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| ZLTQ > SEC Filings for ZLTQ > Form 10-Q on 8-Nov-2012 | All Recent SEC Filings |
8-Nov-2012
Quarterly Report
During the nine months ended September 30, 2012, our system sales were impacted
by new product launches and trial offers by our competitors that created
competition for physician capital equipment dollars. Despite this, we grew our
worldwide installed base by 68% from 812 units as of September 30, 2011 to 1,363
units as of September 30, 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 49% and 29% of our total revenues for the nine
months ended September 30, 2012 and 2011, respectively. During the nine months
ended September 30, 2012, we shipped approximately 225,000 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, historically our
strongest to weakest quarters were as follows: fourth quarter, third quarter,
second quarter and first quarter. We expect during fiscal 2012 our strongest to
weakest quarters will be as follows: fourth quarter, second quarter, third
quarter and first quarter.
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.
There have been no material changes to our significant accounting policies
during the nine months ended September 30, 2012, as compared to the significant
accounting policies described in our Form 10-K for the year ended December 31,
2011, except as described below.
During the nine months ended September 30, 2012, we purchased available-for-sale
securities and have accounted for such investments in accordance with the
following investments policy:
Investments
We invest our excess cash balances primarily in certificates of deposit,
commercial paper, corporate bonds, and U.S. Government agency securities.
Investments with original maturities greater than 90 days that mature less than
one year from the consolidated balance sheet date are classified as short-term
investments. We classify all of our investments as available-for-sale and record
such assets at estimated fair value in the consolidated balance sheets, with
unrealized gains and losses, if any, reported as a component of accumulated
other comprehensive income (loss) in stockholders' equity. Realized gains and
losses from maturities of all such securities are reported in earnings and
computed using the specific identification cost method. Realized gains or losses
and charges for other-than-temporary declines in value, if any, on
available-for-sale securities are reported in other income (expense) as
incurred. We periodically evaluate these investments for other-than-temporary
impairment.
Results of Operations
Revenues (in thousands, except for percentages):
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 $ Change % Change 2012 2011 $ Change % Change
Revenues
Systems $ 8,507 $ 13,220 $ (4,713 ) (36 )% $ 29,528 $ 35,265 $ (5,737 ) (16 )%
Procedure fees 9,421 4,500 4,921 109 % 28,069 14,081 13,988 99 %
Total revenues $ 17,928 $ 17,720 $ 208 1 % $ 57,597 $ 49,346 $ 8,251 17 %
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Total revenues increased by $0.2 million, or 1%, to $17.9 million in the three
months ended September 30, 2012 compared to $17.7 million during the same period
in 2011. Total revenues increased by $8.3 million, or 17%, to $57.6 million in
the nine months ended September 30, 2012 compared to $49.3 million during the
same period in 2011.
Systems revenues. Systems revenues decreased by $4.7 million to $8.5 million in
the three months ended September 30, 2012 compared to $13.2 million during the
same period in 2011. Systems revenues represented 47% and 75% of total revenues
for the three months ended September 30, 2012 and 2011, respectively. During the
third quarter of 2012, as anticipated, our systems revenues were impacted by
seasonal trends due to vacations taken by our physician customers and their
patients during the summer months. New product launches and trial offers by our
competitors, that created competition for physician capital equipment dollars,
continued to negatively impact system sales volume.
Systems revenues decreased by $5.7 million to $29.5 million in the nine months
ended September 30, 2012 compared to $35.3 million during the same period in
2011. Systems revenues represented 51% and 71% of total revenues for the nine
months ended September 30, 2012 and 2011, respectively. The systems revenues in
the first nine months of 2012 were 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 $4.9 million to
$9.4 million in the three months ended September 30, 2012 compared to $4.5
million during the same period in 2011. Procedure fees revenues represented 53%
and 25% of total revenues for the three months ended September 30, 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.
Procedure fees revenues increased by $14.0 million to $28.1 million in the nine
months ended September 30, 2012 compared to $14.1 million during the same period
in 2011. Procedure fees revenues represented 49% and 29% of total revenues for
the nine months ended September 30, 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 Nine Months Ended
September 30, September 30,
2012 2011 $ Change % Change 2012 2011 $ Change % Change
Cost of
revenues $ 5,953 $ 7,283 $ (1,330 ) (18 )% $ 19,096 $ 19,632 $ (536 ) (3 )%
% of total
revenues 33 % 41 % 33 % 40 %
Gross
profit $ 11,975 $ 10,437 $ 1,538 15 % $ 38,501 $ 29,714 $ 8,787 30 %
Gross
profit % 67 % 59 % 67 % 60 %
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Cost of revenues decreased by $1.3 million, or 18%, to $6.0 million in the three months ended September 30, 2012 compared to $7.3 million during the same period in 2011. Cost of revenues decreased by $0.5 million, or 3%, to $19.1 million in the nine months ended September 30, 2012 compared to $19.6 million during the same period in 2011. The quarter-over-quarter and year-over-year decrease in cost of revenues was primarily due to lower direct material costs driven by our continued focus on product cost reductions and negotiations with suppliers. Gross profit was $12.0 million, or 67% of revenues, in the third quarter of 2012, compared to gross profit of $10.4 million, or
59% of revenues, in the third quarter of 2011. Gross profit was $38.5 million, or 67% of revenues, for the nine months ended September 30, 2012, compared to gross profit of $29.7 million, or 60% of revenues, for the same period in 2011. The increase in gross profit as a percentage of revenues was driven by an increase in procedure fees revenues as a percentage of total revenues and a decrease in the per unit manufacturing cost of systems mainly due to lower direct material costs.
Operating Expenses (in thousands, except for percentages):
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 $ Change % Change 2012 2011 $ Change % Change
Operating
expenses
Research and
development $ 2,450 $ 2,933 $ (483 ) (16 )% $ 9,217 $ 7,540 $ 1,677 22 %
% of total
revenues 14 % 17 % 16 % 15 %
Sales and
marketing $ 10,881 $ 7,104 $ 3,777 53 % $ 39,632 $ 18,672 $ 20,960 112 %
% of total
revenues 61 % 40 % 69 % 38 %
General and
administrative $ 3,760 $ 3,209 $ 551 17 % $ 13,169 $ 7,240 $ 5,929 82 %
% of total
revenues 21 % 18 % 23 % 15 %
Total operating
expenses $ 17,091 $ 13,246 $ 3,845 29 % $ 62,018 $ 33,452 $ 28,566 85 %
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Research and development. Research and development expenses decreased by $0.5
million, or 16%, to $2.5 million in the three months ended September 30, 2012
compared to $2.9 million in the same period in 2011. The decrease in research
and development expenses was primarily due to a decrease of $0.2 million in
tooling costs for our control units, $0.1 million in consulting costs and $0.1
million in payroll related costs.
Research and development expenses increased by $1.7 million, or 22%, to $9.2
million in the nine months ended September 30, 2012 compared to $7.5 million in
the same period in 2011. The increase in research and development expenses was
primarily due to an increase of $0.8 million in payroll related costs and a
higher stock-based compensation expense by approximately $0.3 million. The
increase in payroll related costs was attributed to a higher headcount and
severance costs incurred during the nine months ended September 30, 2012.
Sales and marketing. Sales and marketing expenses increased by $3.8 million, or
53%, to $10.9 million in the three months ended September 30, 2012 compared to
$7.1 million for the same period in 2011. The increase in sales and marketing
expenses was mostly due to a $2.4 million increase in advertising expenses
incurred in conjunction with our sales and marketing initiatives, undertaken to
improve brand awareness and increase procedure fee revenues, a $1.0 million
increase in payroll related costs and a $0.6 million increase in sales
commission expenses. The increase in these payroll related expenses is directly
related to the growth of our sales and marketing organization. The overall
increase was partially offset by lower marketing collateral development costs of
$0.5 million. Higher marketing collateral costs in the third quarter of 2011
were driven by special marketing programs and launch of new patient brochures.
Sales and marketing expenses increased by $21.0 million, or 112%, to $39.6
million in the nine months ended September 30, 2012 compared to $18.7 million
for the same period in 2011. The increase in sales and marketing expenses was
mostly due to a $9.4 million increase in advertising expenses incurred in
conjunction with our direct marketing campaign and other sales and marketing
initiatives, a $4.9 million increase in payroll related costs, which include
approximately $0.7 million in severance costs recognized during the nine months
ended September 30, 2012, a $1.6 million increase in sales commission expenses
driven by higher sales levels and a $1.5 million increase in marketing costs
mostly related to public relations, web site maintenance, marketing materials
production and distribution. The remaining increase is attributed to higher
stock-based compensation expenses, higher travel expenses and higher public
relations expenses during the nine months ended September 30, 2012. The increase
in these expenses is directly related to the growth of our sales and marketing
organization.
General and administrative. General and administrative expenses increased by
$0.6 million, or 17%, to $3.8 million for the three months ended September 30,
2012 compared to $3.2 million for the same period in 2011. The increase in
general and administrative expenses was primarily due to $0.9 million increase
in legal expenses mostly related to our ongoing litigation and IP enforcement
activities and higher stock-based compensation expenses by $0.7 million. The
increase was partially offset by lower accounting fees by approximately $0.9
million incurred during the three months ended September 30, 2012 compared to
the prior period. Higher accounting fees during the three months ended
September 30, 2011 were incurred in the preparation
for our initial public offering.
General and administrative expenses increased by $5.9 million, or 82%, to $13.2
million for the nine months ended September 30, 2012 compared to $7.2 million
for the same period in 2011. The increase in general and administrative expenses
was primarily due to a $2.2 million increase in payroll related costs, a $2.8
million increase in legal expenses primarily related to our ongoing litigation
and IP enforcement activities and higher stock-based compensation expenses by
$1.8 million. Consulting, recruiting and travel expenses also increased during
the current period. The increase was partially offset by lower accounting fees
of $1.4 million incurred during the nine months ended September 30, 2012
compared to the prior period. Higher accounting fees during the nine months
ended September 30, 2011 were incurred in the preparation for our initial public
offering. The increase in payroll related costs was attributed to a higher
headcount and severance costs recognized during the nine months ended
September 30, 2012. The stock-based compensation expense for the nine months
ended September 30, 2012 included $0.7 million in modification charges incurred
in connection with the severance packages to our former executives.
Interest Income (Expense), Net and Other Income (Expense), Net (in thousands,
except for percentages):
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 $ Change % Change 2012 2011 $ Change % Change
Interest income
(expense), net $ 11 $ (24 ) $ 35 (146 )% $ 100 $ (84 ) $ 184 (219 )%
% of total
revenues - % - % - % - %
Other income
(expense), net $ (44 ) $ (17 ) $ (27 ) 159 % $ (108 ) $ (412 ) $ 304 (74 )%
% of total
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Interest income (expense), net. Interest income (expense), net was an income of
$11,000 for the three months ended September 30, 2012 compared to an expense of
$24,000 for the same period in 2011. Interest income (expense), net was an
income of $0.1 million for the nine months ended September 30, 2012 compared to
an expense of $84,000 for the same period in 2011. During 2012, interest income
was earned on our available-for-sale securities. During 2011, interest expense
was incurred in relation to our note payable that was paid in full in the
quarter ended March 31, 2012.
Other income (expense), net. Other income (expense), net, for the three months
ended September 30, 2012 was an expense of $44,000 compared to $17,000 of
expense in 2011. Other income (expense), net, for the nine months ended
September 30, 2012 was an expense of $0.1 million compared to $0.4 million of
expense in 2011. Higher expense in prior year was related to the loss incurred
on the change in the fair value of the convertible preferred stock warrant.
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 IPO.
As of September 30, 2012, we had $66.9 million of cash and cash equivalents, short-term and long-term investments. The following table summarizes our working capital, cash and cash equivalents, short-term and long-term investments as of September 30, 2012 and December 31, 2011 as follows (in thousands):
September 30, December 31,
2012 2011
Cash and cash equivalents $ 22,172 $ 83,908
Short-term investments 29,022 -
Long-term investments 15,715 -
Total $ 66,909 $ 83,908
Working capital $ 52,011 $ 84,086
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