, these stockholders, acting together, would be able to exercise significant influence on all matters requiring stockholder approval, including the election of directors and significant corporate transactions such as mergers or other business combinations. This influence could delay, deter, or prevent a third party from acquiring or merging with us, which could adversely affect the market price of our common stock.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current directors and management team, and limit the market price of our common stock.

Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may delay or prevent a change of control, discourage bids at a premium over the market price of our common stock, and adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock. These provisions include:

dividing our board into three classes, with each class serving a staggered three-year term;
prohibiting our stockholders from calling a special meeting of stockholders or acting by written consent;
permitting our board to issue additional shares of our preferred stock, with such rights, preferences and privileges as they may designate, including the right to approve an acquisition or other changes in control;
establishing an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our Board of Directors;
providing that our directors may be removed only for cause;
providing that vacancies on our Board of Directors may be filled only by a majority of directors then in office, even though less than a quorum; and
requiring the approval of our Board of Directors or the holders of a super-majority of our outstanding shares of capital stock to amend our bylaws and certain provisions of our certificate of incorporation.

Although we believe these provisions collectively provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management team by making it more difficult for stockholders to replace members of our board, which is responsible for appointing the members of our management.

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. The restrictions contained in Section 203 are not applicable to any of our existing stockholders that currently own 15% or more of our outstanding voting stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.


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Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

See the Exhibit Index immediately following the signature page to this Quarterly Report on Form 10-Q, which is incorporated by reference here.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.