Attached files
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EXCEL - IDEA: XBRL DOCUMENT - Zeltiq Aesthetics Inc | Financial_Report.xls |
EX-12.1 - RATIO OF EARNINGS TO FIXED CHARGES - Zeltiq Aesthetics Inc | exhibit121q314.htm |
EX-31.2 - CERTIFICATE OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 - Zeltiq Aesthetics Inc | exhibit312q314.htm |
EX-31.1 - CERTIFICATE OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 - Zeltiq Aesthetics Inc | exhibit311q314.htm |
EX-32.1 - CERTIFICATE OF PEO AND PFO PURSUANT TO 18 U.S.C. SECTION 1350 - Zeltiq Aesthetics Inc | exhibit321q314.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________
FORM 10-Q
____________________________________________
(Mark One)
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 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 October 23, 2014, there were 37,854,734 shares of the registrant’s common stock, par value $0.001 per share, outstanding.
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
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZELTIQ Aesthetics, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share data)
September 30, 2014 | December 31, 2013 | ||||||
ASSETS | |||||||
CURRENT ASSETS: | |||||||
Cash and cash equivalents | $ | 24,941 | $ | 25,798 | |||
Short-term investments | 19,157 | 18,840 | |||||
Accounts receivable, net | 15,679 | 10,221 | |||||
Inventory | 18,181 | 8,406 | |||||
Prepaid expenses and other current assets | 4,378 | 4,368 | |||||
Total current assets | 82,336 | 67,633 | |||||
Long-term investments | 3,976 | 11,442 | |||||
Restricted cash | 574 | 331 | |||||
Property and equipment, net | 2,691 | 2,158 | |||||
Intangible asset, net | 5,955 | 6,481 | |||||
Other assets | 84 | 9 | |||||
Total assets | $ | 95,616 | $ | 88,054 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
CURRENT LIABILITIES: | |||||||
Accounts payable | $ | 3,655 | $ | 5,165 | |||
Accrued liabilities | 19,203 | 18,364 | |||||
Deferred revenue | 4,084 | 1,674 | |||||
Total current liabilities | 26,942 | 25,203 | |||||
Other non-current liabilities | 165 | 275 | |||||
Total liabilities | $ | 27,107 | $ | 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 September 30, 2014, and December 31, 2013 | — | — | |||||
Common stock, $0.001 par value: 500,000,000 shares authorized at September 30, 2014, and December 31, 2013; 37,801,511 and 37,038,374 shares issued and outstanding at September 30, 2014, and December 31, 2013, respectively | 42 | 41 | |||||
Additional paid-in capital | 201,502 | 195,507 | |||||
Accumulated other comprehensive (loss) income | (190 | ) | 87 | ||||
Accumulated deficit | (132,845 | ) | (133,059 | ) | |||
Total stockholders’ equity | 68,509 | 62,576 | |||||
Total liabilities and stockholders’ equity | $ | 95,616 | $ | 88,054 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
ZELTIQ Aesthetics, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except share and per share data)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Revenue | $ | 45,670 | $ | 29,465 | $ | 123,706 | $ | 75,785 | |||||||
Cost of revenue | 12,555 | 8,236 | 35,231 | 23,462 | |||||||||||
Gross profit | 33,115 | 21,229 | 88,475 | 52,323 | |||||||||||
Operating expenses: | |||||||||||||||
Research and development | 4,241 | 4,257 | 12,861 | 11,904 | |||||||||||
Sales and marketing | 19,014 | 15,487 | 60,253 | 42,654 | |||||||||||
General and administrative | 4,896 | 4,374 | 14,843 | 11,808 | |||||||||||
Total operating expenses | 28,151 | 24,118 | 87,957 | 66,366 | |||||||||||
Income (loss) from operations | 4,964 | (2,889 | ) | 518 | (14,043 | ) | |||||||||
Interest income, net | 14 | 17 | 47 | 60 | |||||||||||
Other (expense) income, net | (189 | ) | 90 | (338 | ) | 162 | |||||||||
Income (loss) before income taxes | 4,789 | (2,782 | ) | 227 | (13,821 | ) | |||||||||
Income tax expense | 7 | 29 | 13 | 79 | |||||||||||
Net income (loss) | $ | 4,782 | $ | (2,811 | ) | 214 | (13,900 | ) | |||||||
Basic net income (loss) per share: | |||||||||||||||
Net income (loss) per share, basic | $ | 0.13 | $ | (0.08 | ) | $ | 0.01 | $ | (0.39 | ) | |||||
Weighted average shares of common stock outstanding used in computing net income (loss) per share, basic | 37,630,222 | 36,206,008 | 37,430,337 | 36,048,303 | |||||||||||
Diluted net income (loss) per share: | |||||||||||||||
Net income (loss) per share, diluted | $ | 0.12 | $ | (0.08 | ) | $ | 0.01 | $ | (0.39 | ) | |||||
Weighted average shares of common stock outstanding used in computing net income (loss) per share, diluted | 40,926,034 | 36,206,008 | 40,781,141 | 36,048,303 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
ZELTIQ Aesthetics, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(In thousands)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Net income (loss) | $ | 4,782 | $ | (2,811 | ) | $ | 214 | $ | (13,900 | ) | |||||
Other comprehensive (loss) income, net of tax: | |||||||||||||||
Foreign currency translation adjustments | (450 | ) | — | (271 | ) | — | |||||||||
Changes in unrealized losses on available-for-sale securities | (2 | ) | 16 | (6 | ) | — | |||||||||
Other comprehensive (loss) income, net of tax | (452 | ) | 16 | (277 | ) | — | |||||||||
Comprehensive income (loss) | $ | 4,330 | $ | (2,795 | ) | $ | (63 | ) | $ | (13,900 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
ZELTIQ Aesthetics, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Nine Months Ended | |||||||
September 30, | |||||||
2014 | 2013 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
Net income (loss) | $ | 214 | $ | (13,900 | ) | ||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | |||||||
Depreciation and amortization | 1,350 | 1,273 | |||||
Stock-based compensation | 7,029 | 4,097 | |||||
Deferred income taxes | 37 | 46 | |||||
Amortization (accretion) of investment premium (discount), net | 183 | 270 | |||||
Provision for (recovery of) doubtful accounts receivable | 134 | (12 | ) | ||||
Provision for excess and obsolete inventory | 688 | 273 | |||||
Loss on disposal and write-off of property and equipment | 17 | 2 | |||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | (5,653 | ) | 507 | ||||
Inventory | (9,684 | ) | 2,180 | ||||
Prepaid expenses and other assets | 177 | (376 | ) | ||||
Deferred revenue, net of deferred costs | 2,426 | (151 | ) | ||||
Accounts payable, accrued and other non-current liabilities | (2,076 | ) | 2,831 | ||||
Net cash used in operating activities | (5,158 | ) | (2,960 | ) | |||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
Purchase of investments | (9,011 | ) | (24,158 | ) | |||
Proceeds from sale of investments | 1,000 | 10,550 | |||||
Proceeds from maturity of investments | 14,968 | 17,396 | |||||
Purchase of property and equipment | (1,216 | ) | (415 | ) | |||
Change in restricted cash | (252 | ) | 140 | ||||
Net cash provided by investing activities | 5,489 | 3,513 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Proceeds from issuance of common stock upon exercise of stock options | 2,714 | 854 | |||||
Tax payments related to shares withheld for vested restricted stock units | (3,774 | ) | (64 | ) | |||
Tax effect of employee stock plans | 27 | — | |||||
Net cash (used in) provided by financing activities | (1,033 | ) | 790 | ||||
Effect of exchange rate on cash and cash equivalents | (155 | ) | — | ||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (857 | ) | 1,343 | ||||
CASH AND CASH EQUIVALENTS—Beginning of period | 25,798 | 22,876 | |||||
CASH AND CASH EQUIVALENTS—End of period | $ | 24,941 | $ | 24,219 |
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, 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 September 30, 2014, results of operations for the three and nine months ended September 30, 2014 and 2013, comprehensive income (loss) for the three and nine months ended September 30, 2014 and 2013, and cash flows for the nine months ended September 30, 2014 and 2013. The interim results for the three and nine months ended September 30, 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 subsidiaries. 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 the foreign subsidiary's financial statements are included 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.
7
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. The primary estimates underlying the Company's financial statements include the value of revenue elements, product warranty, inventory valuation, allowance for doubtful accounts receivable, assumptions regarding variables used in calculating the fair value of the Company's equity awards, fair value of investments, useful lives of intangibles, income taxes and contingent liabilities. Actual results could differ from those estimates.
Critical Accounting Policies
There have been no material changes to the Company’s critical accounting policies during the nine months ended September 30, 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.
Recent Accounting Pronouncements
On May 28, 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2014-10, Revenue from Contracts with Customers. 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. The Company will adopt this guidance effective January 1, 2017, and is currently assessing the impact it may have on the Company's consolidated financial statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern. This standard update provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new guidance is effective for all annual and interim periods ending after December 15, 2016. The new guidance will not have an impact on the Company's consolidated financial statements.
2. Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
•Level 1—Quoted prices in active markets for identical assets or liabilities.
•Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company did not hold any Level 3 assets or liabilities at September 30, 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.
8
The Company classifies its cash equivalents and investments within Level 1 and Level 2, as it uses quoted market prices or alternative pricing sources and models utilizing market observable inputs. The following tables set forth the fair value of the Company’s financial assets and liabilities by level within the fair value hierarchy (in thousands):
As of September 30, 2014 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Fair Value | ||||||||||||
Financial Assets | |||||||||||||||
Cash equivalents: | |||||||||||||||
Money market funds | $ | 3,983 | $ | — | $ | — | $ | 3,983 | |||||||
Short-term investments: | |||||||||||||||
U.S. Agency securities | — | 8,686 | — | 8,686 | |||||||||||
U.S. Treasury | — | 1,007 | — | 1,007 | |||||||||||
Corporate bonds | — | 7,544 | — | 7,544 | |||||||||||
Commercial paper | — | 749 | — | 749 | |||||||||||
Certificates of deposit | 1,171 | — | — | 1,171 | |||||||||||
Long-term investments: | |||||||||||||||
U.S. Agency securities | — | 500 | — | 500 | |||||||||||
U.S. Treasury | — | 501 | — | 501 | |||||||||||
Corporate bonds | — | 1,505 | — | 1,505 | |||||||||||
Certificates of deposit | 1,470 | — | — | 1,470 | |||||||||||
Total | $ | 6,624 | $ | 20,492 | $ | — | $ | 27,116 |
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 and nine months ended September 30, 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 September 30, 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.
9
3. Balance Sheet Components
Investments
The Company's short-term and long-term investments as of September 30, 2014, are as follows (in thousands):
Short-term | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
U.S. Agency securities | $ | 8,683 | $ | 3 | $ | — | $ | 8,686 | |||||||
U.S. Treasury | 1,006 | 1 | — | 1,007 | |||||||||||
Corporate bonds | 7,546 | 3 | (5 | ) | 7,544 | ||||||||||
Commercial paper | 749 | — | — | 749 | |||||||||||
Certificates of deposit | 1,171 | — | — | 1,171 | |||||||||||
Total | $ | 19,155 | $ | 7 | $ | (5 | ) | $ | 19,157 | ||||||
Long-term | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
U.S. Agency securities | $ | 499 | $ | 1 | $ | — | $ | 500 | |||||||
U.S. Treasury | 500 | 1 | — | 501 | |||||||||||
Corporate bonds | 1,505 | 1 | (1 | ) | 1,505 | ||||||||||
Certificates of deposit | 1,470 | — | — | 1,470 | |||||||||||
Total | $ | 3,974 | $ | 3 | $ | (1 | ) | $ | 3,976 |
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 |
10
For each of the three and nine months ended September 30, 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 September 30, 2014, are as follows (in thousands):
September 30, 2014 | |||||||
Amortized Cost | Fair Value | ||||||
Due in one year or less | $ | 19,155 | $ | 19,157 | |||
Due in one year to five years | 3,974 | 3,976 | |||||
$ | 23,129 | $ | 23,133 |
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, 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):
September 30, 2014 | December 31, 2013 | ||||||
Raw materials | $ | 10,420 | $ | 4,520 | |||
Finished goods | 7,761 | 3,886 | |||||
Total inventory | $ | 18,181 | $ | 8,406 |
Property and equipment, net
Property and equipment, net comprised the following (in thousands):
September 30, 2014 | December 31, 2013 | ||||||
Lab equipment, tooling and molds | $ | 2,548 | $ | 2,071 | |||
Computer software | 1,759 | 1,562 | |||||
Computer equipment | 844 | 801 | |||||
Leasehold improvements | 1,045 | 743 | |||||
Furniture and fixtures | 403 | 334 | |||||
Vehicles | 35 | 35 | |||||
Total property and equipment | 6,634 | 5,546 | |||||
Less: Accumulated depreciation and amortization | (4,414 | ) | (3,594 | ) | |||
Construction in progress | 471 | 206 | |||||
Property and equipment, net | $ | 2,691 | $ | 2,158 |
Depreciation expense was $0.2 million and $0.8 million for the three and nine months ended September 30, 2014, respectively. Depreciation expense was $0.2 million and $0.7 million for the three and nine months ended September 30, 2013, respectively.
11
Accrued Liabilities
The following table shows the components of accrued liabilities (in thousands):
September 30, 2014 | December 31, 2013 | ||||||
Accrued payroll and employee related expenses | $ | 8,950 | $ | 7,863 | |||
Accrued marketing expenses | 2,140 | 3,739 | |||||
Accrued royalty | 3,158 | 2,458 | |||||
Sales and other taxes payable | 1,839 | 1,787 | |||||
Accrued warranty | 701 | 676 | |||||
Accrued legal expenses | 575 | 284 | |||||
Other accrued liabilities | 1,840 | 1,557 | |||||
Total accrued liabilities | $ | 19,203 | $ | 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.
The Company accrues for the estimated future costs of repair or replacement upon shipment. The warranty accrual is recorded to cost of revenue and is based upon historical and forecasted trends in the volume of product failures during the warranty period and the cost to repair or replace the equipment. The Company bases product warranty costs on related freight, material, technical support labor and overhead costs. The estimated product warranty costs are assessed by considering historical costs and applying the experienced failure rates to the outstanding warranty period for products sold. The Company exercises judgment in estimating the expected product warranty costs, using data such as the actual and projected product failure rates, and average repair costs, including freight, material, technical support labor, and overhead costs, for products returned under warranty.
The estimated product warranty accrual was as follows (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Balance at the beginning of the period | $ | 741 | $ | 726 | $ | 676 | $ | 902 | |||||||
Accruals for warranties issued | 100 | 45 | 298 | 142 | |||||||||||
Settlements of warranty claims | (140 | ) | (6 | ) | (273 | ) | (279 | ) | |||||||
Balance at the end of the period | $ | 701 | $ | 765 | $ | 701 | $ | 765 |
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.
12
Intangible asset, net comprised the following (in thousands):
September 30, 2014 | December 31, 2013 | ||||||
Purchased technology | $ | 8,050 | $ | 8,050 | |||
Less: Accumulated amortization | (2,095 | ) | (1,569 | ) | |||
Intangible asset, net | $ | 5,955 | $ | 6,481 |
Amortization expense of the intangible asset was $0.2 million for each of the three months ended September 30, 2014 and 2013, and $0.5 million for each of nine months ended September 30, 2014 and 2013.
The total estimated annual future amortization expense of this intangible asset as of September 30, 2014, is as follows (in thousands):
Fiscal Year | |||
2014 (remaining 3 months) | $ | 174 | |
2015 | 701 | ||
2016 | 701 | ||
2017 | 701 | ||
2018 | 701 | ||
Thereafter | 2,977 | ||
Total | $ | 5,955 |
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. As of August 2014, ADVANCE is no longer the exclusive distributor in Mexico. 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 principal stockholder of the Company, owns an equity interest in ADVANCE Medical, Ltd., the parent company of ADVANCE. Dr. Bryan E. Roberts, who is a member of the Company's Board of Directors, is also a partner of Venrock Associates. The revenue recognized by the Company under this distribution agreement was $0.2 million and $1.3 million for the three and nine months ended September 30, 2014, respectively, compared to $0.6 million and $1.4 million for the three and nine months ended September 30, 2013, respectively. The accounts receivable balance under this distribution agreement was $0.1 million and $0.2 million as of September 30, 2014, and December 31, 2013, respectively.
6. Commitments and Contingencies
Lease Commitments
The Company recently renewed and extended its leases in California. Specifically, the Company 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 December 2015, and a warehouse space in Livermore, California, under a lease which extends through December 2015. The Company also occupies office and warehouse space near 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 2016, and Seoul, South Korea, under a lease which extends through October 2014, which the Company is currently in the process of renegotiating lease terms. Rent expense for non-cancellable operating leases with scheduled rent increases is recognized on a straight-line basis over the lease term. Rent expense was $0.4 million and $1.1 million for the three and nine months ended September 30, 2014, respectively, compared to $0.4 million and $1.0 million for the three and nine months ended September 30, 2013, respectively.
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Future minimum lease payments under the non-cancellable operating leases as of September 30, 2014, are as follows (in thousands):
Year Ending December 31, | Amount | ||
2014 (remaining 3 months) | $ | 338 | |
2015 | 1,719 | ||
2016 | 1,481 | ||
2017 | 1,510 | ||
2018 | 1,548 | ||
Thereafter | 383 | ||
Total future minimum lease payments | $ | 6,979 |
Purchase Commitments
The Company had non-cancellable purchase obligations to contract manufacturers and suppliers for $2.2 million and $6.0 million at September 30, 2014, and December 31, 2013, respectively.
Unrecognized Tax Benefits
The Company's gross liability for unrecognized tax benefits totaled $13,000, including estimated interest and penalties, as of September 30, 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.
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 that is expected to have a material impact on the Company's consolidated financial statements.
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 $37,000 as of September 30, 2014, and is expected to be paid by December 31, 2014.
No similar costs were incurred during the three and nine months ended September 30, 2014 and 2013.
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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 | (255,000 | ) | 255,000 | 18.42 | ||||||
Restricted stock units granted | (410,675 | ) | — | — | ||||||
Options exercised | — | (423,560 | ) | 4.61 | ||||||
Options canceled | 13,906 | (13,906 | ) | 4.72 | ||||||
Restricted stock units canceled | 105,712 | — | — | |||||||
Restricted stock units withheld for tax | 201,702 | — | — | |||||||
Balance, September 30, 2014 | 2,594,176 | 3,415,919 | $ | 6.44 |
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 | 410,675 | 18.36 | |||||
Restricted stock units vested | (490,441 | ) | 5.68 | ||||
Restricted stock units canceled | (105,712 | ) | 5.81 | ||||
Balance, September 30, 2014 | 1,721,218 | $ | 8.61 |
During the three and nine months ended September 30, 2014, 61,283 and 490,441 shares vested, respectively, subject to previously granted restricted stock units. A majority of these vested restricted stock units were net share settled. During the three and nine months ended September 30, 2014, the Company withheld 24,848 and 201,702 shares, respectively, based upon the Company's closing stock price on the vesting date to settle the employee's minimum statutory obligation for the applicable income and other employment taxes. During the three and nine months ended September 30, 2013, 13,710 and 81,709 shares vested, respectively, subject to previously granted restricted stock units. A majority of these vested restricted stock units were net share settled. During the three and nine months ended September 30, 2013, the Company withheld 214 and 15,919 shares, respectively, based upon the Company's closing stock price on the vesting date to settle the employee's minimum statutory obligation for the applicable income and other employment taxes.
Subsequently, the Company remitted cash to the appropriate taxing authorities. Total payments for employee's tax obligations to the relevant taxing authority were $0.5 million and $3.8 million for the three and nine months ended September 30, 2014, respectively. Total payments for employee's tax obligations to the relevant taxing authority were $2,000 and $0.1 million for the three and nine months ended September 30, 2013, respectively. The payments were for taxes related to the net share settlements of restricted stock units.
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Stock-Based Compensation Expense
Stock-based compensation expense related to all of the Company's stock-based awards and employee stock purchases was allocated as follows (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Cost of revenue | $ | 115 | $ | 67 | $ | 325 | $ | 175 | |||||||
Research and development | 289 | 240 | 758 | 663 | |||||||||||
Sales and marketing | 986 | 432 | 2,920 | 1,091 | |||||||||||
General and administrative | 1,128 | 759 | 3,026 | 2,168 | |||||||||||
Total stock-based compensation | $ | 2,518 | $ | 1,498 | $ | 7,029 | $ | 4,097 |
As of September 30, 2014, the total unrecognized compensation costs related to outstanding stock options, awards and employee stock purchases was $15.3 million, which is expected to be recognized using the straight-line attribution method over 2.6 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 $0.4 million and $1.4 million for the three and nine months ended September 30, 2014, respectively, compared to $0.2 million and $0.8 million for the three and nine months ended September 30, 2013, respectively.
Employee Stock-Based Compensation
Stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense on a straight-line basis over the requisite service period. The fair value of stock-based awards to employees is estimated using the Black-Scholes option pricing model. The Company estimates its forfeiture rate based on an analysis of its actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate assumption based on actual forfeitures, analysis of employee turnover, and other related factors.
The fair value of employee stock options was estimated using the following weighted-average assumptions:
Three Months Ended | Nine Months Ended | |||||||||
September 30, | September 30, | |||||||||
2014 | 2013 | 2014 | 2013 | |||||||
Expected term (in years) | N/A | 4.8 | 4.4 | 4.8 | ||||||
Expected volatility | N/A | 49 | % | 43 | % | 51 | % | |||
Risk-free interest rate | N/A | 1.34 | % | 1.21 | % | 1.05 | % | |||
Expected dividend yield | N/A | — | % | — | % | — | % |
No stock options were granted in the three months ended September 30, 2014. During the nine months ended September 30, 2014, the Company granted 250,000 stock options to employees with a weighted-average grant date fair value of $6.77 per share. During the three and nine months ended September 30, 2013, the Company granted 90,000 and 465,000 stock options, respectively, to employees with a weighted-average grant date fair value of $3.14 and $2.38 per share, respectively.
During the three and nine months ended September 30, 2014, the Company granted 31,500 and 400,675 restricted stock units, respectively, to employees with a weighted-average grant date fair value of $19.56 and $18.39 per share, respectively. During the three and nine months ended September 30, 2013, the Company granted 64,400 and 1,042,400 restricted stock units, respectively, to employees with a weighted-average grant date fair value of $8.06 and $4.37 per share, respectively.
As of September 30, 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.
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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 two 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 two years. Stock-based compensation expense related to non-employee grants was $0.3 million and $0.4 million for the three and nine months ended September 30, 2014, respectively. Stock-based compensation expense for non-employees was $0.1 million and $0.2 million for the three and nine months ended September 30, 2013, respectively.
8. Net Income (Loss) per Share of Common Stock
Basic net income (loss) per share of common stock is calculated by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding for the period. Diluted net income (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.
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 | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Numerator | |||||||||||||||
Net income (loss) (in thousands) | $ | 4,782 | $ | (2,811 | ) | $ | 214 | $ | (13,900 | ) | |||||
Denominator | |||||||||||||||
Weighted average shares of common stock outstanding used in computing net income (loss) per share, basic | 37,630,222 | 36,206,008 | 37,430,337 | 36,048,303 | |||||||||||
Dilutive effect of incremental shares and share equivalents | 3,295,812 | — | 3,350,804 | — | |||||||||||
Weighted average shares of common stock outstanding used in computing net income (loss) per share, diluted | 40,926,034 | 36,206,008 | 40,781,141 | 36,048,303 | |||||||||||
Net income (loss) per share: | |||||||||||||||
Net income (loss) per share, basic | $ | 0.13 | $ | (0.08 | ) | $ | 0.01 | $ | (0.39 | ) | |||||
Net income (loss) per share, diluted | $ | 0.12 | $ | (0.08 | ) | $ | 0.01 | $ | (0.39 | ) |
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 | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||
Options to purchase common stock | 305,000 | 953,292 | 192,308 | 3,163,050 | |||||||
Restricted stock units | — | 28,861 | 84,361 | 102,916 | |||||||
Common stock issuable pursuant to the ESPP | — | 33,630 | — | 844 | |||||||
Total | 305,000 | 1,015,783 | 276,669 | 3,266,810 |
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9. Income Taxes
The Company recorded income tax expense of $7,000 and $13,000 for the three and nine months ended September 30, 2014, respectively, compared to income tax expense of $29,000 and $0.1 million for the three and nine months ended September 30, 2013, respectively. The income tax expense for the three and nine months ended September 30, 2014 and 2013, reflects the mixture and distribution of pre-tax income in the Company's operating jurisdictions. The Company continues to maintain a valuation allowance for its U.S. federal and state deferred tax assets.
At September 30, 2014, the Company had $1.3 million of unrecognized tax benefits, of which $8,000, if recognized, would affect the effective tax rate due to the valuation allowance that currently offsets deferred tax assets. During the second quarter, the Company revised its estimate of previously unrecognized tax benefits by $1.7 million for credits more likely than not to be realized as a result of the completion of an analysis of the deferred tax assets related to research and development credits. Such deferred tax assets continue to have a full valuation allowance, therefore such release did not affect the Company’s consolidated balance sheet or statement of operations. 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 quarter ended September 30, 2014, and in conjunction with the filing of its annual tax returns, the Company made an election to capitalize substantially all of its 2013 research and development expenditures. Such election did not change the Company’s overall deferred tax assets, nor did it affect the Company’s consolidated balance sheet or statement of operations. Rather it results in the reclassification of deferred tax assets from net operating loss carryforwards to capitalized research and development.
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, including the U.S. federal jurisdiction, California 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 September 30, 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 | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
North America | $ | 34,964 | $ | 23,500 | $ | 94,828 | $ | 61,295 | |||||||
International | 10,706 | 5,965 | 28,878 | 14,490 | |||||||||||
Total | $ | 45,670 | $ | 29,465 | $ | 123,706 | $ | 75,785 |
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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 $32.2 million and $88.1 million for the three and nine months ended September 30, 2014, respectively, compared to $21.8 million and $57.7 million for the three and nine months ended September 30, 2013, respectively.
The following table sets forth revenue by product expressed as dollar amounts (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
System revenue | $ | 24,783 | $ | 15,889 | $ | 64,627 | $ | 39,939 | |||||||
Consumable revenue | 20,887 | 13,576 | 59,079 | 35,846 | |||||||||||
Total | $ | 45,670 | $ | 29,465 | $ | 123,706 | $ | 75,785 |
Substantially all of the Company’s long-lived assets are located in the United States of America.
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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, 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 CoolSmooth applicator in April 2014, we currently 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 23% of our total revenue for both the three and nine months ended September 30, 2014, compared to 20% and 19% of our total revenue for the three and nine months ended September 30, 2013, respectively.
Our ongoing research and development activities are primarily focused on improving and enhancing our CoolSculpting system and CoolSculpting procedure. In addition to these development activities related to CoolSculpting, we are exploring additional uses of our proprietary controlled cooling technology platform for the dermatology, plastic surgery, and aesthetic markets. We are also exploring potential therapeutic uses for our platform technology, either directly or through collaborative arrangements with strategic partners.
Revenue
We generate revenue from sales of our CoolSculpting system and from sales of consumables to our customers. We generated revenue of $45.7 million and $123.7 million for the three and nine months ended September 30, 2014, respectively, compared to $29.5 million and $75.8 million for the three and nine months ended September 30, 2013, respectively.
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 54% and 52% of our total revenue for the three and nine months ended September 30, 2014, respectively, compared to 54% and 53% of our total revenue for the three and nine months ended September 30, 2013, respectively. Our worldwide installed base grew by 48% from 1,912 units as of September 30, 2013, to 2,822 units as of September 30, 2014.
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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 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 46% and 48% of our total revenue for the three and nine months ended September 30, 2014, respectively, compared to 46% and 47% of our total revenue for the three and nine months ended September 30, 2013, respectively. We shipped 159,116 and 451,291 CoolSculpting revenue cycles to our customers during the three and nine months ended September 30, 2014, respectively, compared to 103,492 and 273,077 CoolSculpting revenue cycles during the three and nine months ended September 30, 2013, 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 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. 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.
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 nine months ended September 30, 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 allocation of selling prices to 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.
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Results of Operations
Revenue (in thousands, except for percentages):
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
September 30, | September 30, | ||||||||||||||||||||||||||||
2014 | 2013 | $ Change | % Change | 2014 | 2013 | $ Change | % Change | ||||||||||||||||||||||
System revenue | $ | 24,783 | $ | 15,889 | $ | 8,894 | 56 | % | $ | 64,627 | $ | 39,939 | $ | 24,688 | 62 | % | |||||||||||||
Consumable revenue | 20,887 | 13,576 | 7,311 | 54 | % | 59,079 | 35,846 | 23,233 | 65 | % | |||||||||||||||||||
Total revenue | $ | 45,670 | $ | 29,465 | $ | 16,205 | 55 | % | $ | 123,706 | $ | 75,785 | $ | 47,921 | 63 | % |
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 along with the release of our CoolSmooth applicator.
System revenue. We experienced incremental growth in system revenue for the three and nine months ended September 30, 2014, as compared to the same periods in 2013, as a result of increased system sales in both North America and our International markets due to the reasons stated above. Overall, we placed 260 and 647 systems in the three and nine months ended September 30, 2014, respectively, as compared to 181 and 429 systems in the three and nine months ended September 30, 2013, respectively. We also experienced an increase in sales of add-on applicators to existing customers in the second and third quarter of 2014, primarily related to the launch of our CoolSmooth applicator in April 2014, such total incremental add-on applicator revenue was $8.3 million in the nine months ended September 30, 2014, whereas in the nine months ended September 30, 2013 our incremental add-on revenue, related primarily to our CoolFit and CoolCurve+ applicators, totaled $4.2 million. 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 targeted marketing programs in the three and nine months ended September 30, 2014, as compared to the same period in 2013, as well as due the release of our CoolSmooth applicator which requires a different consumable procedure pack than our other applicators. Our consumable procedure packs carry two tiers of pricing, and the CoolSmooth consumable procedure pack is priced at the lower tier. With the introduction of the CoolSmooth applicator in April 2014, we saw a shift of sales to the lower tier pricing. 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 | Nine Months Ended | ||||||||||||||||||||||||||||
September 30, | September 30, | ||||||||||||||||||||||||||||
2014 | 2013 | $ Change | % Change | 2014 | 2013 | $ Change | % Change | ||||||||||||||||||||||
Cost of revenue | $ | 12,555 | $ | 8,236 | $ | 4,319 | 52 | % | $ | 35,231 | $ | 23,462 | $ | 11,769 | 50 | % | |||||||||||||
% of total revenue | 27 | % | 28 | % | 28 | % | 31 | % | |||||||||||||||||||||
Gross profit | $ | 33,115 | $ | 21,229 | $ | 11,886 | 56 | % | $ | 88,475 | $ | 52,323 | $ | 36,152 | 69 | % | |||||||||||||
Gross profit % | 73 | % | 72 | % | 72 | % | 69 | % |
Gross profit as a percentage of revenue typically fluctuates with product and regional mix, selling prices, material costs and revenue levels. The increase in gross profit as a percentage of revenue for the three and nine months ended September 30, 2014, as compared to the same periods in 2013, was mainly attributable to increased sales volume, as well as the fact that higher production driven by the increase in sales led to better utilization on a relatively fixed base of overhead costs. Additionally, the increase in gross profit as a percentage of revenue is attributable to our growing system installed base which continues to drive higher consumable sales. These increases were offset in part by the high volume of sales of our CoolSmooth applicator, which currently carries a slightly lower standard margin than our other applicators and was launched in April 2014, with introductory pricing through both
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the second and third quarter of 2014. We continue to focus on cost reduction across our product portfolio, as well as experience the benefit of the completion of the in-sourced manufacturing structure during the second quarter of 2013.
Operating Expenses (in thousands, except for percentages):
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
September 30, | September 30, | ||||||||||||||||||||||||||||
2014 | 2013 | $ Change | % Change | 2014 | 2013 | $ Change | % Change | ||||||||||||||||||||||
Operating expenses | |||||||||||||||||||||||||||||
Research and development | $ | 4,241 | $ | 4,257 | $ | (16 | ) | — | % | $ | 12,861 | $ | 11,904 | $ | 957 | 8 | % | ||||||||||||
% of total revenue | 9 | % | 14 | % | 10 | % | 16 | % | |||||||||||||||||||||
Sales and marketing | $ | 19,014 | $ | 15,487 | $ | 3,527 | 23 | % | $ | 60,253 | $ | 42,654 | $ | 17,599 | 41 | % | |||||||||||||
% of total revenue | 42 | % | 53 | % | 49 | % | 56 | % | |||||||||||||||||||||
General and administrative | $ | 4,896 | $ | 4,374 | $ | 522 | 12 | % | $ | 14,843 | $ | 11,808 | $ | 3,035 | 26 | % | |||||||||||||
% of total revenue | 11 | % | 15 | % | 12 | % | 16 | % | |||||||||||||||||||||
Total operating expenses | $ | 28,151 | $ | 24,118 | $ | 4,033 | 17 | % | $ | 87,957 | $ | 66,366 | $ | 21,591 | 33 | % |
Research and development. Research and development expenses decreased slightly for the three months ended September 30, 2014, compared to the same period in 2013, primarily due to a $0.2 million decrease in consulting, time and expense, and administrative expenses as result of a reduction in the number of consultants being utilized. Facilities and other allocable costs increased by $0.1 million for the three months ended September 30, 2014, when compared to the same period in 2013, resulting from increased headcount and operating costs related to the growth in our business.
Research and development expenses increased for the nine months ended September 30, 2014, compared to the same period in 2013, primarily due to an increase in payroll related costs of $0.6 million for the nine months ended September 30, 2014, when compared to the same period in 2013, attributed to higher headcount and an increase in performance-based compensation. This increase was offset in part by $0.3 million decrease in consulting, time and expense, and administrative expenses as result of a reduction in the number of consultants being utilized. We also experienced an increase in materials, operations and clinical costs of $0.2 million for the nine months ended September 30, 2014, when compared to the same period in 2013, as we continue to explore ways to leverage our proprietary cooling platform for additional applications and indications. Facilities and other allocable costs also increased by $0.2 million for the nine months ended September 30, 2014, when compared to the same period in 2013, resulting from increased headcount and operating costs related to the growth in our business.
Sales and marketing. Sales and marketing expenses increased for the three and nine months ended September 30, 2014, compared to the same periods 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 in headcount resulted in an increase in payroll related costs of $1.4 million and $7.2 million for the three and nine months ended September 30, 2014, respectively, when compared to the same periods in 2013, and included an increase in performance-based compensation resulting from revenue growth. Stock-based compensation expense also increased by $0.6 million and $1.8 million for the three and nine months ended September 30, 2014, respectively, when compared to the same periods in 2013, attributed to grants to existing and new employees and due to an increase in stock price. Travel and related expenses increased by $1.0 million and $2.5 million for the three and nine months ended September 30, 2014, respectively, when compared to the same periods in 2013, 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 an increase in advertising, public relations and collateral production expenses of $0.7 million and $4.5 million for the three and nine months ended September 30, 2014, respectively, when compared to the same periods in 2013, associated with costs incurred in conjunction with our sales and marketing initiatives. These costs were primarily related to brand and collateral development associated with our recent re-branding initiative, which was launched in the second quarter of 2014. 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 decreased by $0.7 million and $1.0 million for the three and nine months ended September 30, 2014 as compared to the same periods in 2013, respectively, due to a change in the program during the first quarter of 2014 whereby the amount of available
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reimbursement was reduced and fewer customers were able to qualify for partial reimbursement on qualifying advertising expenditures.
General and administrative. General and administrative expenses increased for the three and nine months ended September 30, 2014, compared to the same periods in 2013, primarily due to an increase in payroll related costs of $1.3 million for the nine months ended September 30, 2014, when compared to the same period in 2013, resulting from higher headcount in certain functions to support growth in our business. Stock-based compensation expense also increased by $0.4 million and $0.9 million for the three and nine months ended September 30, 2014, respectively, when compared to the same periods in 2013, attributed to grants to existing and new employees and due to an increase in stock price. Professional service fees increased by $0.5 million for the nine months ended September 30, 2014, respectively, when compared to the same periods in 2013, associated with the growth of our business as well as our expansion into international markets. Additionally, we experienced a $0.3 million and $1.0 million increase in legal expenses for the three and nine months ended September 30, 2014, respectively, when compared to the same periods in 2013, mainly due to an increase in IP enforcement, both domestically and overseas.
Interest Income and Other (Expense) Income, Net (in thousands, except for percentages):
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
September 30, | September 30, | ||||||||||||||||||||||||||||
2014 | 2013 | $ Change | % Change | 2014 | 2013 | $ Change | % Change | ||||||||||||||||||||||
Interest income, net | $ | 14 | $ | 17 | $ | (3 | ) | (18 | )% | $ | 47 | $ | 60 | $ | (13 | ) | (22 | )% | |||||||||||
% of total revenue | — | % | — | % | — | % | — | % | |||||||||||||||||||||
Other (expense) income, net | $ | (189 | ) | $ | 90 | $ | (279 | ) | (310 | )% | $ | (338 | ) | $ | 162 | $ | (500 | ) | (309 | )% | |||||||||
% of total revenue | — | % | — | % | — | % | — | % |
Interest income, net. For both the three and nine months ended September 30, 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 investments.
Other (expense) income, net. The change in other (expense) income, net for the three and nine months ended September 30, 2014, as compared to the three and nine months ended September 30, 2013, was the result of an unfavorable change in foreign exchange rates, specifically the British Pound.
Liquidity and Capital Resources
Since our inception, we have financed our operations to date primarily through private placements of convertible preferred stock, promissory notes, borrowings under a loan agreement, product sales and the proceeds from our initial public offering, or IPO.
The following table summarizes our working capital, cash and cash equivalents, short-term and long-term investments as of September 30, 2014, and December 31, 2013 (in thousands):
September 30, | December 31, | ||||||
2014 | 2013 | ||||||
Cash and cash equivalents | $ | 24,941 | $ | 25,798 | |||
Short-term investments | 19,157 | 18,840 | |||||
Long-term investments | 3,976 | 11,442 | |||||
Total | $ | 48,074 | $ | 56,080 | |||
Working capital | $ | 55,394 | $ | 42,430 |
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Summary Statement of Cash Flows
The following table summarizes our cash flows for the nine months ended September 30, 2014 and 2013 (in thousands):
Nine Months Ended | |||||||
September 30, | |||||||
2014 | 2013 | ||||||
Net cash used in operating activities | $ | (5,158 | ) | $ | (2,960 | ) | |
Net cash provided by investing activities | 5,489 | 3,513 | |||||
Net cash (used in) provided by financing activities | (1,033 | ) | 790 | ||||
Effect of exchange rate on cash and cash equivalents | (155 | ) | — | ||||
Net (decrease) increase in cash and cash equivalents | $ | (857 | ) | $ | 1,343 |
Cash Flows for the Nine Months Ended September 30, 2014 and 2013
Operating activities. Net cash used in operating activities was $5.2 million during the nine months ended September 30, 2014, and consisted of a net income of $0.2 million and a net change in operating assets and liabilities of $14.8 million, offset by non-cash items of $9.4 million. Non-cash items for the nine months ended September 30, 2014, consisted primarily of a stock-based compensation expense of $7.0 million and depreciation and amortization expense of $1.4 million. The significant items in the change in operating assets and liabilities include cash used resulting from increases in inventory of $9.7 million, an increase in accounts receivable of $5.7 million, and a decrease in accounts payable, accrued and other non-current liabilities of $2.1 million, offset in part by an increase of $2.4 million in deferred revenue. 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 to support demand for our recently launched CoolSmooth applicator as well as compliance requirements for products being sold in the European Union. The increase in accounts receivable is a function of the increase in sales as well as timing of payment receipts from customers. The decrease in accounts payable, accrued and other non-current liabilities was driven by the timing of invoice receipt and payments to vendors, as well as a reduction in amounts reimbursable to customers for qualifying advertising expenditures under our customer incentive programs resulting primarily from a change in the program during 2014, which reduced both the number of qualifying participants in the program and the amounts available for reimbursement. The increase in deferred revenue is primarily a result of an increase in extended warranty sales as well as the deferral of revenue related to discounts on extended warranties offered in conjunction with our marketing incentive plans.
Net cash used in operating activities was $3.0 million during the nine months ended September 30, 2013, and consisted of a net loss of $13.9 million and a net change in operating assets and liabilities of $5.0 million, offset by non-cash items of $5.9 million. Non-cash items for the nine months ended September 30, 2013, consisted primarily of a stock-based compensation expense of $4.1 million and depreciation and amortization expense of $1.3 million. The significant items in the change in operating assets and liabilities include cash proceeds resulting from decreases in inventory of $2.2 million and an increase in accounts payable, accrued and other non-current liabilities of $2.8 million, as well as cash generated from a decrease in accounts receivable of $0.5 million. The decrease in inventory was as result of our continued focus on the management of inventory levels. The increase in accounts payable, accrued and other non-current liabilities was driven by the timing of invoice receipt and payments to vendors as well as higher accrued payroll related to performance-based compensation, while the decrease in accounts receivable is driven by strong cash collections throughout the period.
Investing activities. Net cash provided by investing activities was $5.5 million for the nine months ended September 30, 2014, as compared to net cash provided by investing activities of $3.5 million during the same period in 2013. During the nine months ended September 30, 2014, we received proceeds from the sale and maturity, net of purchases, of $7.0 million of short-term and long-term investments. During the nine months ended September 30, 2013, we received proceeds from the sale and maturity, net of purchases, of $3.8 million of short-term and long-term investments. Purchases of property and equipment amounted to $1.2 million for the nine months ended September 30, 2014, as result of the growth and expansion of our business and related facilities. Purchases of property and equipment amounted to $0.4 million for the nine months ended 2013.
Financing activities. Net cash used in financing activities during the nine months ended September 30, 2014, of $1.0 million consisted of tax payments related to shares withheld for vested restricted stock units of $3.8 million, offset in part by proceeds received from the issuance of common stock upon the exercise of stock options of $2.7 million. Net cash provided by financing activities during the nine months ended September 30, 2013, of $0.8 million consisted of proceeds received from the issuance of
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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 $8.0 million during the nine months ended September 30, 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 $9.2 million and $7.5 million at September 30, 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 recently renewed and extended certain of our leases, and as a result our leases now have lease terms that expire at various dates through March 2019. Rent expense for non-cancellable operating leases with scheduled rent increases is recognized on a straight-line basis over the lease term. Rent expense was $0.4 million and $1.1 million for the three and nine months ended September 30, 2014, respectively, compared to $0.4 million and $1.0 million for the three and nine months ended September 30, 2013, respectively.
Future minimum lease payments under the non-cancellable operating leases as of September 30, 2014, are as follows (in thousands):
Year Ending December 31, | Amount | ||
2014 (remaining 3 months) | $ | 338 | |
2015 | 1,719 | ||
2016 | 1,481 | ||
2017 | 1,510 | ||
2018 | 1,548 | ||
Thereafter | 383 | ||
Total future minimum lease payments | $ | 6,979 |
Purchase Commitments
We had non-cancellable purchase obligations to contract manufacturers and suppliers for $2.2 million and $6.0 million at September 30, 2014, and December 31, 2013, respectively.
Unrecognized Tax Benefits
Our gross liability for unrecognized tax benefits totaled $13,000, including estimated interest and penalties, as of September 30, 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.
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Product Warranty
The estimated product warranty accrual was as follows (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Balance at the beginning of the period | $ | 741 | $ | 726 | $ | 676 | $ | 902 | |||||||
Accruals for warranties issued | 100 | 45 | 298 | 142 | |||||||||||
Settlements of warranty claims | (140 | ) | (6 | ) | (273 | ) | (279 | ) | |||||||
Balance at the end of the period | $ | 701 | $ | 765 | $ | 701 | $ | 765 |
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. As of August 2014, ADVANCE is no longer the exclusive distributor in Mexico. As the exclusive distributor in Brazil, ADVANCE is required to purchase a minimum quantity of our products each calendar quarter throughout the term of the distribution agreement which expires on December 31, 2018. Venrock, a principal stockholder of ZELTIQ, owns an equity interest in ADVANCE Medical, Ltd., the parent company of ADVANCE. Dr. Bryan E. Roberts, who is a member of our Board of Directors, is also a partner of Venrock Associates. The revenue recognized by us under this distribution agreement was $0.2 million and $1.3 million for the three and nine months ended September 30, 2014, respectively, compared to $0.6 million and $1.4 million for the three and nine months ended September 30, 2013, respectively. The accounts receivable balance under this distribution agreement was $0.1 million and $0.2 million as of September 30, 2014, and December 31, 2013, respectively.
Recent Accounting Pronouncements
On May 28, 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2014-10, Revenue from Contracts with Customers. 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 we will apply to determine the measurement of revenue and timing of when it is recognized. We will adopt this guidance effective January 1, 2017, and we are currently assessing the impact it may have on our consolidated financial statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern. This standard update provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new guidance is effective for all annual and interim periods ending after December 15, 2016. The new guidance will not have an impact on our consolidated financial statements.
Off-balance Sheet Arrangements
As of September 30, 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 decreased since December 31, 2013, as result of the maturity and sale of long-term investments, such proceeds having been utilized to fund our operations. Our long-term investments have decreased from $11.4 million as of December 31, 2013, to $4.0 million as of September 30, 2014.
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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 September 30, 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 September 30, 2014, which 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
None.
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 although we have achieved net income in the last two quarters, we may not be able to 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, and as of September 30, 2014, we had an accumulated deficit of approximately $132.8 million. Although in the last two quarters, and for the nine months ended September 30, 2014, we have achieved net income, there is no guarantee that we will be able to continue to achieve net income. Our net income for the nine months ended September 30, 2014, was only $0.2 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 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 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