ZELTIQ
Zeltiq Aesthetics Inc (Form: 10-Q, Received: 08/09/2016 06:12:10)
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 June 30, 2016
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
 
ý
  
Accelerated filer
 
¨
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 August 4, 2016 , there were 39,627,007 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)
 
 
June 30,
2016
 
December 31,
2015
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
46,930

 
$
35,710

Short-term investments
4,497

 
12,867

Accounts receivable, net
43,086

 
33,359

Inventory
28,103

 
28,095

Prepaid expenses and other current assets
11,135

 
11,771

Total current assets
133,751

 
121,802

Long-term investments
508

 
3,490

Restricted cash
844

 
452

Property and equipment, net
7,730

 
6,969

Intangible asset, net
4,767

 
5,092

Long-term deferred tax assets
38,636

 
40,475

Other assets
383

 
547

Total assets
$
186,619

 
$
178,827

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
13,780

 
$
10,903

Accrued and other current liabilities
37,629

 
34,691

Deferred revenue
20,013

 
7,682

Current portion of capital lease obligations
127

 
124

Total current liabilities
71,549

 
53,400

Long-term deferred revenue
168

 
226

Long-term capital lease obligations, less current portion
74

 
138

Other non-current liabilities
858

 
761

Total liabilities
$
72,649

 
$
54,525

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 June 30, 2016 and December 31, 2015

 

Common stock, $0.001 par value: 500,000,000 shares authorized at June 30, 2016, and December 31, 2015; 39,578,675 and 39,217,630 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively
43

 
43

Additional paid-in capital
222,368

 
215,621

Accumulated other comprehensive loss
(3,943
)
 
(1,636
)
Accumulated deficit
(104,498
)
 
(89,726
)
Total stockholders’ equity
113,970

 
124,302

Total liabilities and stockholders’ equity
$
186,619

 
$
178,827

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
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Revenue
$
89,465

 
$
64,431

 
$
153,934

 
$
115,989

Cost of revenue
27,521

 
18,116

 
45,750

 
32,494

Gross profit
61,944

 
46,315

 
108,184

 
83,495

Operating expenses:
 
 
 
 
 
 
 
Research and development
6,403

 
5,809

 
12,606

 
11,889

Sales and marketing
50,293

 
32,199

 
90,948

 
56,605

General and administrative
8,774

 
6,654

 
19,320

 
15,042

Total operating expenses
65,470

 
44,662

 
122,874

 
83,536

Income (loss) from operations
(3,526
)
 
1,653

 
(14,690
)
 
(41
)
Interest income (expense), net
(20
)
 
13

 
(56
)
 
26

Other income (expense), net
1,409

 
(445
)
 
2,055

 
(865
)
Income (loss) before income taxes
(2,137
)
 
1,221

 
(12,691
)
 
(880
)
Provision for income taxes
2,765

 
43

 
2,081

 
71

Net income (loss)
$
(4,902
)
 
$
1,178

 
$
(14,772
)
 
$
(951
)
Basic net income (loss) per share:
 
 
 
 
 
 
 
Net income (loss) per share, basic
$
(0.12
)
 
$
0.03

 
$
(0.38
)
 
$
(0.02
)
Weighted average shares of common stock outstanding used in computing net income (loss) per share, basic
39,493,665

 
38,649,873

 
39,391,259

 
38,517,817

Diluted net income (loss) per share:
 
 
 
 
 
 
 
Net income (loss) per share, diluted
$
(0.12
)
 
$
0.03

 
$
(0.38
)
 
$
(0.02
)
Weighted average shares of common stock outstanding used in computing net income (loss) per share, diluted
39,493,665

 
41,641,660

 
39,391,259

 
38,517,817

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 Income (Loss)
(Unaudited)
(In thousands)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
(4,902
)
 
$
1,178

 
$
(14,772
)
 
$
(951
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(1,964
)
 
798

 
(2,329
)
 
210

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

 

 
22

 
5

Other comprehensive income (loss), net of tax
(1,964
)
 
798

 
(2,307
)
 
215

Comprehensive income (loss)
$
(6,866
)
 
$
1,976

 
$
(17,079
)
 
$
(736
)
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)
 
Six Months Ended
 
June 30,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(14,772
)
 
$
(951
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,522

 
1,062

Stock-based compensation
8,822

 
7,233

Deferred income taxes
1,839

 

Amortization of investment premium, net
33

 
44

Provision for doubtful accounts receivable
231

 
158

Provision for excess and obsolete inventory
153

 
253

Loss on disposal and write-off of property and equipment
22

 

Gain on foreign currency exchange rates
(1,501
)
 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(10,098
)
 
(9,414
)
Inventory
(521
)
 
(2,994
)
Prepaid expenses and other assets
702

 
707

Deferred revenue, net of deferred costs
12,336

 
2,645

Accounts payable, accrued and other liabilities
6,895

 
8,487

Net cash provided by operating activities
5,663

 
7,230

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of investments
(741
)
 
(6,024
)
Proceeds from sale of investments
8,683

 

Proceeds from maturity of investments
3,398

 
11,310

Purchase of property and equipment
(2,733
)
 
(1,188
)
Change in restricted cash
(421
)
 
1

Net cash provided by investing activities
8,186

 
4,099

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Principal payments on capital leases
(62
)
 
(59
)
Proceeds from issuance of common stock upon exercise of stock options and from employee stock purchase program
1,801

 
2,816

Tax payments related to shares withheld for vested restricted stock units
(3,871
)
 
(5,599
)
Tax effect of employee stock plans

 
17

Net cash used in financing activities
(2,132
)
 
(2,825
)
Effect of exchange rate changes on cash and cash equivalents
(497
)
 
153

NET INCREASE IN CASH AND CASH EQUIVALENTS
11,220

 
8,657

CASH AND CASH EQUIVALENTS—Beginning of period
35,710

 
28,649

CASH AND CASH EQUIVALENTS—End of period
$
46,930

 
$
37,306

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 of ZELTIQ Aesthetics, Inc. (the "Company") 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, 2015 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 June 30, 2016 , results of operations for the three and six months ended June 30, 2016 and 2015 , comprehensive income (loss) for the three and six months ended June 30, 2016 and 2015 , and cash flows for the six months ended June 30, 2016 and 2015 . The interim results for the three and six months ended June 30, 2016 , are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 , or for any other future annual or interim period.

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, 2015 .

Out of period adjustments  

During the three months ended June 30, 2016 , the Company recorded certain out-of-period correcting adjustments totaling $0.4 million to increase cost of revenue by $0.2 million , with a corresponding decrease to inventory, and to increase other operating expenses by $0.2 million , with a corresponding increase to other accruals, relating to prior periods. The Company does not believe that such amounts are material to any prior period consolidated financial statements, and the impact of correcting these errors in the six months ended June 30, 2016 is not material to the current consolidated financial statements or expected to be material to the financial statements for the year ending December 31, 2016 .

During the three months ended March 31, 2016 , the Company recorded certain out-of-period correcting adjustments totaling $0.2 million to increase cost of revenue by $0.4 million , with a corresponding increase to warranty accrual, and to reduce other operating expenses by $0.2 million , with a corresponding decrease to other accruals, relating to prior periods. The Company does not believe that such amounts are material to any prior period consolidated financial statements, and the impact of correcting these errors in the three months ended March 31, 2016 is not material to the current consolidated financial statements or expected to be material to the financial statements for the year ending December 31, 2016 .

During the three months ended June 30, 2015 , the Company recorded an out-of-period adjustment of $0.2 million to increase cost of revenue to write-off of certain inventory held by vendors.  Of this adjustment,  $0.1 million $23,000 and $42,000 related to the fiscal years ended December 31, 2013 , 2014 and 2015 , respectively. The Company does not believe that such amounts are material to any prior period consolidated financial statements, and the impact of correcting these errors in the six months ended June 30, 2015 is not material to the current consolidated financial statements.

Principles of Consolidation

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

The functional currency of the Company’s international subsidiaries is evaluated on a case-by-case basis and has been determined to be the respective local currency. 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 the foreign subsidiaries' financial statements are included

7


as a separate component of stockholders' equity under "Accumulated other comprehensive income (loss)." 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.

Concentration of Credit Risk

As of June 30, 2016 , no individual customer accounted for more than 10% of accounts receivable. As of December 31, 2015 , one individual customer, which is a large aesthetic chain, accounted for 10% of accounts receivable. During the three months ended June 30, 2016 , one individual customer accounted for 12% of total revenue. During the six months ended June 30, 2016 , no customer accounted for more than 10% of total revenue. During the three and six months ended June 30, 2015 , one individual customer accounted for 17% and 14% of total revenue, respectively.

Critical Accounting Policies

There have been no changes to the Company’s critical accounting policies during the six months ended June 30, 2016 , as compared to the critical accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 .

Recent Accounting Pronouncements

On May 28, 2014 , the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 and issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016 and May 2016 within ASU 2015-14, ASU 2016-08, ASU 2016-10 and ASU 2016-12, respectively (ASU 2014-09, ASU 2015-14, ASU 2016-08, ASU 2016-10 and ASU 2016-12 collectively, Topic 606). Topic 606 supersedes nearly all existing revenue recognition guidance under GAAP. The objective of this update is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. This standard update contains principles that the Company will apply to determine the measurement of revenue and timing of when it is recognized. This guidance allows for two methods of adoption: (a) full retrospective adoption, meaning the guidance is applied to all periods presented, or (b) modified retrospective adoption, meaning the cumulative effect of applying this guidance is recognized as an adjustment to the fiscal 2018 opening accumulated deficit balance. The Company expects to adopt this guidance effective January 1, 2018 , and is currently evaluating the two adoption methods as well as the impact this new guidance will have on its consolidated financial statements and related disclosures.

In July 2015 , the FASB issued Accounting Standards Update No. 2015-11 to amend ASC Topic 330, Inventory ("ASC 330") to simplify the measurement of inventory. The amendments require that an entity measure inventory at the lower of cost and net realizable value instead of the lower of cost and market. This guidance is effective for public companies for years, and interim periods within those years, beginning on or after December 15, 2016, with earlier application permitted as of the beginning of an interim or annual reporting period. This guidance will be effective for the Company beginning in its first quarter of fiscal 2017. The Company is currently evaluating the impact this new guidance will have on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. This ASU requires lease assets and lease liabilities arising from leases, including operating leases, to be recognized on the balance sheet. ASU 2016-02 will become effective for the Company on January 1, 2019, and requires adoption using a modified retrospective approach. The Company is currently evaluating the impact of this guidance on its consolidated financial statements and related disclosures.


8


In March 30, 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU will change how companies account for certain aspects of share-based payments to employees. This guidance will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee's shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The guidance is effective for public business entities for fiscal years beginning after December 2016, and interim periods within those years, with earlier application permitted in any annual or interim period for which financial statements haven't been issued or made available for issuance, but all of the guidance must be adopted in the same period. The Company is currently evaluating the impact this new guidance will have on its consolidated financial statements and related disclosures.

In May 2016, the FASB issued ASU No. 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 pursuant to Staff announcements at the March 3, 2016 EITF Meeting” (“ASU 2016-11”). The purpose of ASU 2016-11 is to rescind from the FASB Accounting Standards Codification certain SEC paragraphs as a result of two SEC Staff Announcements at the March 3, 2016 meeting. For public entities, the amendments in ASU 2016-11 related to Topic 605 are effective for interim and annual reporting periods beginning after December 15, 2017 and amendments related to Topic 815 are effective for interim and annual reporting periods beginning after December 15, 2015. The Company is currently assessing the impact of ASU 2016-11 on its condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses." This ASU changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. The new guidance will be effective for the Company starting in the first quarter of fiscal 2021. Early adoption is permitted starting in the first quarter of fiscal 2020. The Company is in the process of determine the effects the adoption will have on its consolidated financial statements as well as whether to adopt the new guidance early.

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 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.


9


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 June 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
Financial Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
2,762

 
$

 
$

 
$
2,762

Short-term investments:
 
 
 
 
 
 
 
U.S. Agency securities

 
750

 

 
750

Corporate bonds

 
3,747

 

 
3,747

Long-term investments:
 
 
 
 
 
 
 
Corporate bonds

 
263

 

 
263

Certificates of deposit
245

 

 

 
245

Total
$
3,007

 
$
4,760

 
$

 
$
7,767


 
As of December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
Financial Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
1,342

 
$

 
$

 
$
1,342

Short-term investments:
 
 
 
 
 
 

U.S. Agency securities

 
1,549

 

 
1,549

U.S. Treasury

 
500

 

 
500

Corporate bonds

 
7,763

 

 
7,763

Commercial paper

 
500

 

 
500

Certificates of deposit
2,555

 

 

 
2,555

Long-term investments:
 
 
 
 
 
 

U.S. Agency securities

 
497

 

 
497

Corporate bonds

 
874

 

 
874

Certificates of deposit
2,119

 

 

 
2,119

Total
$
6,016

 
$
11,683

 
$

 
$
17,699


During the three and six months ended June 30, 2016 and 2015 , 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 June 30, 2016 , and December 31, 2015 .

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


10


3. Balance Sheet Components

Investments

The Company's short-term and long-term investments as of June 30, 2016 are as follows (in thousands):
Short-term
 
 
 
 
 
 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. Agency securities
$
750

 
$

 
$

 
$
750

U.S. Treasury

 

 

 

Corporate bonds
3,747

 

 

 
3,747

Commercial paper

 

 

 

Certificates of deposit

 

 

 

Total
$
4,497

 
$

 
$

 
$
4,497

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

 
$

 
$

 
$

Corporate bonds
263

 

 

 
263

Certificates of deposit
245

 

 

 
245

Total
$
508

 
$

 
$

 
$
508


The Company's short-term and long-term investments as of December 31, 2015 are as follows (in thousands):

Short-term
 
 
 
 
 
 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. Agency securities
$
1,551

 
$

 
$
(2
)
 
$
1,549

U.S. Treasury
500

 

 

 
500

Corporate bonds
7,776

 

 
(13
)
 
7,763

Commercial paper
500

 

 

 
500

Certificates of deposit
2,555

 

 

 
2,555

Total
$
12,882

 
$

 
$
(15
)
 
$
12,867

 
 
 
 
 
 
 
 
Long-term
 
 
 
 
 
 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. Agency securities
$
499

 
$

 
$
(2
)
 
$
497

U.S. Treasury

 

 

 

Corporate bonds
878

 

 
(4
)
 
874

Certificates of deposit
2,119

 

 

 
2,119

Total
$
3,496

 
$

 
$
(6
)
 
$
3,490


For each of the three and six months ended June 30, 2016 and 2015 , gains or losses realized on the sale of investments were insignificant.

11



The contractual maturities of the Company's short-term and long-term investments as of June 30, 2016 , are as follows (in thousands):

 
June 30, 2016
 
Amortized Cost
 
Fair Value
Due in one year or less
$
4,497

 
$
4,497

Due in one year to five years
508

 
508

 
$
5,005

 
$
5,005


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.

Inventory

Inventory is stated at the lower of cost (which approximates actual cost on a first-in, first-out basis) or market. 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, new production introductions and market conditions.

The components of inventory consist of the following (in thousands):
 
 
June 30,
2016
 
December 31,
2015
Raw materials
$
8,091

 
$
9,117

Finished goods
20,012

 
18,978

          Total inventory
$
28,103

 
$
28,095


Property and equipment, net

Property and equipment, net comprised the following (in thousands):
 
 
June 30,
2016
 
December 31,
2015
Lab equipment, tooling and molds
$
3,943

 
$
3,228

Computer software
2,503

 
2,019

Computer equipment
2,543

 
2,757

Leasehold improvements
1,929

 
1,670

Furniture and fixtures
1,134

 
950

Vehicles
35

 
35

Construction in progress
1,950

 
1,945

Total property and equipment
14,037

 
12,604

Less: Accumulated depreciation and amortization
(6,307
)
 
(5,635
)
Property and equipment, net
$
7,730

 
$
6,969


The table above includes property and equipment acquired under capital leases which totaled $0.4 million as of both June 30, 2016 and December 31, 2015 .

Depreciation and amortization expense related to property and equipment was $0.6 million and $1.2 million for the three and six months ended June 30, 2016 , respectively. Depreciation and amortization expense related to property and equipment was $0.4 million and $0.7 million for the three and six months ended June 30, 2015 , respectively.

12



Accrued and Other Current Liabilities

The following table shows the components of accrued liabilities (in thousands):
 
 
June 30,
2016
 
December 31,
2015
Accrued payroll and employee related expenses
$
13,408

 
$
14,887

Accrued marketing expenses
4,995

 
5,554

Accrued royalty
6,786

 
5,453

Sales and other taxes payable
3,853

 
3,703

Advance payments from customers
1,879

 
1,585

Accrued warranty
1,428

 
527

Accrued legal expenses
2,987

 
1,465

Other
2,293

 
1,517

     Total accrued and other current liabilities
$
37,629

 
$
34,691


Deferred Revenue

The following table shows the components of deferred revenue, including long-term deferred revenue (in thousands): 

 
June 30,
2016
 
December 31,
2015
Deferred extended warranty revenue
$
3,072

 
$
2,902

Deferred training revenue
3,793

 
3,115

Deferred product revenue
13,316

*
1,891

     Total deferred revenue
$
20,181

 
$
7,908


* A portion of the total balance consists of undelivered CoolAdvantage applicators that total $8.2 million as of June 30, 2016 and other deferrals that have not met the Company's revenue recognition policy.

Deferred Extended Warranty Revenue

The Company offers standard extended warranties which allows customers to receive service and support which extend beyond the contractual term of the product warranty. The Company recognizes these contracts over the life of the service period. Changes in the Company's deferred revenue, including long-term deferred revenue, related to extended warranties were as follows (in thousands):

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Balance at the beginning of the period
$
2,901

 
$
3,215

 
$
2,902

 
$
3,272

Extended warranties issued
1,215

 
1,073

 
2,219

 
1,806

Amortization
(1,044
)
 
(903
)
 
(2,049
)
 
(1,693
)
Balance at the end of the period
$
3,072

 
$
3,385

 
$
3,072

 
$
3,385


Product Warranties

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 3.2 years for control units and 1.2 years for applicators.


13


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 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 product failure rates, and average repair costs, including freight, material, technical support labor, and overhead costs, for products returned under warranty.

Changes in the Company's product warranty accrual was as follows (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Balance at the beginning of the period
$
1,052

 
$
440

 
$
527

 
$
569

Settlements of warranties
(248
)
 
33

 
(473
)
 
(67
)
Provision
624

 
(134
)
 
1,374

 
(163
)
Balance at the end of the period
$
1,428

 
$
339

 
$
1,428

 
$
339


4. Intangible Asset, Net

The Company's 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, clearance were 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):
 
 
June 30,
2016
 
December 31,
2015
Purchased technology
$
8,050

 
$
8,050

Less: Accumulated amortization
(3,283
)
 
(2,958
)
     Intangible asset, net
$
4,767

 
$
5,092


Amortization expense of the intangible asset was $0.2 million for both the three months ended June 30, 2016 and 2015 , and $0.3 million and $0.4 million for the six months ended June 30, 2016 and 2015 , respectively.

The total estimated annual future amortization expense of this intangible asset as of June 30, 2016 , is as follows (in thousands):

Fiscal Year
 
2016 (remaining 6 months)
$
325

2017
650

2018
650

2019
650

2020
650

Thereafter
1,842

Total
$
4,767



14


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 , as the Company's exclusive distributor of CoolSculpting in Brazil and Mexico, as amended on August 29, 2011 , February 27, 2012 and September 4, 2012 . The distribution agreement was further amended on August 15, 2014 , whereby ADVANCE is no longer a distributor in Mexico, effective November 13, 2014 . As the exclusive distributor in Brazil, 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 former principal stockholder of the Company, owns an equity interest in ADVANCE Medical, Ltd., the parent company of ADVANCE. Dr. Bryan E. Roberts, who was a member of the Company's Board of Directors until our annual meeting of stockholders in June 2016, is also a partner of Venrock Associates. ADVANCE purchases product with payment terms up to 180 days , and to date no amounts have been determined to be unrecoverable. The revenue recognized by the Company under this distribution agreement was $0.4 million and $1.4 million for the three and six months ended June 30, 2016 , respectively, compared to $0.3 million and $1.6 million for the three and six months ended June 30, 2015 , respectively. The accounts receivable balance under this distribution agreement was zero and $1.7 million as of June 30, 2016 and December 31, 2015 , respectively.

6. Commitments and Contingencies

Operating Lease Obligations
 
The Company leases facilities under non-cancellable operating leases with various expiration dates. In the three months ended June 30, 2016 , the Company entered into an office lease for approximately 109,701 square feet in Pleasanton California which extends through August 2027 and a manufacturing facility in Galway, Ireland which extends through June 2022 . The Company currently occupies a facility in Pleasanton, California, under a lease which extends through March 2019 , a manufacturing facility in Dublin, California, under a lease which extends through May 2017 , and a warehouse space in Livermore, California, under a lease which extends through May 2017 . The Company also occupies office and warehouse space near Gatwick, United Kingdom, under a lease which extends through December 2018 , Seoul, South Korea, under a lease which extends through August 2016 , Reston, Virginia, under a lease which extends through September 2021 , and Galway, Ireland which extends through September 2016 , as well as office space in London, United Kingdom and Taipei, Taiwan that are leased on a month to month basis. 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 $0.7 million and $1.3 million for the three and six months ended June 30, 2016 , respectively, compared to $0.6 million and $1.1 million for the three and six months ended June 30, 2015 , respectively.

Future minimum lease payments under the non-cancellable operating leases as of June 30, 2016 , are as follows (in thousands):

Year Ending December 31,
Amount
2016 (remaining 6 months)
$
1,340

2017
3,845

2018
5,317

2019
5,188

2020
4,943

Thereafter
31,785

Total future minimum lease payments
$
52,418


This compares to future minimum lease payments under the non-cancellable operating leases as of December 31, 2015 , of $7.3 million .

Capital Lease Obligations

The Company has entered into certain capital lease obligations to purchase equipment for operations which include a bargain purchase option. The underlying assets and related depreciation are included in the appropriate property and equipment category and related accumulated depreciation account.

Property and equipment includes amounts under leases that have been capitalized as follows (dollars in thousands):


15


 
Useful life (Years)
 
June 30, 2016
 
December 31,
2015
Computer equipment
3
 
$
392

 
$
382

Total capital leased equipment
 
 
392

 
382

Less: Accumulated depreciation and amortization
 
 
(212
)
 
(149
)
Capital leased equipment, net
 
 
$
180

 
$
233


Total amortization of assets acquired under capital leases was $32,000 and $0.1 million for the three and six months ended June 30, 2016 , respectively, which is included in total depreciation and amortization expense.

Future minimum payments required under capital leases as of June 30, 2016 , are as follows (dollars in thousands):
 
Year Ending December 31,
Amount



2016 (remaining 6 months)
$
66

2017
141

     Total future payments
$
207

 
 
Less: Amount representing interest
6

Present value of future minimum payments
201

Less: Current portion
127

Long term portion
$
74


Purchase Commitments

The Company had non-cancellable purchase obligations to contract manufacturers and suppliers of $5.0 million and $5.9 million at June 30, 2016 and December 31, 2015 , respectively.

Unrecognized Tax Benefits

The Company's gross liability for unrecognized tax benefits totaled $0.3 million , including estimated interest and penalties, as of June 30, 2016 , 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.

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.

The Company is not currently a defendant in any litigation or claims that are expected to have a material impact on the Company's consolidated financial statements.

Product Liability Contingencies

The Company has historically been and continues to be predominantly self-insured for any product liability losses related to its products. The Company obtains third-party insurance to limit its exposure to these claims, but this insurance is subject to a cap on reimbursement. Product liability losses are, by their nature, uncertain and are based upon complex judgments and

16


probabilities. The Company accrues for reported claims and estimates for incurred, but not reported claims, to the extent that such losses can be reasonably estimated. The Company determines its accruals for probable product liability losses based on various factors, including historical claims and settlement experience. The total amount of self-insured product liability claims settled in the three and six months ended June 30, 2016 were $0.6 million and $1.5 million , respectively. The total amount of self-insured product liability claims settled in the three and six months ended June 30, 2015 were not material. The amount of reported and estimated incurred but not known self-insured product liability claims pending was $2.0 million as of June 30, 2016 and $1.1 million as of December 31, 2015 , which is recorded as an accrual on the Company's condensed consolidated balance sheet and expected to be paid within one year.

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.

Separation Agreements

On February 25, 2016 , the Company's former Chief Financial Officer and the Company mutually agreed that the former Chief Financial Officer would cease to be an officer and employee of the Company which resulted in the Company incurring $0.3 million in termination benefits. In addition, stock-based compensation expense relating to the modifications of the former Chief Financial Officer's stock options and stock awards totaled $1.1 million , of which $0.7 million was recognized as stock-based compensation during the quarter ended March 31, 2016 and $0.4 million was recognized in the quarter ended June 30, 2016 .


17


7. Stock-Based Compensation Expense

Share-Based Awards Available for Grant

A summary of share-based awards available for grant is as follows:

 
 
 
 
 
Shares
Available
for Grant
Balance, December 31, 2015
3,517,305

Additional shares reserved
1,000,000

Options granted
(302,236
)
Restricted stock units granted
(761,790
)
Options canceled
7,509

Restricted stock units canceled
87,621

Restricted stock units withheld for tax
154,682

Balance, June 30, 2016
3,703,091


Stock Option Awards

A summary of the stock option activity is as follows:

 
 
Options Outstanding
 
 
Number of
Stock Options
Outstanding
 
Weighted-
Average
Exercise
Price
Balance, December 31, 2015
2,641,592

 
$
6.47

Options granted
302,236

 
22.25

Options exercised
(29,167
)
 
6.30

Options canceled
(7,509
)
 
4.19

Balance, June 30, 2016
2,907,152

 
$
8.47


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, 2015
1,312,651

 
$
19.09

Restricted stock units granted
761,790

 
25.25

Restricted stock units vested
(419,703
)
 
14.68

Restricted stock units canceled
(87,621
)
 
21.44

Balance, June 30, 2016
1,567,117

 
$
23.14


During the three and six months ended June 30, 2016 , 111,069 and 419,703 shares vested, respectively, subject to previously granted restricted stock units. A majority of these vested restricted stock units were net share settled. During the three and six months ended June 30, 2016 , the Company withheld 42,136 and 154,682 shares, respectively, based upon the Company's closing stock price on the vesting date to settle the employees' minimum statutory obligations for the applicable income and other employment taxes. During the three and six months ended June 30, 2015 , 101,407 and 431,608 shares vested, respectively, subject to previously granted restricted stock units. A majority of these vested restricted stock units were net share settled. During the three and six months ended June 30, 2015 , the Company withheld 41,832 and 174,867 shares, respectively, based upon the

18


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 authorities was $1.2 million and $3.9 million for the three and six months ended June 30, 2016 , respectively. Total payments for employees' tax obligations to the relevant taxing authorities was $1.3 million and $5.6 million for the three and six months ended June 30, 2015 , respectively. The payments were for taxes related to the net share settlements of restricted stock units.

Stock-Based Compensation Expense

Stock-based compensation related to all of the Company's stock-based awards and employee stock purchases was recorded as an expense or a reduction to revenue and categorized as follows (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Revenue
$
56

 
$
68

 
$
56

 
$
148

Cost of revenue
258

 
149

 
490

 
283

Research and development
507

 
392

 
1,008

 
742

Sales and marketing
1,820

 
1,345

 
3,203

 
2,896

General and administrative
1,979

 
1,129

 
4,065

 
3,164

Total stock-based compensation
$
4,620

 
$
3,083

 
$
8,822

 
$
7,233


As of June 30, 2016 , the total unrecognized compensation costs related to outstanding stock options, awards and employee stock purchases was $30.8 million , which is expected to be recognized using the straight-line attribution method over 3.70 years .

Performance-Based Awards

From time to time, the Company will issue performance-based stock options and restricted stock units to senior executives.  During both the six months ended June 30, 2016 and 2015 , the Company granted 40,000 performance-based restricted stock units to a senior executive, which was accounted for as an equity award. The number of units that ultimately vest depends on achieving certain performance criteria and can range from 0% to 100% of the number of units granted. The performance criteria are specific to the roles of each of the executives and are set by the Compensation Committee of the Board of Directors. The performance-based restricted stock units have no dividend or voting rights during the performance period. Each of the performance-based restricted stock units represents the contingent right to receive one share of the Company's common stock if the vesting conditions are satisfied. Compensation expense related to these grants is based on the grant date fair value of the award. Stock-based compensation expense includes charges related to performance-based stock options and restricted stock units granted to certain executives. 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 $0.4 million and $0.8 million for the three and six months ended June 30, 2016 , respectively, compared to $0.5 million and $2.0 million for the three and six months ended June 30, 2015 , respectively.

Employee Stock-Based Compensation

The Company uses the Black-Scholes option pricing model to determine the fair value of stock options. The valuation model for stock-based compensation expense requires the Company to make assumptions and judgments about the variables used in the calculation including the expected term (weighted-average period of time that the options granted are expected to be outstanding), volatility of the Company's common stock, an assumed-risk-free interest rate and the estimated forfeitures of unvested stock options. During 2015, the Company modified its approach for calculating assumptions related to the expected term and volatility as detailed below.

19



The fair value of employee stock options was estimated using the following weighted-average assumptions:
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Expected term
N/A
 
N/A
 
4.80 years

 
4.80 years

Expected volatility
N/A
 
N/A
 
63
%
 
63
%
Risk-free interest rate
N/A
 
N/A
 
1.21
%
 
1.29
%
Expected dividend yield
N/A
 
N/A
 
%
 
%

Expected Term . Subsequent to the Company's initial public offering of its common stock, or IPO, and through 2014, the expected term used was based on expected term of a group of similar entities, referred to as its “peer group.” In evaluating similarity, the Company considered factors such as industry, stage of life cycle and size. In 2015, the Company modified its approach by including its own historical data along with the expected term of the identified peer group companies. The Company will continue to apply this methodology until a sufficient amount of historical information regarding its own expected term becomes available.

Volatility . Subsequent to the IPO, and through 2014, the Company continued to estimate its volatility based on its peer group as the Company did not have sufficient historical data regarding its specific volatility. In 2015, the Company modified its approach by including its own common stock trading history along with the volatility of the identified peer group companies. The expected stock price volatility is estimated using a combination of historical and peer group volatility to derive the expected volatility assumption. The Company believes the blended volatility is more representative of future stock price trends over the expected life of the options rather than just using historical or peer group volatility. The Company will continue to apply this methodology until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.

Risk-Free Interest Rate . The risk-free interest rate is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.

Dividend Yield . The Company has never paid any dividends and does not plan to pay dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.

Forfeitures. The Company is required to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and to record stock-based compensation expense only for those awards that are expected to vest. To the extent actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period that the estimates are revised.

No stock options were granted in either of the three months ended June 30, 2016 or June 30, 2015 . During the six months ended June 30, 2016 , the Company granted 302,236 stock options to employees with a weighted-average grant date fair value of $22.25 per share. During the six months ended June 30, 2015 , the Company granted 45,622 stock options to employees with a weighted-average grant date fair value of $18.19 per share, respectively.

During the three and six months ended June 30, 2016 , the Company granted 382,221 and 761,790 restricted stock units, respectively, to employees with a weighted-average grant date fair value of $27.71 and $25.25 per share, respectively. During the three and six months ended June 30, 2015 , the Company granted 65,215 and 418,972 restricted stock units, respectively, to employees with a weighted-average grant date fair value of $29.42 and $31.56 per share.

During the six months ended June 30, 2016 , employees purchased 66,857 shares under the Company's employee stock purchase plan, or ESPP, at a weighted average exercise price of $24.19 . As of June 30, 2016 , the unrecognized compensation cost related to the ESPP was $0.5 million , which will be recognized using the straight-line attribution method over 0.4 years .

Stock-Based Compensation for Non-employees

20



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 three and six months ended June 30, 2016 , the Company granted stock-based awards to a non-employee that vest over one year. Stock-based compensation expense related to non-employee grants was $0.1 million for both the three and six months ended June 30, 2016 , of which $0.1 million relates to an arrangement with a non-employee customer and has been recorded as a reduction of revenue for both the three and six months ended June 30, 2016 , in the condensed consolidated statements of operations. Stock-based compensation expense for non-employees was $0.1 million and $0.3 million for the three and six months ended June 30, 2015 , respectively.

8. Net Income (Loss) per Share

Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the treasury stock method to calculate the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential dilutive common shares include unvested restricted stock awards and units and incremental common shares issuable upon the exercise of stock options, less shares from assumed proceeds. The assumed proceeds calculation includes actual proceeds to be received from the employee upon exercise, the average unrecognized stock compensation cost during the period and any tax benefits that will be credited upon exercise to additional paid-in capital.

A reconciliation of the numerator and denominator used in the calculation of the basic and diluted net income (loss) per share is as follows:
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Numerator
 
 
 
 
 
 
 
Net income (loss) (in thousands)
$
(4,902
)
 
$
1,178

 
$
(14,772
)
 
$
(951
)
Denominator
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding used in computing net income (loss) per share, basic
39,493,665

 
38,649,873

 
39,391,259

 
38,517,817

Dilutive effect of incremental shares and share equivalents

 
2,991,787

 

 

Weighted average shares of common stock outstanding used in computing net income (loss) per share, diluted
39,493,665

 
41,641,660

 
39,391,259

 
38,517,817

Net income (loss) per share:
 
 
 
 
 
 
 
Net income (loss) per share, basic
$
(0.12
)
 
$
0.03

 
$
(0.38
)
 
$
(0.02
)
Net income (loss) per share, diluted
$
(0.12
)
 
$
0.03

 
$
(0.38
)
 
$
(0.02
)

The following outstanding potentially dilutive securities were excluded from the computation of diluted net income (loss) per share of common stock for the periods presented, because including them would have been anti-dilutive:
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Options to purchase common stock
347,848

 
45,622

 
2,907,152

 
2,958,922

Restricted stock units
98,586

 
116,035

 
1,567,117

 
1,419,718

Common stock issuable pursuant to the ESPP

 

 

 
722

Total
446,434

 
161,657

 
4,474,269

 
4,379,362



21


9. Income Taxes

The Company recorded income tax expense of $2.8 million and $2.1 million for the three and six months ended June 30, 2016 , respectively, compared to income tax expense of $43,000 and $71,000 for the three and six months ended June 30, 2015 , respectively. The income tax expense for the three and six months ended June 30, 2016 and 2015 reflects the mixture and distribution of pre-tax income in the Company's operating jurisdictions. The Company continues to maintain a valuation allowance on its deferred tax assets relating to its California research and development credit.

The Company generated pre-tax year-to-date ordinary losses in its zero-rate jurisdiction, and the Company has elected to exclude these pre-tax year-to-date ordinary losses from its zero-rate jurisdiction from its estimated effective tax rate computations. The exclusion is based on the notion that a loss in a zero-rate jurisdiction ultimately will not provide the Company a tax benefit.

At June 30, 2016 , the Company had $3.1 million of unrecognized tax benefits. 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.

During the fourth quarter of the year ended December 31, 2015, the Company released its valuation allowance against U.S. federal and state deferred tax assets, with the exception of the California research and development credit carryforwards.  Based upon the evaluation of positive and negative evidence supporting the realizability of deferred tax assets as of the quarter ended June 30, 2016 , there remains sufficient positive evidence to support the realization of U.S. federal and state deferred tax assets, with the exception of California research and development credit carryforwards. 

The Company files annual income tax returns in multiple taxing jurisdictions around the world, including the U.S. federal and state jurisdictions, Ireland and the United Kingdom. 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  June 30, 2016 , 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
North America
$
74,014

 
$
51,436

 
$
125,483

 
$
86,665

International
15,451

 
12,995

 
28,451

 
29,324

     Total
$
89,465

 
$
64,431

 
$
153,934

 
$
115,989


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 $71.6 million and $122.9 million for the three and six months ended June 30, 2016 , respectively, compared to $46.4 million and $79.5 million for the three and six months ended June 30, 2015 , respectively.


22


The following table sets forth revenue by product expressed as dollar amounts (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
System revenue
$
39,449

 
$
32,047

 
$
64,138

 
$
58,203

Consumable revenue
50,016

 
32,384

 
89,796

 
57,786

     Total
$
89,465

 
$
64,431

 
$
153,934

 
$
115,989


As of June 30, 2016 and December 31, 2015, property and equipment, net, by geographical area are presented below (in thousands):

 
 
 
 
 
June 30,
 
December 31,
 
2016
 
2015
U.S.
$
5,873

 
$
6,691

Ireland
1,589

 

Other
268

 
278

          Total
$
7,730

 
$
6,969

 
 
 
 
 
 
 
 
 
 
 
 



23


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, 2015 . 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 primarily from sales of our CoolSculpting system, add-on applicators 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 CoolAdvantage applicator in June 2016, we currently offer seven 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. In April 2014, CoolSculpting was cleared by the FDA for treatment of the thigh area, and, in January 2015, CoolSculpting was cleared by the FDA for treatment at lower temperatures which will enable shorter treatment times. In September 2015, the FDA cleared CoolSculpting for treatment of the submental area under the chin, an area that is consistently ranked as one of the top areas of concern both by consumers and physicians. Most recently, in April 2016, the FDA cleared CoolSculpting for the reduction of fat around bra straps, on the back and underneath the buttocks. We may seek additional regulatory clearances from the FDA to expand our United States marketed indications for CoolSculpting to other areas on the body. 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, thighs submental area under the chin, around bra straps, back and underneath the buttocks. In addition to the applicators that we include in our current system bundle, we recently launched a new family of applicators called CoolAdvantage. These applicators reduce treatment time by nearly half compared to our existing applicators due to lower temperatures. In June 2016, we released our first applicator from this family, which features an adaptable 3-in-1 configuration and enhanced cup design. Additionally, in the fourth quarter of 2016 we expect to launch the second applicator from this family, which will address larger fat bulges.

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, Latin America and Europe, we sell CoolSculpting through both 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 17% and 18% of our total revenue for the three and six months ended June 30, 2016 , respectively, compared to 20% and 25% of our total revenue for the three and six months ended June 30, 2015 , respectively.

Our ongoing research and development activities are primarily focused on improving and enhancing our CoolSculpting system and CoolSculpting procedure. In addition to these development activities related to CoolSculpting, we are exploring additional uses of our proprietary controlled cooling technology platform for the dermatology, plastic surgery, aesthetic and OBGYN 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 primarily from sales of our CoolSculpting system and from sales of consumables to our customers. We generated revenue of $89.5 million and $153.9 million for the three and six months ended June 30, 2016 , respectively, compared to $64.4 million and $116.0 million for the three and six months ended June 30, 2015 , respectively.


24

Table of Contents

System revenue.  Sales of our CoolSculpting system include the CoolSculpting control unit and our CoolSculpting applicators. Sales of systems can include sales of systems to new customers that include our entire suite of applicators, as well as multi-system sales to new customers or sales to existing customers which may not include the entire suite of applicators.  Additionally, some practices may 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 44% and 42% of our total revenue for the three and six months ended June 30, 2016 , respectively, compared to 50% of our total revenue for both the three and six months ended June 30, 2015 . Our worldwide installed base grew by 34% from 3,910 units as of June 30, 2015 , to 5,252 units as of June 30, 2016 .

Consumable revenue.  We generate consumable revenue through sales of cycles in the form of consumable procedure packs, each of which includes our consumable CoolGels, CoolLiners, and in the case of our CoolSmooth and CoolMini procedure packs, disposable securement accessories, all of which are used by our customer during treatments. In addition, each consumable procedure pack includes 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 cycles. Consumable revenue accounted for 56% and 58% of our total revenue for the three and six months ended June 30, 2016 , respectively, compared to 50% of our total revenue for both the three and six months ended June 30, 2015 . We shipped 370,122 and 677,540 CoolSculpting revenue cycles to our customers during the three and six months ended June 30, 2016 , respectively, compared to 252,642 and 459,929 CoolSculpting revenue cycles during the three and six months ended June 30, 2015 , respectively.

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 continue to implement our business plan and expand our installed base 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. Seasonal fluctuations occur in both system revenue and consumable revenue as well as by geographic region. Specifically, our customers often take vacation or are on holiday during the summer months and therefore tend to perform fewer procedures, particularly in certain international countries. 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.

Out of period adjustments.

During the three months ended June 30, 2016 , the Company recorded certain out-of-period correcting adjustments totaling $0.4 million to increase cost of revenue by $0.2 million , with a corresponding decrease to inventory, and to increase other operating expenses by $0.2 million , with a corresponding increase to other accruals, relating to prior periods. The Company does not believe that such amounts are material to any prior period consolidated financial statements, and the impact of correcting these errors in the six months ended June 30, 2016 is not material to the current consolidated financial statements or expected to be material to the financial statements for the year ending December 31, 2016 .

During the three months ended March 31, 2016 , we recorded certain out-of-period correcting adjustments totaling $0.2 million to increase cost of revenue by $0.4 million , with a corresponding increase to warranty accrual, and to reduce other operating expenses by $0.2 million , with a corresponding decrease to other accruals, relating to prior periods. We do not believe that such amounts are material to any prior period consolidated financial statements, and the impact of correcting these errors in the three months ended March 31, 2016 is not material to the current consolidated financial statements or expected to be material to the financial statements for the year ending December 31, 2016 .


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Table of Contents

During the three months ended June 30, 2015 , we recorded an out-of-period adjustment of $0.2 million to increase cost of revenue to write-off of certain inventory held by vendors.  Of this adjustment,  $0.1 million $23,000 and $42,000 related to the fiscal years ended December 31, 2013 , 2014 and 2015 , respectively. We do not believe that such amounts are material to any prior period consolidated financial statements, and the impact of correcting these errors in the six months ended June 30, 2015 is not material to the current consolidated financial statements.

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, 2015 .

Our critical accounting policies have not changed during the six months ended   June 30, 2016 . 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 statements 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 allocation of selling prices to revenue elements, (2) customer programs and payments, including accruals for customer programs, cooperative marketing arrangements, customer incentive programs and payments to customers, (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, 2015 .

Results of Operations

Revenue (in thousands, except for percentages):

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Revenue
2016
 
2015
 
$ Change
 
% Change
 
2016
 
2015
 
$ Change
 
% Change
System revenue
$
39,449

 
$
32,047

 
$
7,402

 
23
%
 
$
64,138

 
$
58,203

 
$
5,935

 
10
%
Consumable revenue
50,016

 
32,384

 
17,632

 
54
%
 
89,796

 
57,786

 
32,010

 
55
%
Total revenue
$
89,465

 
$
64,431

 
$
25,034

 
39
%
 
$
153,934

 
$
115,989

 
$
37,945

 
33
%

Overall, we experienced an increase in revenue primarily as a result of our national direct-to-consumer advertising campaign, 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 and six months ended June 30, 2016 , as compared to the same periods in 2015 . Overall, we placed 364 and 620 systems in the three and six months ended June 30, 2016 , respectively, as compared to 387 and 734 systems in the three and six months ended June 30, 2015 , respectively. The majority of this decline is attributable to a single customer, which purchased 80 and 160 systems in the three and six months ended June 30, 2015 , respectively. The decrease in system sales was offset by an increase in add-on applicator revenue. We continue to experience significant sales of add-on applicators to existing customers, driven by our CoolMini and CoolAdvantage applicators which we launched in April 2015 and June 2016, respectively. We recognized add-on applicator revenue of $8.4 million and $11.8 million in the three and six months ended June 30, 2016 , respectively, related primarily to our CoolAdvantage applicator which totaled $5.6 million in the three months ended June 30, 2016 and the CoolMini applicator which totaled $2.1 million and $5.0 million in the three and six months ended June 30, 2016 . In the three and six months ended June 30, 2015 our add-on revenue, related primarily to sales of our CoolSmooth PRO applicator which launched in April 2015, totaled $1.8 million and $2.5 million,

26

Table of Contents

respectively. Add-on applicators allow our customers to optimize their existing system to fit different body shapes and sizes, as well as different body parts or regions of the body.

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 national direct-to-consumer advertising campaign and targeted marketing programs in the three and six months ended June 30, 2016 , as compared to the same periods in 2015 , offset by certain rebate programs with our international distributors. There were no significant changes in average selling price for our consumable procedures packs in the three and six months ended June 30, 2016 as compared to the same periods in 2015 . Our average selling price is influenced by procedure type mix as well as region and customer type.

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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
$ Change
 
% Change
 
2016
 
2015
 
$ Change
 
% Change
Cost of revenue
$
27,521

 
$
18,116

 
$
9,405

 
52
%
 
$
45,750

 
$
32,494

 
$
13,256

 
41
%
% of total revenue
31
%
 
28
%
 
 
 
 
 
30
%
 
28
%
 
 
 
 
Gross profit
$
61,944

 
$
46,315

 
$
15,629

 
34
%
 
$
108,184

 
$
83,495

 
$
24,689

 
30
%
Gross profit %
69
%
 
72
%
 
 
 
 
 
70
%
 
72
%
 
 
 
 

Gross profit as a percentage of revenue typically fluctuates with product and regional mix, selling prices, material costs and revenue levels. The gross profit as a percentage of revenue for the three and six months ended June 30, 2016 decreased compared to the same period in 2015 and was unfavorably impacted by sales of our CoolMini and CoolAdvantage applicators which currently carry a higher cost than the other applicators we offer, a higher number of applicators sold with each system, and an increase in warranty related expense. However, this impact was offset in part by increased sales volumes on a fixed base of overhead costs as well as a change in overall revenue mix that resulted in a shift of revenue to consumables, which carry a higher standard margin.
 
Operating Expenses (in thousands, except for percentages):

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
$ Change
 
% Change
 
2016
 
2015
 
$ Change
 
% Change
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
$
6,403

 
$
5,809

 
$
594

 
10
%
 
$
12,606

 
$
11,889

 
$
717

 
6
%
% of total revenue
7
%
 
9
%
 
 
 
 
 
8
%
 
10
%
 
 
 
 
Sales and marketing
$
50,293

 
$
32,199

 
$
18,094

 
56
%
 
$
90,948

 
$
56,605

 
$
34,343

 
61
%
% of total revenue
56
%
 
50
%
 
 
 
 
 
59
%
 
49
%
 
 
 
 
General and administrative
$
8,774

 
$
6,654

 
$
2,120

 
32
%
 
$
19,320

 
$
15,042

 
$
4,278

 
28
%
% of total revenue
10
%
 
10
%
 
 
 
 
 
13
%
 
13
%
 
 
 
 
Total operating expenses
$
65,470

 
$
44,662

 
$
20,808

 
47
%
 
$
122,874

 
$
83,536

 
$
39,338

 
47
%

Research and development.  Research and development expenses increased for the three and six months ended June 30, 2016 , as compared to the same periods in 2015 , due to an increase in materials, operations and clinical costs of $0.3 million and $0.1 million for the three and six months ended June 30, 2016 , respectively, as we continue to explore ways to leverage our proprietary cooling platform for additional applications and indications including our recently announced CoolAdvantage line of applicators. Stock-based compensation expense also increased by $0.1 million and $0.3 million for the three and six months ended June 30, 2016 , respectively, attributed to grants to existing and new employees and due to an increase in stock price. We also experienced an increase in payroll related costs of $45,000 and $0.1 million , respectively, attributed to higher headcount.


27

Table of Contents

Sales and marketing.  Sales and marketing expenses increased for the three and six months ended June 30, 2016 , as compared to the same period of 2015 , primarily due to the launch of our national direct-to-consumer advertising campaign, which along with other sales and marketing initiatives increased sales and marketing expense by $7.7 million and $16.9 million , respectively. As we continued to expand into new and existing markets, we experienced a significant increase in headcount attributable to our sales force, which increased by approximately 44% . This growth in headcount resulted in an increase in payroll related costs of $6.9 million and $10.6 million for the three and six months ended June 30, 2016 , respectively, which includes an increase in variable compensation primarily resulting from revenue growth. Stock-based compensation expense also increased by $0.5 million and $0.3 million for the three and six months ended June 30, 2016 , respectively, attributed to grants to existing and new employees, including certain performance-based award grants, and due to an increase in stock price. Travel and related expenses increased by $0.6 million and $1.5 million for the three and six months ended June 30, 2016 , respectively, associated with sales efforts in the normal course of business as well as the training of new and existing members of our sales force. In addition, we also incur expenses related to 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. The expense incurred with respect to these programs is dependent on both the number of qualifying customers as well as the amount of advertising expenditures by our customers that is determined to be reimbursable. The expense for these cooperative marketing arrangements included in our customer incentive programs increased by $1.0 million and $1.7 million for the three and six months ended June 30, 2016 , respectively, when compared to the same periods in 2015 , primarily due to an increase in our customer base.

General and administrative.  General and administrative expenses increased for the three and six months ended June 30, 2016 , as compared to the same periods in 2015 , primarily due to an increase in payroll related costs of $0.8 million and $2.0 million for the three and six months ended June 30, 2016 , respectively, resulting from higher headcount in certain functions to support growth in our business. Stock-based compensation expense also increased by $0.9 million for both the three and six months ended June 30, 2016 , respectively, attributed to grants to existing and new employees and due to an increase in stock price, as well as the expense related to certain performance-based awards for which all release criteria were achieved. Additionally, professional services fees increased by $0.2 million and $0.8 million for the three and six months ended June 30, 2016 , respectively, when compared to the same periods in 2015 , associated with the growth of our business.

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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
$ Change
 
% Change
 
2016
 
2015
 
$ Change
 
% Change
Interest income (expense), net
$
(20
)
 
$
13

 
$
(33
)
 
(254
)%
 
$
(56
)
 
$
26

 
$
(82
)
 
(315
)%
% of total revenue
 %
 
 %
 
 
 
 
 
 %
 
 %
 
 
 
 
Other income (expense), net
$
1,409

 
$
(445
)
 
$
1,854

 
(417
)%
 
$
2,055

 
$
(865
)
 
$
2,920

 
(338
)%
% of total revenue
2
 %