Summary of ZELTIQ AESTHETICS INC

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
In addition, the following discussion contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "should," "estimate," or "continue," and similar expressions or variations. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to the differences include, but are not limited to, those discussed in the section titled "Risk Factors," set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of 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 that may not respond to diet or exercise. We generate revenues from capital sales of our CoolSculpting System and from procedure fees our physician customers pay for each CoolSculpting procedure they perform. We received clearance from the 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." We have received regulatory approval or are otherwise free to market CoolSculpting in 49 international markets where use of the product is generally not limited to specific treatment areas. Physicians in these markets commonly perform CoolSculpting procedures on the abdomen, inner thighs, back, and chest, in addition to the flanks.
In the United States and Canada, we use our direct sales organization to selectively market CoolSculpting. As of March 31, 2012, our worldwide sales force consisted of 60 professionals. To support the continued roll-out of CoolSculpting, we anticipate that our worldwide sales force will increase to between 65 and 70 sales professionals during fiscal 2012. We also intend to seek additional regulatory clearances from the FDA to expand our U.S. marketed indications for CoolSculpting to areas on the body other than the flanks. In markets outside of North America, we sell CoolSculpting through a network of distributors as well as through our direct sales force. We intend to grow our international sales and marketing organization to focus on increasing sales and strengthening our physician relationships. As part of that strategy, we intend to continue opportunistically deploying a direct sales force in select international markets. We also intend to seek regulatory approval to market CoolSculpting in key additional international markets, including China. Revenues from markets outside of North America accounted for 25% and 26% of our total revenues for the three months ended March 31, 2012 and 2011, respectively. Our ongoing research and development activities are primarily focused on improving and enhancing our CoolSculpting System and the 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. Revenues
We generate revenues from capital sales of our CoolSculpting System and from procedure fees our physician customers pay for each CoolSculpting procedure they perform. We generated revenues of $17.4 million and $14.3 million for the three months ended March 31, 2012 and 2011, respectively.
Systems revenues. Sales of our CoolSculpting System include the CoolSculpting control unit and our CoolSculpting vacuum applicators. We are targeting 4,000 to 5,000 physician practice sites on a global basis that have our target characteristics. Some of our target practices may purchase more than one CoolSculpting System. Our standard terms do not allow for trial or evaluation periods, rights of return, or refund payments contingent upon the customer obtaining financing or other terms that could impact the customer's obligation. During the first quarter of 2012, our system sales were impacted by new product launches and trial offers by our competitors

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that created competition for physician capital equipment dollars. Despite this, we grew our worldwide installed base by 131% from 475 units as of March 31, 2011 to 1,097 units as of March 31, 2012.
Procedure fees revenues. We generate revenues from procedure fees through sales of CoolSculpting procedure packs, each of which includes our consumable CoolGels and CoolLiners and a disposable computer cartridge that we market as the CoolCard. The CoolCard contains enabling software that permits our physician customer to perform a fixed number of CoolSculpting procedures. Procedure fees accounted for approximately 48% and 30% of our total revenues for the three months ended March 31, 2012 and 2011, respectively. During the first quarter of 2012, we shipped approximately 63,900 CoolSculpting procedures to our physician customers.
Our business plan focuses on expanding our base of physician customers, and increasing our procedure fees revenues by driving demand for CoolSculpting procedures through our physician and consumer marketing programs. We anticipate that as we implement our business plan our revenues from procedure fees will increase as a percentage of our total revenues.
Seasonality. Seasonal fluctuations in the number of physician customers in their offices and available to take appointments as well as their patients have affected, and are likely to continue to affect, our business. Specifically, our customers often take vacation or are on holiday during the summer months and therefore tend to perform fewer procedures, particularly in Europe. These seasonal trends have caused and will likely continue to cause, fluctuations in our quarterly results, including fluctuations in sequential revenue growth rates. In order of revenue significance throughout the year, we believe our strongest to weakest quarters are as follows: fourth quarter, second quarter, first quarter and third quarter. We expect these trends to continue during the fiscal 2012.
Critical Accounting Policies and Estimates Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America or GAAP. The preparation of our consolidated financial statements requires management to make estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the applicable periods. Management bases its estimates, assumptions, and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our financial statements, which, in turn, could materially change our results from those reported. Management evaluates its estimates, assumptions, and judgments on an ongoing basis. Historically, our critical accounting estimates have not differed materially from actual results. However, if our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material adverse effect on our statements of operations, liquidity, and financial condition. We believe the following critical accounting policies reflect our most significant estimates, judgments and assumptions used in the preparation of our consolidated financial statements. These critical accounting policies and related disclosures appear in our Annual Report on Form 10-K for the year ended December 31, 2011:
• Revenue recognition;

• Stock-based compensation;

• Income taxes;

• Warranty.

Results of Operations
Revenues (in thousands, except for percentages):
                       Three Months Ended
                           March 31,
                        2012         2011       $ Change    % Change
Revenues
   Systems          $     9,025    $  9,936    $   (911 )     (9 )%
   Procedure fees         8,379       4,336       4,043       93  %
     Total revenues $    17,404    $ 14,272    $  3,132       22  %

Total revenues increased by $3.1 million, or 22%, to $17.4 million in the three months ended March 31, 2012 compared to

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$14.3 million during the same period in 2011.
Systems revenues. Systems revenues decreased by $0.9 million to $9.0 million in the three months ended March 31, 2012 compared to $9.9 million during the same period in 2011. Systems revenues represented 52% and 70% of total revenues for the three months ended March 31, 2012 and 2011, respectively. The systems revenues in the first quarter of 2012 were negatively impacted by new product launches and trial offers by our competitors that created competition for physician capital equipment dollars as well as by changes in our sales force in the North American Franchise. Our rest of the world systems sales were impacted by the transition to a direct sales model.
Procedure fees revenues. Procedure fees revenues increased by $4.0 million to $8.4 million in the three months ended March 31, 2012 compared to $4.3 million during the same period in 2011. Procedure fees revenues represented 48% and 30% of total revenues for the three months ended March 31, 2012 and 2011, respectively. The increase in procedure fees revenues was primarily due to the growth of our installed base of worldwide CoolSculpting Systems, and an increased number of procedures performed by our physician customers driven by our targeted physician and consumer marketing programs.

Cost of Revenues and Gross Profit (in thousands, except for percentages):
                       Three Months Ended
                           March 31,
                        2012         2011       $ Change      % Change
Cost of revenues    $    5,993     $ 5,649     $      344         6 %
% of total revenues         34 %        40 %
Gross profit        $   11,411     $ 8,623     $    2,788        32 %
Gross profit %              66 %        60 %

Cost of revenues increased by $0.3 million, or 6%, to $6.0 million in the three months ended March 31, 2012 compared to $5.6 million during the same period in 2011. The increase in cost of revenues was primarily due to the increase in volume of CoolSculpting Systems and procedure packs sold.
Gross profit was $11.4 million, or 66% of revenues, in the first quarter of 2012, compared to gross profit of $8.6 million, or 60% of revenues, in the first quarter of 2011. The year-over-year increase in gross profit was driven by an increase in procedure fees revenues as a percentage of total revenues as well as a decrease in the per unit manufacturing cost of systems.

Operating Expenses (in thousands, except for percentages):

                                 Three Months Ended
                                     March 31,
                                  2012         2011       $ Change    % Change
Operating expenses
   Research and development   $    3,398     $ 2,281     $   1,117        49 %
     % of total revenues              20 %        16 %
   Sales and marketing        $   14,497     $ 5,736     $   8,761       153 %
     % of total revenues              83 %        40 %
   General and administrative $    3,853     $ 1,389     $   2,464       177 %
     % of total revenues              22 %        10 %
Total operating expenses      $   21,748     $ 9,406     $  12,342       131 %

Research and development. Research and development expenses increased by $1.1 million, or 49%, to $3.4 million in the three months ended March 31, 2012 compared to $2.3 million in the same period in 2011. The increase in research and development expenses was primarily due to an increase of $0.5 million in payroll related costs resulting from an increase in headcount, a higher stock-based compensation expense by approximately $0.2 million. The remaining increase is attributed to higher IT and facilities costs.

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Sales and marketing. Sales and marketing expenses increased by $8.8 million, or 153%, to $14.5 million in the three months ended March 31, 2012 compared to $5.7 million for the same period in 2011. The increase in sales and marketing expenses was due to an increase in advertising expenses by $3.2 million, a $1.7 million increase in marketing expenses, a $1.7 million increase in payroll related costs and a $0.6 million increase in travel expenses. The remaining increase is attributed to higher IT and facilities costs, higher stock-based compensation expenses, higher sales meetings related costs and higher sales commission expenses during the three months ended March 31, 2012. General and administrative. General and administrative expenses increased by $2.5 million, or 177%, to $3.9 million for the three months ended March 31, 2012 compared to $1.4 million for the same period in 2011. The increase in general and administrative expenses was primarily due to a $0.9 million increase in payroll related costs, a $0.7 million increase in legal expenses and an increase in accounting costs of $0.4 million. The remaining increase is attributed to higher IT and facilities costs, higher stock-based compensation expenses and higher travel expenses.

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

                                  Three Months Ended
                                      March 31,
                                   2012          2011      $ Change    % Change
Interest income (expense), net $     29        $ (40 )    $     69       (173 )%
% of total revenues                   0  %         0  %
Other income (expense), net    $    (17 )      $  (2 )    $    (15 )      750  %
% of total revenues                   0  %         0  %

Interest income (expense), net. Interest income (expense), net was an income of $29 thousand for the three months ended March 31, 2012 compared to an expense of $40 thousand for the same period in 2011.
Other income (expense), net. Other income (expense), net, for three months ended March 31, 2012 was an expense of $17 thousand compared to $2 thousand of expense in 2011.
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, and the proceeds from our IPO. As of March 31, 2012, we had cash and cash equivalents of $75.3 million, a decrease of $8.6 million over December 31, 2011, reflecting approximately $8.0 million of cash used during the period to fund operations. During the first quarter of 2012, we spent approximately $0.4 million on capital expenditures and $0.3 million on payment of the remaining balance of our loan from Silicon Valley Bank.
The following table summarizes our working capital and cash and cash equivalents (in thousands):

                           March 31,      December 31,
                              2012            2011
Working capital           $    75,108    $       84,341
Cash and cash equivalents      75,304            83,908