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ZLTQ > SEC Filings for ZLTQ > Form 10-Q on 30-Apr-2014All Recent SEC Filings

Show all filings for ZELTIQ AESTHETICS INC

Form 10-Q for ZELTIQ AESTHETICS INC


30-Apr-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and with our Management's Discussion and Analysis of Financial Condition and Results of Operations and financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013. In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the section entitled Risk Factors in this Quarterly Report on Form 10-Q.

Overview

We are a medical technology company focused on developing and commercializing products utilizing our proprietary controlled cooling technology platform. Our first commercial product, the CoolSculpting system, is designed to selectively reduce stubborn fat bulges. We generate revenue from sales of our CoolSculpting system and from sales of cycles in the form of consumable procedure packs to our customers. Our CoolSculpting system comprises a CoolSculpting control unit and our CoolSculpting applicators which are designed to allow a physician to treat a different size and shape fat bulge. With the launch of our CoolSmooth applicator in April 2014, we now offer five CoolSculpting applicators for use with our CoolSculpting system.
We received clearance from the Food and Drug Administration, or FDA, in September 2010 to market CoolSculpting for the selective reduction of fat around the flanks, an area commonly referred to as the "love handles." In May 2012, CoolSculpting was cleared by the FDA for treatment of the abdomen area. Most recently, in April 2014, CoolSculpting was cleared by the FDA for treatment of the thigh area. We may seek additional regulatory clearances from the FDA to expand our United States marketed indications for CoolSculpting to areas on the body other than the flanks, abdomen and thighs. We have received regulatory approval or are otherwise free to market CoolSculpting in numerous international markets where use of the product is generally not limited to specific treatment areas. Customers in these markets commonly perform CoolSculpting procedures on the back and chest, in addition to the flanks, abdomen and thighs. In the United States and related territories, as well as Canada, we use our direct sales organization to selectively market CoolSculpting. In markets outside of North America, including Asia Pacific and Europe, we sell CoolSculpting through a direct sales organization as well as a network of distributors. We intend to continue developing our international sales and marketing organization to focus on increasing sales and strengthening our customer relationships. We also intend to seek regulatory approval to market CoolSculpting in key additional international markets, including markets in Asia and Europe. Revenue from markets outside of North America accounted for 26% of our total revenue for the three months ended March 31, 2014, compared to 17% of our total revenue for the three months ended March 31, 2013.

Our ongoing research and development activities are primarily focused on improving and enhancing our CoolSculpting system and CoolSculpting procedure. In addition to these development activities related to CoolSculpting, we are exploring additional uses of our proprietary controlled cooling technology platform for the dermatology, plastic surgery, and aesthetic markets. We are also exploring potential therapeutic uses for our platform technology, either directly or through collaborative arrangements with strategic partners.

Revenue

We generate revenue from sales of our CoolSculpting system and from sales of consumables to our customers. We generated revenue of $31.0 million for the three months ended March 31, 2014, compared to $20.0 million for the three months ended March 31, 2013.

System revenue. Sales of our CoolSculpting system include the CoolSculpting control unit and our CoolSculpting applicators. Some practices may purchase more than one CoolSculpting system, as well as purchase additional applicators, or add-on applicators, for existing systems. Our standard terms do not allow for trial or evaluation periods, rights of return, or refund payments contingent upon the customer obtaining financing or other terms that could impact the customer's obligation. System revenue represented 47% of our total revenue for the three months ended March 31, 2014, compared to 55% of our total revenue for the three months ended March 31, 2013. Our worldwide installed base grew by 48% from 1,595 units as of March 31, 2013, to 2,354 units as of March 31, 2014.

Consumable revenue. We generate consumable revenue through sales of cycles in the form of consumable procedure packs, each of which includes our consumable CoolGels and CoolLiners and a disposable computer cartridge that we market as the CoolCard. The CoolCard contains enabling software that permits our customers to perform a fixed number of CoolSculpting procedures, or


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

Our business plan focuses on expanding our installed base of systems at customers, and increasing our consumable revenue by driving demand for CoolSculpting procedures through our targeted marketing programs. We anticipate that as we implement our business plan our consumable revenue will increase as a percentage of our total revenue.

Seasonality. Seasonal fluctuations in the number of patients seeking treatment and the availability of our customers are likely to continue to affect, our business. Specifically, our customers often take vacation or are on holiday during the summer months and therefore tend to perform fewer procedures, particularly in Europe. These seasonal trends have caused and will likely continue to cause, fluctuations in our quarterly results, including fluctuations in sequential revenue growth rates.

Market in which we operate. The medical technology and aesthetic product markets are highly competitive and dynamic, and are characterized by rapid and substantial technological development and product innovations. We compete with many other technologies for consumer demand. Further, the aesthetic industry in which we operate is particularly vulnerable to economic trends. The decision to undergo a procedure from our systems is driven by consumer demand. Procedures performed using our systems are elective procedures, the cost of which must be borne by the patient, and are not reimbursable through government or private health insurance. In times of economic uncertainty or recession, individuals often reduce the amount of money that they spend on discretionary items, including aesthetic procedures. The general economic difficulties being experienced and the lack of availability of consumer credit for some of our customers' patients could adversely affect the markets in which we operate.

Critical Accounting Policies and Estimates

Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.

Our critical accounting policies have not materially changed during the three months ended March 31, 2014. Furthermore, the preparation of our consolidated financial statements is in conformity with generally accepted accounting principles in the United States of America, or GAAP. The preparation of our consolidated financial statement requires management to make judgments and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Our management believes that we consistently apply these judgments and estimates and the consolidated financial statements and accompanying notes fairly represent all periods presented. However, any differences between these judgments and estimates and actual results could have a material impact on our consolidated statements of income and financial position.

Critical accounting estimates, as defined by the Securities and Exchange Commission, are those that are most important to the portrayal of our consolidated financial condition and results of operations and require our management's most difficult and subjective judgments and estimates of matters that are inherently uncertain. Our critical accounting estimates include those regarding (1) revenue recognition and the fair value of revenue elements, (2) accruals for customer programs, including cooperative marketing arrangements and customer incentive programs, (3) investments, including the fair value of such investments, (4) warranty accruals, (5) valuation and recognition of stock-based compensation, and (6) provision for income taxes, tax liabilities and valuation allowance for deferred tax assets. For a discussion of our critical accounting estimates, see Item 7: "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2013.

Results of Operations

Revenue (in thousands, except for percentages):

                                 Three Months Ended
                                      March 31,
                     2014        2013       $ Change     % Change
System revenue     $ 14,461    $ 11,072    $   3,389        31 %
Consumable revenue   16,514       8,910        7,604        85 %
Total revenue      $ 30,975    $ 19,982    $  10,993        55 %


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Overall, we experienced an increase in revenue driven primarily by the expansion of our sales force into new and existing key markets, increased focus and prioritization of our business through our revamped sales team structure and training, and an increase in our installed base of CoolSculpting systems.

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

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

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

                                   Three Months Ended
                                       March 31,
                      2014         2013       $ Change      % Change
Cost of revenue    $  9,016     $  7,348     $    1,668        23 %
% of total revenue       29 %         37 %
Gross profit       $ 21,959     $ 12,634     $    9,325        74 %
Gross profit %           71 %         63 %

Gross profit as a percentage of revenue typically fluctuates with product and regional mix, selling prices, material costs and revenue levels. The increase in gross profit as a percentage of revenue for the three months ended March 31, 2014, as compared to the same period in 2013, was attributable to consumable procedure packs, which carry a higher margin than our systems, increased in the first quarter of 2014 compared to the first quarter of 2013 on both an overall basis and as a percentage of overall sales. Additionally, the increase in gross profit as a percentage of revenue is attributable to our continued high rate of new system placements combined with our continued focus on cost reduction across our product portfolio and the completion of the in-sourced manufacturing structure during the second quarter of 2013. Specifically, higher production from higher sales led to better utilization on a relatively fixed base of overhead costs.


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Operating Expenses (in thousands, except for percentages):

                                           Three Months Ended
                                               March 31,
                              2014         2013       $ Change      % Change
Operating expenses
Research and development   $  4,270     $  3,749     $      521        14 %
% of total revenue               14 %         19 %
Sales and marketing        $ 20,187     $ 12,542     $    7,645        61 %
% of total revenue               65 %         63 %
General and administrative $  4,713     $  3,808     $      905        24 %
% of total revenue               15 %         19 %
Total operating expenses   $ 29,170     $ 20,099     $    9,071        45 %

Research and development. Research and development expenses increased for the three months ended March 31, 2014, compared to the same period in 2013, primarily due to a $0.3 million increase in payroll related costs attributed to higher headcount and an increase in performance-based compensation, as well as a $0.1 million increase in consulting, development, materials and clinical costs, as we continue to explore ways to leverage our proprietary cooling platform for additional applications and indications.

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

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

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

                                  Three Months Ended
                                       March 31,
                       2014       2013      $ Change     % Change
Interest income, net $  19      $  24      $     (5 )     (21 )%
% of total revenue       -  %       -  %
Other expense, net   $ (66 )    $ (34 )    $    (32 )      94  %
% of total revenue       -  %       -  %

Interest income, net. For both the three months ended March 31, 2014 and 2013, interest income was earned on our available-for-sale securities. The amount of income earned varies based on the type of investments held, market conditions and other factors. The decrease in interest income is attributable to a decrease in our cash, cash equivalents and investments.


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

Liquidity and Capital Resources

Since our inception, we have financed our operations to date primarily through private placements of convertible preferred stock, promissory notes, borrowings under a loan agreement, product sales and the proceeds from our initial public offering, or IPO.

The following table summarizes our working capital, cash and cash equivalents, short-term and long-term investments as of March 31, 2014, and December 31, 2013 (in thousands):

                           March 31,      December 31,
                              2014            2013
Cash and cash equivalents $    14,546    $       25,798
Short-term investments         18,442            18,840
Long-term investments           8,234            11,442
Total                     $    41,222    $       56,080

Working capital           $    38,359    $       42,430

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