Attached files
| file | filename |
|---|---|
| EXCEL - IDEA: XBRL DOCUMENT - Zeltiq Aesthetics Inc | Financial_Report.xls |
| EX-10.3 - AMENDMENT TO RELOCATION AGREEMENT - Zeltiq Aesthetics Inc | exhibit103q115.htm |
| EX-10.1 - AMENDMENT TO EMPLOYMENT OFFER LETTER - Zeltiq Aesthetics Inc | exhibit101q115.htm |
| EX-32.1 - CERTIFICATE OF PEO AND PFO PURSUANT TO 18 U.S.C. SECTION 1350 - Zeltiq Aesthetics Inc | exhibit321q115.htm |
| EX-31.1 - CERTIFICATE OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 - Zeltiq Aesthetics Inc | exhibit311q115.htm |
| EX-10.2 - RELOCATION AGREEMENT - Zeltiq Aesthetics Inc | exhibit102q115.htm |
| EX-10.5 - COMPENSATION ARRANGEMENT WITH NON-EMPLOYEE DIRECTORS - Zeltiq Aesthetics Inc | exhibit105q115.htm |
| EX-12.1 - RATIO OF EARNINGS TO FIXED CHARGES - Zeltiq Aesthetics Inc | exhibit121q115.htm |
| EX-31.2 - CERTIFICATE OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 - Zeltiq Aesthetics Inc | exhibit312q115.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 March 31, 2015
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 April 30, 2015, there were 38,606,704 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)
March 31, 2015 | December 31, 2014 | ||||||
ASSETS | |||||||
CURRENT ASSETS: | |||||||
Cash and cash equivalents | $ | 25,057 | $ | 28,649 | |||
Short-term investments | 15,822 | 16,286 | |||||
Accounts receivable, net | 24,525 | 21,472 | |||||
Inventory | 17,353 | 15,536 | |||||
Prepaid expenses and other current assets | 7,384 | 7,060 | |||||
Total current assets | 90,141 | 89,003 | |||||
Long-term investments | 3,411 | 4,805 | |||||
Restricted cash | 546 | 560 | |||||
Property and equipment, net | 3,608 | 3,724 | |||||
Intangible asset, net | 5,605 | 5,780 | |||||
Other assets | 68 | 33 | |||||
Total assets | $ | 103,379 | $ | 103,905 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
CURRENT LIABILITIES: | |||||||
Accounts payable | $ | 7,297 | $ | 5,824 | |||
Accrued liabilities | 20,224 | 21,450 | |||||
Deferred revenue | 5,674 | 5,069 | |||||
Current portion of capital lease obligations | 121 | 120 | |||||
Total current liabilities | 33,316 | 32,463 | |||||
Long-term deferred revenue | 472 | 622 | |||||
Long-term capital lease obligations, less current portion | 232 | 262 | |||||
Other non-current liabilities | 385 | 39 | |||||
Total liabilities | $ | 34,405 | $ | 33,386 | |||
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 March 31, 2015, and December 31, 2014 | — | — | |||||
Common stock, $0.001 par value: 500,000,000 shares authorized at March 31, 2015, and December 31, 2014; 38,569,936 and 38,123,998 shares issued and outstanding at March 31, 2015, and December 31, 2014, respectively | 42 | 42 | |||||
Additional paid-in capital | 203,868 | 202,701 | |||||
Accumulated other comprehensive income (loss) | (1,279 | ) | (696 | ) | |||
Accumulated deficit | (133,657 | ) | (131,528 | ) | |||
Total stockholders’ equity | 68,974 | 70,519 | |||||
Total liabilities and stockholders’ equity | $ | 103,379 | $ | 103,905 | |||
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 | |||||||
March 31, | |||||||
2015 | 2014 | ||||||
Revenue | $ | 51,558 | $ | 30,975 | |||
Cost of revenue | 14,378 | 9,016 | |||||
Gross profit | 37,180 | 21,959 | |||||
Operating expenses: | |||||||
Research and development | 6,080 | 4,270 | |||||
Sales and marketing | 24,406 | 20,187 | |||||
General and administrative | 8,388 | 4,713 | |||||
Total operating expenses | 38,874 | 29,170 | |||||
Income (loss) from operations | (1,694 | ) | (7,211 | ) | |||
Interest income (expense), net | 13 | 19 | |||||
Other income (expense), net | (420 | ) | (66 | ) | |||
Income (loss) before income taxes | (2,101 | ) | (7,258 | ) | |||
Income tax expense | 28 | 79 | |||||
Net income (loss) | $ | (2,129 | ) | $ | (7,337 | ) | |
Basic net income (loss) per share: | |||||||
Net income (loss) per share, basic | $ | (0.06 | ) | $ | (0.20 | ) | |
Weighted average shares of common stock outstanding used in computing net income (loss) per share, basic | 38,383,022 | 37,215,697 | |||||
Diluted net income (loss) per share: | |||||||
Net income (loss) per share, diluted | $ | (0.06 | ) | $ | (0.20 | ) | |
Weighted average shares of common stock outstanding used in computing net income (loss) per share, diluted | 38,383,022 | 37,215,697 | |||||
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 | |||||||
March 31, | |||||||
2015 | 2014 | ||||||
Net income (loss) | $ | (2,129 | ) | $ | (7,337 | ) | |
Other comprehensive income (loss), net of tax: | |||||||
Foreign currency translation adjustments | (588 | ) | 30 | ||||
Changes in unrealized gains (losses) on available-for-sale securities | 5 | 2 | |||||
Other comprehensive income (loss), net of tax | (583 | ) | 32 | ||||
Comprehensive income (loss) | $ | (2,712 | ) | $ | (7,305 | ) | |
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.
Three Months Ended | |||||||
March 31, | |||||||
2015 | 2014 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
Net income (loss) | $ | (2,129 | ) | $ | (7,337 | ) | |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | |||||||
Depreciation and amortization | 513 | 455 | |||||
Stock-based compensation | 4,150 | 2,105 | |||||
Deferred income taxes | — | 30 | |||||
Amortization (accretion) of investment premium (discount), net | 22 | 67 | |||||
Provision for (recovery of) doubtful accounts receivable | 123 | — | |||||
Provision for excess and obsolete inventory | 128 | 105 | |||||
Loss on disposal and write-off of property and equipment | — | 17 | |||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | (3,359 | ) | (2,088 | ) | |||
Inventory | (2,100 | ) | (6,291 | ) | |||
Prepaid expenses and other assets | (391 | ) | 570 | ||||
Deferred revenue, net of deferred costs | 503 | 853 | |||||
Accounts payable, accrued and other non-current liabilities | 710 | (829 | ) | ||||
Net cash provided by (used in) operating activities | (1,830 | ) | (12,343 | ) | |||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
Purchase of investments | (4,070 | ) | (2,249 | ) | |||
Proceeds from sale of investments | — | 1,000 | |||||
Proceeds from maturity of investments | 5,911 | 4,791 | |||||
Purchase of property and equipment | (285 | ) | (559 | ) | |||
Change in restricted cash | — | (1 | ) | ||||
Net cash provided by (used in) investing activities | 1,556 | 2,982 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Principal payments on capital leases | (29 | ) | — | ||||
Proceeds from issuance of common stock upon exercise of stock options | 1,346 | 640 | |||||
Tax payments related to shares withheld for vested restricted stock units | (4,345 | ) | (2,546 | ) | |||
Tax effect of employee stock plans | 16 | — | |||||
Net cash provided by (used in) financing activities | (3,012 | ) | (1,906 | ) | |||
Effect of exchange rate changes on cash and cash equivalents | (306 | ) | 15 | ||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (3,592 | ) | (11,252 | ) | |||
CASH AND CASH EQUIVALENTS—Beginning of period | 28,649 | 25,798 | |||||
CASH AND CASH EQUIVALENTS—End of period | $ | 25,057 | $ | 14,546 | |||
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, 2014, 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 March 31, 2015, results of operations for the three months ended March 31, 2015 and 2014, comprehensive income (loss) for the three months ended March 31, 2015 and 2014, and cash flows for the three months ended March 31, 2015 and 2014. The interim results for the three months ended March 31, 2015, are not necessarily indicative of the results that may be expected for the year ending December 31, 2015, or for any other future annual or interim period. Certain amounts in the prior year's condensed consolidated statement of balance sheets 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, 2014.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
The functional currency of the Company’s international subsidiaries is evaluated on a case-by-case basis and has been determined to be the local currency. All assets and liabilities of these foreign operations are translated to U.S. Dollars at current period end exchange rates, and revenue and expenses are translated to U.S. Dollars using average exchange rates in effect during the period. The gains and losses from the foreign currency translation of the foreign subsidiaries' financial statements are included as a separate component of stockholders' equity under "Accumulated other comprehensive income (loss)." Gains or losses arising from currency exchange rate fluctuations on transactions denominated in a currency other than the local functional currency are included in other income (expense), net.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. The primary estimates underlying the Company's financial statements include the value of revenue elements, product warranty, inventory valuation, allowance for doubtful accounts receivable, assumptions regarding variables used in calculating the fair value of the Company's equity awards, fair value of investments, useful lives of intangibles, income taxes and contingent liabilities. Actual results could differ from those estimates.
Concentration of Credit Risk
As of March 31, 2015, one individual customer, which is a large aesthetic chain, accounted for 25% of accounts receivable. As of March 31, 2014, no individual customer accounted for 10% or more of the Company's accounts receivable. During the three months ended March 31, 2015, one individual customer, which is a large aesthetic chain, accounted for 11% of total revenue. During the three months ended March 31, 2014, no individual customer accounted for 10% or more of total revenue.
7
Critical Accounting Policies
There have been no material changes to the Company’s critical accounting policies during the three months ended March 31, 2015, as compared to the critical accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
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. This guidance allows for two methods of adoption: (a) full retrospective adoption, meaning the guidance is applied to all periods presented, or (b) modified retrospective adoption, meaning the cumulative effect of applying this guidance is recognized as an adjustment to the fiscal 2017 opening Accumulated deficit balance. The Company will adopt this guidance effective January 1, 2017, and is currently evaluating the two adoption methods as well as the impact this new guidance will have on the consolidated financial statements and related disclosures.
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 March 31, 2015.
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 March 31, 2015 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Fair Value | ||||||||||||
Financial Assets | |||||||||||||||
Cash equivalents: | |||||||||||||||
Money market funds | $ | 4,962 | $ | — | $ | — | $ | 4,962 | |||||||
Short-term investments: | |||||||||||||||
U.S. Agency securities | — | 5,253 | — | 5,253 | |||||||||||
U.S. Treasury | — | 1,002 | — | 1,002 | |||||||||||
Corporate bonds | — | 7,734 | — | 7,734 | |||||||||||
Commercial paper | — | 600 | — | 600 | |||||||||||
Certificates of deposit | 1,233 | — | — | 1,233 | |||||||||||
Long-term investments: | |||||||||||||||
U.S. Agency securities | — | 850 | — | 850 | |||||||||||
Corporate bonds | — | 250 | — | 250 | |||||||||||
Certificates of deposit | 2,311 | — | — | 2,311 | |||||||||||
Total | $ | 8,506 | $ | 15,689 | $ | — | $ | 24,195 | |||||||
As of December 31, 2014 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Fair Value | ||||||||||||
Financial Assets | |||||||||||||||
Cash equivalents: | |||||||||||||||
Money market funds | $ | 6,062 | $ | — | $ | — | $ | 6,062 | |||||||
Short-term investments: | |||||||||||||||
U.S. Agency securities | — | 5,240 | — | 5,240 | |||||||||||
U.S. Treasury | — | 1,004 | — | 1,004 | |||||||||||
Corporate bonds | — | 7,774 | — | 7,774 | |||||||||||
Commercial paper | — | 1,349 | — | 1,349 | |||||||||||
Certificates of deposit | 919 | — | — | 919 | |||||||||||
Long-term investments: | |||||||||||||||
U.S. Agency securities | — | 999 | — | 999 | |||||||||||
U.S. Treasury | — | 500 | — | 500 | |||||||||||
Corporate bonds | — | 750 | — | 750 | |||||||||||
Certificates of deposit | 2,556 | — | — | 2,556 | |||||||||||
Total | $ | 9,537 | $ | 17,616 | $ | — | $ | 27,153 | |||||||
During the three months ended March 31, 2015 and 2014, 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 March 31, 2015, and December 31, 2014.
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 March 31, 2015, are as follows (in thousands):
Short-term | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
U.S. Agency securities | $ | 5,252 | $ | 1 | $ | — | $ | 5,253 | |||||||
U.S. Treasury | 1,001 | 1 | — | 1,002 | |||||||||||
Corporate bonds | 7,737 | 2 | (5 | ) | 7,734 | ||||||||||
Commercial paper | 600 | — | — | 600 | |||||||||||
Certificates of deposit | 1,233 | — | — | 1,233 | |||||||||||
Total | $ | 15,823 | $ | 4 | $ | (5 | ) | $ | 15,822 | ||||||
Long-term | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
U.S. Agency securities | $ | 850 | $ | — | $ | — | $ | 850 | |||||||
Corporate bonds | 250 | — | — | 250 | |||||||||||
Certificates of deposit | 2,311 | — | — | 2,311 | |||||||||||
Total | $ | 3,411 | $ | — | $ | — | $ | 3,411 | |||||||
The Company's short-term and long-term investments as of December 31, 2014, are as follows (in thousands):
Short-term | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
U.S. Agency securities | $ | 5,240 | $ | 1 | $ | (1 | ) | $ | 5,240 | ||||||
U.S. Treasury | 1,003 | 1 | — | 1,004 | |||||||||||
Corporate bonds | 7,778 | 2 | (6 | ) | 7,774 | ||||||||||
Commercial paper | 1,349 | — | — | 1,349 | |||||||||||
Certificates of deposit | 919 | — | — | 919 | |||||||||||
Total | $ | 16,289 | $ | 4 | $ | (7 | ) | $ | 16,286 | ||||||
Long-term | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
U.S. Agency securities | $ | 1,000 | $ | — | $ | (1 | ) | $ | 999 | ||||||
U.S. Treasury | 500 | — | — | 500 | |||||||||||
Corporate bonds | 752 | — | (2 | ) | 750 | ||||||||||
Certificates of deposit | 2,556 | — | — | 2,556 | |||||||||||
Total | $ | 4,808 | $ | — | $ | (3 | ) | $ | 4,805 | ||||||
For each of the three months ended March 31, 2015 and 2014, gains or losses realized on the sale of investments were insignificant.
10
The contractual maturities of the Company's short-term and long-term investments as of March 31, 2015, are as follows (in thousands):
March 31, 2015 | |||||||
Amortized Cost | Fair Value | ||||||
Due in one year or less | $ | 15,823 | $ | 15,822 | |||
Due in one year to five years | 3,411 | 3,411 | |||||
$ | 19,234 | $ | 19,233 | ||||
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):
March 31, 2015 | December 31, 2014 | ||||||
Raw materials | $ | 7,906 | $ | 7,692 | |||
Finished goods | 9,447 | 7,844 | |||||
Total inventory | $ | 17,353 | $ | 15,536 | |||
Property and equipment, net
Property and equipment, net comprised the following (in thousands):
March 31, 2015 | December 31, 2014 | ||||||
Lab equipment, tooling and molds | $ | 2,707 | $ | 2,766 | |||
Computer software | 1,813 | 1,337 | |||||
Computer equipment | 1,106 | 984 | |||||
Leasehold improvements | 1,443 | 1,452 | |||||
Furniture and fixtures | 569 | 494 | |||||
Vehicles | 35 | 35 | |||||
Total property and equipment | 7,673 | 7,068 | |||||
Less: Accumulated depreciation and amortization | (4,407 | ) | (4,111 | ) | |||
Construction in progress | 342 | 767 | |||||
Property and equipment, net | $ | 3,608 | $ | 3,724 | |||
The table above includes property and equipment acquired under capital leases which totaled $0.4 million as of both March 31, 2015, and December 31, 2014.
Depreciation and amortization expense related to property and equipment was $0.3 million for the three months ended March 31, 2015. Depreciation and amortization expense related to property and equipment was $0.3 million for the three months ended March 31, 2014.
11
Accrued Liabilities
The following table shows the components of accrued liabilities (in thousands):
March 31, 2015 | December 31, 2014 | ||||||
Accrued payroll and employee related expenses | $ | 6,592 | $ | 8,386 | |||
Accrued marketing expenses | 2,870 | 2,959 | |||||
Accrued royalty | 3,494 | 3,612 | |||||
Sales and other taxes payable | 1,971 | 2,123 | |||||
Advance payments from customers | 1,244 | 1,908 | |||||
Accrued warranty | 440 | 569 | |||||
Accrued legal expenses | 1,917 | 592 | |||||
Other accrued liabilities | 1,696 | 1,301 | |||||
Total accrued liabilities | $ | 20,224 | $ | 21,450 | |||
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 | |||||||
March 31, | |||||||
2015 | 2014 | ||||||
Balance at the beginning of the period | $ | 569 | $ | 676 | |||
Change in accruals for warranties issued | (29 | ) | 39 | ||||
Settlements of warranty claims | (100 | ) | (55 | ) | |||
Balance at the end of the period | $ | 440 | $ | 660 | |||
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, clearance were capitalized as purchased technology when paid, and are subsequently amortized into cost of revenue using the straight-line method over the estimated remaining useful life of the technology, not to exceed the term of the agreement or the life of the patent.
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Intangible asset, net comprised the following (in thousands):
March 31, 2015 | December 31, 2014 | ||||||
Purchased technology | $ | 8,050 | $ | 8,050 | |||
Less: Accumulated amortization | (2,445 | ) | (2,270 | ) | |||
Intangible asset, net | $ | 5,605 | $ | 5,780 | |||
Amortization expense of the intangible asset was $0.2 million for both the three months ended March 31, 2015 and 2014.
The total estimated annual future amortization expense of this intangible asset as of March 31, 2015, is as follows (in thousands):
Fiscal Year | |||
2015 (remaining 9 months) | $ | 526 | |
2016 | 701 | ||
2017 | 701 | ||
2018 | 701 | ||
2019 | 701 | ||
Thereafter | 2,275 | ||
Total | $ | 5,605 | |
5. Related Party Transactions
Brazilian Distribution Agreement
The Company entered into a distribution agreement with ADVANCE Medical, Inc. and its wholly-owned subsidiaries, or ADVANCE, dated March 18, 2011, as our exclusive distributor of CoolSculpting in Brazil and Mexico, as amended on August 29, 2011, February 27, 2012, and September 4, 2012. The distribution agreement was further amended on August 15, 2014, whereby ADVANCE is no longer a distributor in Mexico effective November 2014. As the exclusive distributor in Brazil, ADVANCE is required to purchase a minimum quantity of the Company’s products each calendar quarter throughout the term of the distribution agreement which expires on December 31, 2018. Venrock, a 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 $1.3 million for the three months ended March 31, 2015, compared to $1.0 million for the three months ended March 31, 2014. The accounts receivable balance under this distribution agreement was $1.4 million and $0.2 million as of March 31, 2015, and December 31, 2014, respectively.
6. Commitments and Contingencies
Operating Lease Obligations
The Company leases facilities under non-cancellable operating leases with various expiration dates. 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 May 2017, and a warehouse space in Livermore, California, under a lease which extends through May 2017. The Company also occupies office and warehouse space near Gatwick, United Kingdom, under a lease which extends through December 2018, as well as office space in London, United Kingdom, under a lease which extends through October 2015, Taipei, Taiwan, under a lease which extends through August 2016, Seoul, South Korea, under a lease which extends through October 2015, Reston, Virginia, under a lease which extends through September 2020, and Dublin, Ireland under a month-to-month lease. 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 $0.5 million for the three months ended March 31, 2015, compared to $0.4 million for the three months ended March 31, 2014.
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Future minimum lease payments under the non-cancellable operating leases as of March 31, 2015, are as follows (in thousands):
Year Ending December 31, | Amount | ||
2015 (remaining 9 months) | $ | 1,504 | |
2016 | 1,761 | ||
2017 | 1,798 | ||
2018 | 1,845 | ||
2019 | 694 | ||
Thereafter | 228 | ||
Total future minimum lease payments | $ | 7,830 | |
Capital Lease Obligations
The Company has entered into certain capital lease obligations to purchase equipment for operations which include a bargain purchase option. The underlying assets and related depreciation are included in the appropriate property and equipment category and related accumulated depreciation account.
Property and equipment includes amounts under leases that have been capitalized as follows (in thousands):
Useful life (Years) | March 31, 2015 | December 31, 2014 | |||||||
Computer equipment | 3 | 382 | 382 | ||||||
Total capital leased equipment | 382 | 382 | |||||||
Less: Accumulated depreciation and amortization | (53 | ) | (21 | ) | |||||
Capital leased equipment, net | $ | 329 | $ | 361 | |||||
Total amortization of assets acquired under capital leases was $32,000 for the three months ended March 31, 2015, which is included in total depreciation and amortization expense. There were no such arrangements during the three months ended March 31, 2014.
Future minimum payments required under capital leases as of March 31, 2015, are as follows (in thousands):
Year Ending December 31, | Amount | ||
2015 (remaining 9 months) | $ | 100 | |
2016 | 132 | ||
2017 | 141 | ||
Total future payments | $ | 373 | |
Less: Amount representing interest | $ | 20 | |
Present value of future minimum payments | 353 | ||
Less: Current portion | 121 | ||
Long term portion | $ | 232 | |
Purchase Commitments
The Company had non-cancellable purchase obligations to contract manufacturers and suppliers for $5.8 million and $4.0 million at March 31, 2015, and December 31, 2014, respectively.
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Unrecognized Tax Benefits
The Company's gross liability for unrecognized tax benefits totaled $26,000, including estimated interest and penalties, as of March 31, 2015, 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. Additionally, the Company may be subject to insurance related claims resulting from matters associated with CoolSculpting treatments. The Company records a liability in its consolidated financial statements for these matters when a loss is known and considered probable and the amount can be reasonably estimated. Management reviews these estimates in each accounting period as additional information becomes known and adjusts the loss provision when appropriate. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in the consolidated financial statements. If a loss is probable but the amount of loss cannot be reasonably estimated, the Company discloses the loss contingency and an estimate of possible loss or range of loss (unless such an estimate cannot be made). The Company does not recognize gain contingencies until they are realized. Legal costs incurred in connection with loss contingencies are expensed as incurred.
The Company is not currently a defendant in any litigation or claims that are expected to have a material impact on the Company's condensed 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.
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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, 2014 | 2,685,209 | 3,242,421 | $ | 6.47 | ||||||
Additional shares reserved | 1,000,000 | — | — | |||||||
Options granted | (45,622 | ) | 45,622 | 34.65 | ||||||
Restricted stock units granted | (353,757 | ) | — | — | ||||||
Options exercised | — | (252,855 | ) | 5.32 | ||||||
Options canceled | 10,093 | (10,093 | ) | 5.10 | ||||||
Restricted stock units canceled | 58,392 | — | — | |||||||
Restricted stock units withheld for tax | 133,035 | — | — | |||||||
Balance, March 31, 2015 | 3,487,350 | 3,025,095 | $ | 6.99 | ||||||
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, 2014 | 1,533,081 | $ | 10.08 | ||||
Restricted stock units granted | 353,757 | 31.95 | |||||
Restricted stock units vested | (330,201 | ) | 8.77 | ||||
Restricted stock units canceled | (58,392 | ) | 8.74 | ||||
Balance, March 31, 2015 | 1,498,245 | $ | 15.58 | ||||
During the three months ended March 31, 2015, 330,201 shares vested subject to previously granted restricted stock units. A majority of these vested restricted stock units were net share settled. During the three months ended March 31, 2015, the Company withheld 133,035 shares 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 months ended March 31, 2014, 319,582 shares vested subject to previously granted restricted stock units. A majority of these vested restricted stock units were net share settled. During the three months ended March 31, 2014, the Company withheld 134,836 shares 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 was $4.3 million for the three months ended March 31, 2015. Total payments for employee's tax obligations to the relevant taxing authority was $2.5 million for the three months ended March 31, 2014. 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 related to all of the Company's stock-based awards and employee stock purchases was recorded as an expense or a reduction to revenue and categorized as follows (in thousands):
Three Months Ended | |||||||
March 31, | |||||||
2015 | 2014 | ||||||
Revenue | $ | 80 | $ | — | |||
Cost of revenue | 134 | 93 | |||||
Research and development | 350 | 206 | |||||
Sales and marketing | 1,551 | 936 | |||||
General and administrative | 2,035 | 870 | |||||
Total stock-based compensation | $ | 4,150 | $ | 2,105 | |||
As of March 31, 2015, the total unrecognized compensation costs related to outstanding stock options, awards and employee stock purchases was $21.2 million, which is expected to be recognized using the straight-line attribution method over 1.8 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 $1.5 million for the three months ended March 31, 2015, compared to $0.5 million for the three months ended March 31, 2014.
Employee Stock-Based Compensation
The Company uses the Black-Scholes option pricing model to determine the fair value of stock options. The valuation model for stock-based compensation expense requires the Company to make assumptions and judgments about the variables used in the calculation including the expected term (weighted-average period of time that the options granted are expected to be outstanding), volatility of the Company's common stock, an assumed-risk-free interest rate and the estimated forfeitures of unvested stock options. During 2015, the Company modified its approach for calculating assumptions related to the expected term and volatility as detailed below.
The fair value of employee stock options was estimated using the following weighted-average assumptions:
Three Months Ended | |||||
March 31, | |||||
2015 | 2014 | ||||
Expected term (in years) | 4.8 | 4.4 | |||
Expected volatility | 63 | % | 43 | % | |
Risk-free interest rate | 1.29 | % | 1.11 | % | |
Expected dividend yield | — | % | — | % | |
Expected Term. Prior to the Company's initial public offering of its common stock, or IPO, the Company derived the expected term using the “simplified” method (the expected term is determined as the average of the time-to-vesting and the contractual life of the options), as the Company had limited historical information to develop expectations about future exercise patterns and post-vesting employment termination behavior. Subsequent to the IPO and through 2014, the expected term used was based on expected term of a group of similar entities, referred to as its “peer group.” In evaluating similarity, the Company considered factors such as industry, stage of life cycle and size. In 2015, the Company modified its approach by including its own historical data along with the expected term of the identified peer group companies. The Company will continue to apply this methodology until a sufficient amount of historical information regarding its own expected term becomes available.
Volatility. Prior to the IPO, because the Company was a private entity with no historical data regarding the volatility of its common stock, the expected volatility used was based on volatility of a group of similar entities, referred to as its “peer group.” In evaluating
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similarity, the Company considered factors such as industry, stage of life cycle and size. Subsequent to the IPO and through 2014, the Company continued to estimate its volatility based on its peer group as the Company did not have sufficient historical data regarding its specific volatility. In 2015, the Company modified its approach by including its own common stock trading history along with the volatility of the identified peer group companies. The expected stock price volatility is estimated using a combination of historical and peer group volatility to derive the expected volatility assumption. The Company believes the blended volatility is more representative of future stock price trends over the expected life of the options rather than just using historical or peer group volatility. The Company will continue to apply this methodology until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.
Risk-Free Interest Rate. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.
Dividend Yield. The Company has never paid any dividends and does not plan to pay dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.
Forfeitures. The Company is required to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and to record stock-based compensation expense only for those awards that are expected to vest. To the extent actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period that the estimates are revised.
During the three months ended March 31, 2015, the Company granted 45,622 stock options to employees with a weighted-average grant date fair value of $18.19 per share. During the three months ended March 31, 2014, the Company granted 70,000 stock options to employees with a weighted-average grant date fair value of $7.69 per share.
During the three months ended March 31, 2015, the Company granted 353,757 restricted stock units to employees with a weighted-average grant date fair value of $31.95 per share. During the three months ended March 31, 2014, the Company granted 183,800 restricted stock units to employees with a weighted-average grant date fair value of $20.80 per share.
As of March 31, 2015, the unrecognized compensation cost related to the Company's employee stock purchase plan, or ESPP, was $0.2 million, which will be recognized using the straight-line attribution method over 0.2 years.
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 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 $0.1 million for the three months ended March 31, 2015, of which $0.1 million relates to an arrangement with a non-employee customer and has been recorded as a reduction of revenue in the condensed consolidated statements of operations. Stock-based compensation expense for non-employees was $0.1 million for the three months ended March 31, 2014.
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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 | |||||||
March 31, | |||||||
2015 | 2014 | ||||||
Numerator | |||||||
Net income (loss) (in thousands) | $ | (2,129 | ) | $ | (7,337 | ) | |
Denominator | |||||||
Weighted average shares of common stock outstanding used in computing net income (loss) per share, basic | 38,383,022 | 37,215,697 | |||||
Dilutive effect of incremental shares and share equivalents | — | — | |||||
Weighted average shares of common stock outstanding used in computing net income (loss) per share, diluted | 38,383,022 | 37,215,697 | |||||
Net income (loss) per share: | |||||||
Net income (loss) per share, basic | $ | (0.06 | ) | $ | (0.20 | ) | |
Net income (loss) per share, diluted | $ | (0.06 | ) | $ | (0.20 | ) | |
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 | |||||
March 31, | |||||
2015 | 2014 | ||||
Options to purchase common stock | 3,025,095 | 3,534,340 | |||
Restricted stock units | 1,498,245 | 1,730,064 | |||
Common stock issuable pursuant to the ESPP | 8,874 | — | |||
Total | 4,532,214 | 5,264,404 | |||
9. Income Taxes
The Company recorded income tax expense of $28,000 for the three months ended March 31, 2015, compared to income tax expense of $0.1 million for the three months ended March 31, 2014. The income tax expense for the three months ended March 31, 2015 and 2014, 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 March 31, 2015, the Company had $1.5 million of unrecognized tax benefits, of which $25,000, if recognized, would affect the effective tax rate due to the valuation allowance that currently offsets deferred tax assets. 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.
The Company files annual income tax returns in multiple taxing jurisdictions around the world, including the U.S. federal and state jurisdictions, 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
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use of cash. As of March 31, 2015, 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.
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. If an ownership change were to occur, 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.
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 | |||||||
March 31, | |||||||
2015 | 2014 | ||||||
North America | $ | 35,229 | $ | 22,787 | |||
International | 16,329 | 8,188 | |||||
Total | $ | 51,558 | $ | 30,975 | |||
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 $33.2 million for the three months ended March 31, 2015, compared to $20.9 million for the three months ended March 31, 2014.
The following table sets forth revenue by product expressed as dollar amounts (in thousands):
Three Months Ended | |||||||
March 31, | |||||||
2015 | 2014 | ||||||
System revenue | $ | 26,156 | $ | 14,461 | |||
Consumable revenue | 25,402 | 16,514 | |||||
Total | $ | 51,558 | $ | 30,975 | |||
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, 2014. In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the section entitled Risk Factors in this Quarterly Report on Form 10-Q.
Overview
We are a medical technology company focused on developing and commercializing products utilizing our proprietary controlled cooling technology platform. Our first commercial product, the CoolSculpting system, is designed to selectively reduce stubborn fat bulges. We generate revenue primarily from sales of our CoolSculpting system, add-on applicators and from sales of cycles in the form of consumable procedure packs to our customers. Our CoolSculpting system comprises a CoolSculpting control unit and our CoolSculpting applicators which are designed to allow a physician to treat a different size and shape fat bulge. With the launch of our 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. In April 2014, CoolSculpting was cleared by the FDA for treatment of the thigh area, and most recently, in January 2015, we were cleared by the FDA for treatment at lower temperatures which will enable shorter treatment times. 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, Latin America and Europe, we sell CoolSculpting through both a direct sales organization as well as a network of distributors. We intend to continue developing our international sales and marketing organization to focus on increasing sales and strengthening our customer relationships. We also intend to seek regulatory approval to market CoolSculpting in key additional international markets, including markets in Asia and Europe. Revenue from markets outside of North America accounted for 32% of our total revenue for the three months ended March 31, 2015, compared to 26% of our total revenue for the three months ended March 31, 2014.
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 primarily from sales of our CoolSculpting system and from sales of consumables to our customers. We generated revenue of $51.6 million for the three months ended March 31, 2015, compared to $31.0 million for the three months ended March 31, 2014.
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 51% of our total revenue for the three months ended March 31, 2015, compared to 47% of our total revenue for the three months ended March 31, 2014. Our worldwide installed base grew by 50% from 2,354 units as of March 31, 2014, to 3,523 units as of March 31, 2015.
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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 49% of our total revenue for the three months ended March 31, 2015, compared to 53% of our total revenue for the three months ended March 31, 2014. We shipped 207,287 CoolSculpting revenue cycles to our customers during the three months ended March 31, 2015, compared to 126,059 CoolSculpting revenue cycles during the three months ended March 31, 2014.
Our business plan focuses on expanding our installed base of systems at customers, and increasing our consumable revenue by driving demand for CoolSculpting procedures through our targeted marketing programs. We anticipate that as we continue to implement our business plan and expand our installed base our consumable revenue will increase as a percentage of our total revenue.
Seasonality. Seasonal fluctuations in the number of patients seeking treatment and the availability of our customers are likely to continue to affect our business. Seasonal fluctuations occur in both system revenue and consumable revenue as well as by geographic region. Specifically, our customers often take vacation or are on holiday during the summer months and therefore tend to perform fewer procedures, particularly in certain international countries. These seasonal trends have caused and will likely continue to cause, fluctuations in our quarterly results, including fluctuations in sequential revenue growth rates.
Market in which we operate. The medical technology and aesthetic product markets are highly competitive and dynamic, and are characterized by rapid and substantial technological development and product innovations. We compete with many other technologies for consumer demand. Further, the aesthetic industry in which we operate is particularly vulnerable to economic trends. The decision to undergo a procedure from our systems is driven by consumer demand. Procedures performed using our systems are elective procedures, the cost of which must be borne by the patient, and are not reimbursable through government or private health insurance. In times of economic uncertainty or recession, individuals often reduce the amount of money that they spend on discretionary items, including aesthetic procedures. The general economic difficulties being experienced and the lack of availability of consumer credit for some of our customers' patients could adversely affect the markets in which we operate.
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, 2014.
Our critical accounting policies have not materially changed during the three months ended March 31, 2015. Furthermore, the preparation of our consolidated financial statements is in conformity with generally accepted accounting principles in the United States of America, or GAAP. The preparation of our consolidated financial statements requires management to make judgments and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Our management believes that we consistently apply these judgments and estimates and the consolidated financial statements and accompanying notes fairly represent all periods presented. However, any differences between these judgments and estimates and actual results could have a material impact on our consolidated statements of income and financial position.
Critical accounting estimates, as defined by the Securities and Exchange Commission, are those that are most important to the portrayal of our consolidated financial condition and results of operations and require our management’s most difficult and subjective judgments and estimates of matters that are inherently uncertain. Our critical accounting estimates include those regarding (1) revenue recognition and the allocation of selling prices to revenue elements, (2) customer programs and payments, including accruals for customer programs, cooperative marketing arrangements, customer incentive programs and payments to customers, (3) investments, including the fair value of such investments, (4) warranty accruals, (5) valuation and recognition of stock-based compensation, and (6) provision for income taxes, tax liabilities and valuation allowance for deferred tax assets. For a discussion of our critical accounting estimates, see Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2014.
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Results of Operations
Revenue (in thousands, except for percentages):
Three Months Ended | ||||||||||||||
March 31, | ||||||||||||||
Revenue | 2015 | 2014 | $ Change | % Change | ||||||||||
System revenue | $ | 26,156 | $ | 14,461 | $ | 11,695 | 81 | % | ||||||
Consumable revenue | 25,402 | 16,514 | 8,888 | 54 | % | |||||||||
Total revenue | $ | 51,558 | $ | 30,975 | $ | 20,583 | 66 | % | ||||||
Overall, we experienced an increase in revenue primarily as a result of 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, 2015, as compared to the same period in 2014, as a result of increased system sales in both North America and our International markets due to the reasons stated above. Overall, we placed 347 systems in the three months ended March 31, 2015, as compared to 179 systems in the three months ended March 31, 2014. We also continue to experience an increase in sales of add-on applicators to existing customers, related primarily to our CoolSmooth applicator; such total incremental add-on applicator revenue was $0.7 million in the three months ended March 31, 2015, whereas in the three months ended March 31, 2014 our incremental add-on revenue, related primarily to our CoolFit and CoolCurve+ applicators, totaled $0.3 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. These increases were offset in part by lower average selling prices as result of an increase in international sales, including sales to distributors, as a percentage of total revenue as well as due to volume based discounts offered on certain multiple system deals.
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 months ended March 31, 2015, as compared to the same period in 2014.
Cost of Revenue and Gross Profit (in thousands, except for percentages):
Three Months Ended | ||||||||||||||
March 31, | ||||||||||||||
2015 | 2014 | $ Change | % Change | |||||||||||
Cost of revenue | $ | 14,378 | $ | 9,016 | $ | 5,362 | 59 | % | ||||||
% of total revenue | 28 | % | 29 | % | ||||||||||
Gross profit | $ | 37,180 | $ | 21,959 | $ | 15,221 | 69 | % | ||||||
Gross profit % | 72 | % | 71 | % | ||||||||||
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, 2015, as compared to the same periods in 2014, 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.
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Operating Expenses (in thousands, except for percentages):
Three Months Ended | ||||||||||||||
March 31, | ||||||||||||||
2015 | 2014 | $ Change | % Change | |||||||||||
Operating expenses | ||||||||||||||
Research and development | $ | 6,080 | $ | 4,270 | $ | 1,810 | 42 | % | ||||||
% of total revenue | 12 | % | 14 | % | ||||||||||
Sales and marketing | $ | 24,406 | $ | 20,187 | $ | 4,219 | 21 | % | ||||||
% of total revenue | 47 | % | 65 | % | ||||||||||
General and administrative | $ | 8,388 | $ | 4,713 | $ | 3,675 | 78 | % | ||||||
% of total revenue | 16 | % | 15 | % | ||||||||||
Total operating expenses | $ | 38,874 | $ | 29,170 | $ | 9,704 | 33 | % | ||||||
Research and development. Research and development expenses increased for the three months ended March 31, 2015, as compared to the same period of 2014, primarily due to an increase in payroll related costs of $0.7 million attributed to higher headcount and an increase in performance-based compensation. We also experienced an increase in materials, operations and clinical costs of $0.6 million as we continue to explore ways to leverage our proprietary cooling platform for additional applications and indications including our recently announced CoolSmooth PRO, which we expect to launch in the second quarter of 2015. Facilities and other allocable costs also increased by $0.1 million resulting from increased headcount and operating costs related to the growth in our business. Additionally, stock-based compensation expense increased by $0.1 million attributed to grants to existing and new employees and due to an increase in stock price.
Sales and marketing. Sales and marketing expenses increased for the three months ended March 31, 2015, as compared to the same period of 2014, primarily due to the significant increase in headcount attributable to our sales force, which increased by approximately 40%, as we continue to expand into new and existing markets. This growth in headcount resulted in an increase in payroll related costs of $2.7 million, which includes an increase in performance-based compensation resulting from revenue growth. Stock-based compensation expense also increased by $0.6 million attributed to grants to existing and new employees, including certain performance-based award grants, and due to an increase in stock price. Travel and related expenses increased by $0.5 million 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 $0.6 million 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 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 due to a change in the program, which occurred during the first quarter of 2014, whereby the amount of available 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 months ended March 31, 2015, as compared to the same period of 2014, primarily due to an increase in payroll related costs of $0.8 million resulting from higher headcount in certain functions to support growth in our business. Stock-based compensation expense also increased by $1.2 million attributed to grants to existing and new employees and due to an increase in stock price, as well as the expense related to certain performance-based awards for which all release criteria were achieved. Professional service fees increased by $0.2 million associated with the growth of our business as well as our expansion into international markets. Additionally, we experienced a $1.2 million increase in legal expenses mainly due to an increase in IP enforcement, both domestically and overseas, certain product liability cases, and to a lesser extent certain other one-time project fees.
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Interest Income and Other (Expense) Income, Net (in thousands, except for percentages):
Three Months Ended | ||||||||||||||
March 31, | ||||||||||||||
2015 | 2014 | $ Change | % Change | |||||||||||
Interest income (expense), net | $ | 13 | $ | 19 | $ | (6 | ) | (32 | )% | |||||
% of total revenue | — | % | — | % | ||||||||||
Other income (expense), net | $ | (420 | ) | $ | (66 | ) | $ | (354 | ) | 536 | % | |||
% of total revenue | (1 | )% | — | % | ||||||||||
Interest income (expense), net. For both the three months ended March 31, 2015 and 2014, 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 income (expense), net. The change in other income (expense), net for the three months ended March 31, 2015, as compared to the three months ended March 31, 2014, was the result of changes in foreign exchange rates, primarily the British Pound and Euro.
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 cash and cash equivalents, short-term and long-term investments, and working capital as of March 31, 2015, and December 31, 2014 (in thousands):
March 31, | December 31, | ||||||
2015 | 2014 | ||||||
Cash and cash equivalents | $ | 25,057 | $ | 28,649 | |||
Short-term investments | 15,822 | 16,286 | |||||
Long-term investments | 3,411 | 4,805 | |||||
Total | $ | 44,290 | $ | 49,740 | |||
Working capital | $ | 56,825 | $ | 56,540 | |||
Summary Statement of Cash Flows
The following table summarizes our cash flows for the three months ended March 31, 2015 and 2014 (in thousands):
Three Months Ended | |||||||
March 31, | |||||||
2015 | 2014 | ||||||
Net cash provided by (used in) operating activities | $ | (1,830 | ) | $ | (12,343 | ) | |
Net cash provided by (used in) investing activities | 1,556 | 2,982 | |||||
Net cash provided by (used in) financing activities | (3,012 | ) | (1,906 | ) | |||
Effect of exchange rate changes on cash and cash equivalents | (306 | ) | 15 | ||||
Net increase (decrease) in cash and cash equivalents | $ | (3,592 | ) | $ | (11,252 | ) | |
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Cash Flows for the Three Months Ended March 31, 2015 and 2014
Operating activities. Net cash used in operating activities was $1.8 million during the three months ended March 31, 2015, and consisted of a net loss of $2.1 million and a net change in operating assets and liabilities of $4.6 million, offset by non-cash items of $4.9 million. Non-cash items for the three months ended March 31, 2015, consisted primarily of a stock-based compensation expense of $4.2 million and depreciation and amortization expense of $0.5 million. The significant items in the change in operating assets and liabilities include cash used resulting from increases in inventory of $2.1 million and an increase in accounts receivable of $3.4 million. These uses of cash were offset in part by an increase of $0.5 million in deferred revenue and an increase in accounts payable, accrued and other non-current liabilities of $0.7 million. We experienced an increase in inventory as we continued to build inventory to support expected customer demand as well as the build up in inventory for CoolSmooth PRO, which we expect to launch in the second quarter of 2015. 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, while the decrease in accrued payroll and employee related expenses as a result of timing of payments as well as a reduction in performance-based compensation. The increase in deferred revenue is primarily a result of an increase in extended warranty sales and the deferral of revenue related to discounts on extended warranties offered in conjunction with customer incentive plans, as well as an increase in revenue deferral for customer attendance of the CoolSculpting University that has not yet occurred.
Net cash used in operating activities was $12.3 million during the three months ended March 31, 2014, and consisted of a net loss of $7.3 million and a net change in operating assets and liabilities of $7.8 million, offset by non-cash items of $2.8 million. Non-cash items for the three months ended March 31, 2014, consisted primarily of a stock-based compensation expense of $2.1 million and depreciation and amortization expense of $0.5 million. The significant items in the change in operating assets and liabilities include cash used resulting from increases in inventory of $6.3 million and an increase in accounts receivable of $2.1 million. 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 in advance of the introduction of the CoolSmooth applicator, which we began shipping to customers in the second quarter of 2014. The increase in accounts receivable is a function of the increase in sales as well as timing of payment receipts from customers.
Investing activities. Net cash provided by investing activities was $1.6 million for the three months ended March 31, 2015, as compared to net cash provided by investing activities of $3.0 million during the same period in 2014. During the three months ended March 31, 2015, we received proceeds from the sale of, net of purchases, of $1.8 million of short-term and long-term investments. During the three months ended March 31, 2014, we received proceeds from the sale and maturity, net of purchases, of $3.5 million of short-term and long-term investments. Purchases of property and equipment amounted to $0.3 million for the three months ended March 31, 2015, primarily as result of purchases of leasehold improvements, furniture and fixtures and certain software to support the growth and expansion of our business and related facilities. Purchases of property and equipment amounted to $0.6 million for the three months ended 2014.
Financing activities. Net cash used in financing activities during the three months ended March 31, 2015, of $3.0 million consisted of tax payments related to shares withheld for vested restricted stock units of $4.3 million, offset in part by proceeds received from the issuance of common stock upon the exercise of stock options of $1.3 million. Net cash used in financing activities during the three months ended March 31, 2014, of $1.9 million consisted of tax payments related to shares withheld for vested restricted stock units of $2.5 million, offset in part by proceeds received from the issuance of common stock upon the exercise of stock options of $0.6 million.
Our cash, cash equivalents and investments declined by $5.5 million from $49.7 million as of December 31, 2014, to $44.3 million as of March 31, 2015. 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
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estimates. Our fixed contractual obligations and commitments were $14.0 million and $11.7 million at March 31, 2015, and December 31, 2014, 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.
Operating Lease Obligations
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 September 2020. 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 $0.5 million for the three months ended March 31, 2015, compared to $0.4 million for the three months ended March 31, 2014.
Future minimum lease payments under the non-cancellable operating leases as of March 31, 2015, are as follows (in thousands):
Year Ending December 31, | Amount | ||
2015 (remaining 9 months) | $ | 1,504 | |
2016 | 1,761 | ||
2017 | 1,798 | ||
2018 | 1,845 | ||
2019 | 694 | ||
Thereafter | 228 | ||
Total future minimum lease payments | $ | 7,830 | |
This compares to future minimum lease payments under the non-cancellable operating leases as of December 31, 2014, of $7.3 million.
Capital Lease Obligations
We have entered into certain capital lease obligations to purchase equipment for operations which include a bargain purchase option. The underlying assets and related depreciation are included in the appropriate property and equipment category and related accumulated depreciation account.
Property and equipment includes amounts under leases that have been capitalized as follows (in thousands):
Useful life (Years) | March 31, 2015 | December 31, 2014 | |||||||
Computer equipment | 3 | 382 | 382 | ||||||
Total capital leased equipment | 382 | 382 | |||||||
Less: Accumulated depreciation and amortization | (53 | ) | (21 | ) | |||||
Capital leased equipment, net | $ | 329 | $ | 361 | |||||
Total amortization of assets acquired under capital leases was $32,000 for the three months ended March 31, 2015, which is included in total depreciation and amortization expense. There were no such arrangements during the three months ended March 31, 2014.
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Future minimum payments required under capital leases as of March 31, 2015, are as follows (in thousands):
Year Ending December 31, | Amount | ||
2015 (remaining 9 months) | $ | 100 | |
2016 | 132 | ||
2017 | 141 | ||
Total future payments | $ | 373 | |
Less: Amount representing interest | $ | 20 | |
Present value of future minimum payments | 353 | ||
Less: Current portion | 121 | ||
Long term portion | $ | 232 | |
Purchase Commitments
We had non-cancellable purchase obligations to contract manufacturers and suppliers for $5.8 million and $4.0 million at March 31, 2015, and December 31, 2014, respectively.
Unrecognized Tax Benefits
Our gross liability for unrecognized tax benefits totaled $26,000, including estimated interest and penalties, as of March 31, 2015, 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.
Product Warranty
The estimated product warranty accrual was as follows (in thousands):
Three Months Ended | |||||||
March 31, | |||||||
2015 | 2014 | ||||||
Balance at the beginning of the period | $ | 569 | $ | 676 | |||
Change in accruals for warranties issued | (29 | ) | 39 | ||||
Settlements of warranty claims | (100 | ) | (55 | ) | |||
Balance at the end of the period | $ | 440 | $ | 660 | |||
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, as our exclusive distributor of CoolSculpting in Brazil and Mexico, as amended on August 29, 2011, February 27, 2012, and September 4, 2012. The distribution agreement was further amended on August 15, 2014, whereby ADVANCE is no longer a distributor in Mexico effective November 2014. 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 $1.3 million for the three months ended March 31, 2015, compared to $1.0 million for the three months ended March 31, 2014. The accounts receivable balance under this distribution agreement was $1.4 million and $0.2 million as of March 31, 2015, and December 31, 2014, respectively.
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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. This guidance allows for two methods of adoption: (a) full retrospective adoption, meaning the guidance is applied to all periods presented, or (b) modified retrospective adoption, meaning the cumulative effect of applying this guidance is recognized as an adjustment to the fiscal 2017 opening Accumulated deficit balance. We will adopt this guidance effective January 1, 2017, and we are currently evaluating the two adoption methods as well as the impact this new guidance will have on the consolidated financial statements and related disclosures.
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 March 31, 2015, and December 31, 2014, 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, 2014. Our market risks have not materially changed during the three months ended March 31, 2015.
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 March 31, 2015.
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 March 31, 2015, that 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 set forth below have not changed substantively from those included in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission on February 26, 2014, 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 year ended December 31, 2014, 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 incurred significant net losses since our inception through the end of 2013, including net losses of approximately $19.3 million in 2013 and $30.1 million in 2012, and as of March 31, 2015, we had an accumulated deficit of approximately $(133.7) million. Although we achieved net income in the year ended December 31, 2014, there is no guarantee that we will be able to continue to achieve net income. Our net income for the year ended December 31, 2014, was only $1.5 million, and for the three months ended March 31, 2015, we had a net loss of $2.1 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; |
• | costs associated with obtaining components for manufacturing, including increases due to changes in foreign exchange rates or increased shipping costs; |
• | 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, 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, whether due to their inability to meet our demands or other forces, such as port strikes, labor shortages or other factors that could impact shipping costs or the ability of manufacturers to ship components to us; |
• | 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 capital expenditure, our ability to grow our business will be harmed.
Customers must make significant capital expenditures to purchase our CoolSculpting systems, and our ability to increase the number of customers willing to make these significant capital expenditures and make CoolSculpting a significant part of their practices depends on the success of our sales and marketing programs. We must be able to demonstrate that the cost of our CoolSculpting system and the revenue that a customer can derive from performing CoolSculpting cycle are compelling when compared to the cost and revenue associated with alternative aesthetic treatments our customer may offer. In addition, alternative treatments may be invasive, minimally-invasive, or non-invasive and we must, in some cases, overcome a bias against non-invasive aesthetic procedures for fat reduction, principally from plastic surgeons. Further, we believe our marketing programs, including our co-operative marketing strategy with individual practices, will be critical in driving additional CoolSculpting procedures, but these programs require customers commitment and involvement to succeed. If we are unable to increase customer adoption and use of CoolSculpting, our financial performance will be adversely affected.
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If there is not sufficient patient demand for CoolSculpting procedures, our financial results and future prospects will be harmed.
The CoolSculpting procedure is an elective procedure, the cost of which must be borne by the patient, and is not reimbursable through government or private health insurance. The decision to undergo a CoolSculpting procedure is thus driven by patient demand, which may be influenced by a number of factors, such as:
• | the success of our sales and marketing programs, including our co-operative marketing strategy with individual practices, as to which we have limited experience; |
• | the cost, safety, and effectiveness of CoolSculpting versus other aesthetic treatments; |
• | the price of CoolSculpting relative to other aesthetic products and alternative treatments; |
• | the willingness of patients to wait up to four months post-treatment to notice the aesthetic results of a CoolSculpting procedure; |
• | the ability to obtain regulatory clearance to market CoolSculpting for additional treatment indications in the United States; |
• | the adverse event profile of CoolSculpting, including warnings, side effects, and contraindications, which are subject to change; |
• | the extent to which our customers recommend CoolSculpting to their patients; |
• | our success in attracting consumers who have not previously purchased an aesthetic procedure; |
• | the extent to which our CoolSculpting procedure satisfies patient expectations; |
• | our ability to properly train our customers in the use of CoolSculpting such that their patients do not experience excessive discomfort during treatment or adverse side effects; |
• | consumer sentiment about the benefits and risks of aesthetic procedures generally and CoolSculpting in particular; |
• | the success of any direct-to-consumer marketing efforts we initiate; and |
• | general consumer confidence, which may be impacted by economic and political conditions. |
Our success depends in part upon patient satisfaction with the effectiveness of CoolSculpting.
To generate repeat and referral business, patients must be satisfied with the effectiveness of CoolSculpting. Our clinical studies demonstrate that a single CoolSculpting procedure noticeably and measurably reduces the fat layer within a treated fat bulge without requiring diet or exercise. However, we designed CoolSculpting to address the aesthetic concerns of individuals who have stubborn fat bulges. Although there are no technical or regulatory restrictions on the use of CoolSculpting based on patient weight, we believe patients who are significantly obese and who do not have specific fat bulges but require significant fat reduction to achieve aesthetic results are better candidates for invasive and minimally-invasive procedures not offered by us. In addition, results obtained from a CoolSculpting procedure occur gradually over a period of two to four months after treatment and patient perception of their results may vary. Although we train our customers to select the appropriate patient candidates for a CoolSculpting procedure, explain to their patients the time period over which the results from a CoolSculpting procedure will occur, and take before and after photographs of a patient, our customers may not select appropriate patient candidates or CoolSculpting may produce results that may not meet patients' expectations. If patients are not satisfied with the long term aesthetic benefits or safety of CoolSculpting, or feel that it is too expensive for the results obtained, our reputation and future sales will suffer. As market experience of CoolSculpting increases and more procedures are performed, we may learn more about the risk profile of the CoolSculpting system and receive reports of new side effects. For example, we have received reports of rare side effects, including late-onset pain, subcutaneous induration, which is hardening of normally soft tissue under the skin, hernia, and paradoxical hyperplasia, which is unusually enlarged tissue volume in the treatment area.
To market and sell CoolSculpting in markets outside of North America, we mainly depend on third-party distributors.
We currently depend on third-party distributors to sell, market, and service our CoolSculpting systems in certain markets outside of North America and to train our customers in these markets. We may need to engage additional third-party distributors to expand in new markets outside of North America. We are subject to a number of risks associated with our dependence on these third parties, including:
• | we lack day-to-day control over the activities of third-party distributors; |
• | third-party distributors may not commit the necessary resources to market, sell, and service our systems to the level of our expectations; |
• | third-party distributors may not be as selective as we would be in choosing customers to purchase CoolSculpting systems or as effective in training customers in marketing and patient selection; |
• | third-party distributors may terminate their arrangements with us on limited, or no, notice or may change the terms of these arrangements in a manner unfavorable to us; and |
• | disagreements with our distributors could require or result in costly and time-consuming litigation or arbitration which we could be required to conduct in jurisdictions with which we are not familiar. |
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If we fail to establish and maintain satisfactory relationships with our third-party distributors, our revenue and market share may not grow as anticipated, and we could be subject to unexpected costs, each of which would harm our results of operations and financial condition.
*To successfully market and sell CoolSculpting in markets outside of North America, we must address many issues with which we have limited experience.
We believe that a significant percentage of our business will continue to come from sales in markets outside of North America through increased penetration in countries where we currently market and sell CoolSculpting directly and through our third-party distributor network, combined with expansion into new international markets. However, international sales are subject to a number of risks, including:
• | difficulties in staffing and managing our international operations; |
• | increased competition as a result of more products and procedures receiving regulatory approval or otherwise free to market in international markets; |
• | longer accounts receivable payment cycles and difficulties in collecting accounts receivable; |
• | reduced or varied protection for intellectual property rights in some countries; |
• | export restrictions, trade regulations, and foreign tax laws; |
• | fluctuations in currency exchange rates, which could increase the selling costs of, and therefore lower demand for, our products overseas; |
• | foreign certification and regulatory clearance or approval requirements; |
• | difficulties in developing effective marketing campaigns in unfamiliar foreign countries; |
• | customs clearance and shipping delays; |
• | political, social, and economic instability abroad, terrorist attacks, and security concerns in general; |
• | preference for locally produced products; |
• | potentially adverse tax consequences, including the complexities of foreign value-added tax systems, tax inefficiencies related to our corporate structure, and restrictions on the repatriation of earnings; |
• | the burdens of complying with a wide variety of foreign laws and different legal standards; and |
• | increased financial accounting and reporting burdens and complexities. |
If one or more of these risks were realized, it could require us to dedicate significant financial and management resources which could negatively affect our financial results.
*Our inability to effectively compete with our competitors may prevent us from achieving significant market penetration or improving our operating results.
The medical technology and aesthetic product markets are highly competitive and dynamic, and are characterized by rapid and substantial technological development and product innovations. Demand for CoolSculpting could be limited by the products and technologies offered by our competitors, including newly announced products and technologies, whether or not effective. We designed CoolSculpting to address the aesthetic concerns of individuals who have stubborn fat bulges. Patients who are obese and who do not have specific fat bulges but require significant fat reduction to achieve aesthetic results are candidates for invasive and minimally-invasive procedures, such as liposuction and laser-assisted liposuction. Patients who do not require significant fat reduction to achieve meaningful aesthetic results explore non-invasive fat reduction and body contouring procedures to avoid the pain, expense, downtime, and surgical risks associated with invasive and minimally-invasive procedures. In the United States, the FDA has cleared the marketing of a laser energy-based product for body contouring. The laser energy-based product, marketed by Erchonia Corporation, is used to perform a non-invasive procedure reported to be safe and easy to perform, without causing patient pain. In September 2011, the FDA cleared the marketing of Liposonix, an ultrasound energy-based product for body contouring offered by Solta Medical, Inc., now a wholly owned subsidiary of Valeant Pharmaceuticals International, Inc. This ultrasound energy-based product utilizes heat to non-invasively eliminate fat cells in a single procedure. In April 2014, the UltraShape system from Syneron Medical Ltd. received FDA clearance for non-invasive fat cell destruction using non-thermal, focused ultrasound, and Cynosure recently announced that its in-development noninvasive fat reduction platform is anticipated to receive FDA clearance in the second half of 2015. We believe that the marketing of these products has extended the sales cycle for CoolSculpting beginning in 2013 and may continue to have an impact on our sales in the future. The timing of, and publicity around, the introduction of such products or other technologies is outside our control, and may have an adverse impact on our sales and the rate at which practices purchase CoolSculpting systems and/or cycles in the form of consumable procedure packs.
Due to less stringent regulatory requirements, there are many more aesthetic products and procedures available for use in international markets than are approved for use in the United States. For example, multiple ultrasound based products have been cleared for marketing outside the United States. There are also fewer limitations on the claims our competitors in international
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markets can make about the effectiveness of their products and the manner in which they can market them. As a result, we face more competition in these markets than in the United States.
We also compete generally against medical technology and aesthetic companies, including those offering products and technologies unrelated to fat reduction, for customer resources and mind share. Some of our competitors have a broad range of product offerings, large direct sales forces, and long-term customer relationships with our target customers, which could inhibit our market penetration efforts. Our potential customers also may need to recoup the cost of expensive products that they have already purchased from our competitors, and thus they may decide to delay purchasing, or not to purchase, our CoolSculpting system.
Many of our competitors are large, experienced companies that have substantially greater resources and brand recognition than we do. Competing in the medical technology and aesthetic markets could result in price-cutting, reduced profit margins, and limited market share, any of which would harm our business, financial condition, and results of operations.
Third parties may attempt to produce counterfeit versions of our products and may harm our ability to collect revenue from sales of our CoolSculpting systems or consumables, negatively affect our reputation, or harm patients and subject us to product liability.
Third parties may seek to develop, manufacture, distribute and sell systems that we believe infringe our proprietary rights, which would compete against our CoolSculpting systems and impair our ability to sell our CoolSculpting systems in jurisdictions in which our proprietary rights are not upheld. In addition, counterfeit products may be promoted in a way that misleads consumers into believing they are affiliated with us. If counterfeit products are used with or in place of our products, we could be subject to product liability lawsuits resulting from the use of damaged or defective goods and suffer damage to our reputation.
For example, in January 2013, the Mercantile Court in Spain rendered its ruling on the merits of Massachusetts General Hospital's, or MGH, and our request for a permanent injunction against Clinipro's LipoCryo device based on Clinipro's infringement of two European patents owned by MGH and globally licensed exclusively to us. While the Mercantile Court had earlier granted in 2012 MGH's and our request for a preliminary injunction, the Court, in the January 2013 ruling, denied the request for a permanent injunction, and the Mercantile Court’s ruling has been upheld on appeal. The Mercantile Court's ruling affects only Clinipro's activities in Spain. Further, although we and MGH did prevail against Clinipro in a patent infringement case in France, holding that an MGH patent exclusively licensed to us is valid and enforceable and enjoining Clinipro and its distributors from selling LipoCryo in France, Clinipro has appealed that ruling, and there is no assurance that Clinipro will not prevail.
In addition, in May 2014, the United States District Court Eastern District of Wisconsin granted a mandatory injunction in our favor against a clinic using and promoting “Freeze Sculpting” treatments with a counterfeit device. Other counterfeit users are present in the United States and although our enforcement strategy is aggressive, there is no assurance that we will be successful in our actions to enjoin them from using or promoting treatments with counterfeit devices.
We have limited experience in manufacturing our CoolSculpting system, and if we are unable to manufacture our CoolSculpting system in high-quality commercial quantities successfully and consistently to meet demand, our growth will be limited.
Our CoolSculpting system consists of a CoolSculpting control unit and our CoolSculpting applicators. Our CoolSculpting procedure packs are composed of 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 customer to perform a fixed number of CoolSculpting cycles. Prior to the second quarter of 2013, we manufactured our CoolSculpting system and related procedure packs through a combination of direct manufacturing and third-party contract manufacturers. During the second quarter of 2013, we fully in-sourced the manufacturing of our CoolSculpting system. CoolGels, CoolLiners and disposable securement accessories continue to be manufactured through third-party contract manufacturers. To manufacture our CoolSculpting system in the quantities that we believe will be required to meet anticipated market demand, we will need to increase manufacturing capacity, which will involve significant challenges and may require additional regulatory approvals. In addition, the development of these manufacturing capabilities will require us to invest substantial additional funds and hire and retain the technical personnel who have the necessary manufacturing experience. We may not successfully complete any required increase to existing manufacturing processes in a timely manner, or at all.
If there is a disruption to our manufacturing operations, we will have no other means of producing our CoolSculpting systems until we restore the affected facilities or develop alternative manufacturing facilities or methods, including potentially re-outsourcing our manufacturing operations. Additionally, any damage to or destruction of our facilities or equipment may significantly impair our ability to manufacture CoolSculpting systems on a timely basis.
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If we are unable to produce CoolSculpting systems in sufficient quantities to meet anticipated customer demand, our revenue, business, and financial prospects would be harmed. The lack of experience we have in producing commercial quantities of our CoolSculpting system may also result in quality issues, and result in product recalls. Manufacturing delays related to quality control could negatively impact our ability to bring our CoolSculpting system and procedure packs to market, harm our reputation, and decrease our revenue. Any recall could be expensive and generate negative publicity, which could impair our ability to market our CoolSculpting system and further affect our results of operations.
We outsource the manufacturing of key components to third-party contract manufacturers.
Key components of our consumable procedure packs, including CoolGels, CoolLiners and securement accessories used with our CoolSmooth applicator, are manufactured by third-party contract manufacturers. If the operations of third-party contract manufacturers are interrupted or if they are unable to meet our delivery requirements due to capacity limitations, regulatory problems or other constraints, we may be limited in our ability to fulfill new customer orders or to repair equipment at current customer sites. Any change to another contract manufacturer would likely entail significant delay, require us to devote substantial time and resources, and could involve a period in which our products could not be produced in a timely or consistently high-quality manner, any of which could harm our reputation and results of operations.
*Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to supply shortages and price fluctuations, which could harm our business.
Our CoolSculpting system contains a few critical components, the integrated circuit contained in the CoolSculpting control unit, the CoolSculpting applicators and the CoolCard, which is supplied by a company in Japan, and the connector that attaches our applicators to the control unit, which is supplied by a separate company in the United States. The single source suppliers of these critical components may not be replaced without significant effort and delay in production. We do not have supply agreements with the suppliers of these critical components beyond purchase orders. However, we attempt to maintain a safety stock inventory for these critical components equal to one year of forecasted part requirements of the integrated circuit and one month of connectors in finished assemblies, as well as at least three months' supply of connectors to support open purchase orders. Such forecasted amounts may be inaccurate and we may experience shortages as a result of serious supply problems or longer lead times with these suppliers as well as an increased demand for our products. In addition, several other non-critical components and materials that compose our CoolSculpting system are currently supplied by a single supplier or a limited number of suppliers. In many of these cases, we have not yet qualified alternate suppliers and rely upon purchase orders, rather than long-term supply agreements. A supply interruption or an increase in demand beyond our current suppliers' capabilities could harm our ability to manufacture our CoolSculpting system to meet demand until new sources of supply are identified and qualified, which could impact our sales and/or gross margins. Our reliance on these suppliers subjects us to a number of risks that could harm our business, including:
• | interruption of supply resulting from modifications to or discontinuation of a supplier's operations; |
• | interruption of supply, or increased shipping costs, resulting from port strikes, work stoppages or other unrest; |
• | delays in product shipments resulting from uncorrected defects, reliability issues, or a supplier's variation in a component; |
• | a lack of long-term supply arrangements for key components with our suppliers; |
• | inability to obtain adequate supply in a timely manner, or to obtain adequate supply on commercially reasonable terms; |
• | difficulty and cost associated with locating and qualifying alternative suppliers for our components in a timely manner; |
• | production delays related to the evaluation and testing of products from alternative suppliers, and corresponding regulatory qualifications; |
• | delay in delivery due to our suppliers prioritizing other customer orders over ours; |
• | damage to our brand reputation caused by defective components produced by our suppliers; |
• | increased cost of our warranty program due to product repair or replacement based upon defects in components produced by our suppliers; and |
• | fluctuation in delivery by our suppliers due to changes in demand from us or their other customers. |
Any interruption in the supply of components or materials, or our inability to obtain substitute components or materials from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers, which would have an adverse effect on our business.
Regulations related to conflict minerals could adversely impact our business.
Regulations promulgated by the United States Security and Exchange Commission, or SEC, prescribe annual disclosure and reporting requirements for public companies that use tin, tantalum, tungsten and gold, known as conflict minerals, mined from the Democratic Republic of Congo and adjoining countries, referred to as Covered Countries, in their products. These disclosure requirements require us to use diligent efforts to determine which conflict minerals we use and the source of those conflict minerals.
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We have determined that we use at least one of these conflict minerals in the manufacture of our CoolSculpting system, and so we are subject to these reporting requirements. We filed our first conflict minerals report on May 30, 2014, reporting that we could not yet determine whether the conflict minerals we source were, directly or indirectly, used to finance or benefit armed groups in the Covered Countries. There are and will continue to be costs associated with complying with these disclosure requirements. Further, these disclosure requirements could adversely affect the sourcing, supply and pricing of materials used in our CoolSculpting system and related consumables. In addition, our inability to conclude that we use conflict free minerals may damage our reputation. If we determine it is necessary to redesign our CoolSculpting system and/or related consumables to enable us to confirm that we do not use conflict minerals, we would incur costs associated with doing so.
*We forecast sales to determine requirements for components and materials used in our CoolSculpting system, and if our forecasts are incorrect, we may experience delays in shipments or increased inventory costs.
We keep limited materials, components, and finished products on hand. To manage our operations with our third-party contract manufacturers and suppliers, we forecast anticipated product orders and material requirements to predict our inventory needs and enter into purchase orders on the basis of these requirements. Several components of our CoolSculpting system require an order lead time of six months or more. Our limited historical commercial experience and growth may not provide us with enough data to consistently and accurately predict future demand. If our business expands, and our demand for components and materials increases beyond our estimates, our contract manufacturers and suppliers may be unable to meet our demand. In addition, if we underestimate our component and material requirements, we may have inadequate inventory, which could interrupt, delay, or prevent delivery of our CoolSculpting system to our customers. In contrast, if we overestimate our component and material requirements, we may have excess inventory, which would increase our expenses. Further, outside forces, such as port strikes, could impact our ability to receive components necessary to meet demand. Any of these occurrences would negatively affect our financial performance and the level of satisfaction our customers have with our business.
There exists a potential for misuse of our CoolSculpting system, which could harm our reputation and our business.
Under state law in the United States, our customers can generally allow nurse practitioners, technicians, and other non-physicians to perform CoolSculpting procedures under their supervision. Similarly, in markets outside of the United States, our customers can allow non-physicians to perform CoolSculpting procedures under their supervision. Although we and our distributors provide training on the use of CoolSculpting systems, we do not supervise the procedures performed with our CoolSculpting system, nor can we be assured that direct physician supervision of procedures occurs according to our recommendations. The potential misuse of our CoolSculpting system by physicians and non-physicians may result in adverse treatment outcomes, which could harm our reputation and expose us to costly product liability litigation.
Product liability suits could be brought against us due to defective design, labeling, material, workmanship, or misuse of our CoolSculpting system, or unanticipated adverse events, and could result in expensive and time-consuming litigation, payment of substantial damages, an increase in our insurance rates and substantial harm to our reputation.
If our CoolSculpting system is defectively designed, manufactured, or labeled, contains defective components, or is misused, we may become subject to substantial and costly litigation by our customers or their patients. Misusing our CoolSculpting system or failing to adhere to operating guidelines can cause skin damage and underlying tissue damage and, if our operating guidelines are found to be inadequate, we may be subject to liability. Furthermore, if a patient is injured in an unexpected manner after undergoing a CoolSculpting procedure, even if the procedure was performed in accordance with our operating guidelines, we may be subject to product liability claims. We may also be subject to additional liability from claims related to known rare side effects such as late-onset pain, subcutaneous induration, hernia, and paradoxical hyperplasia. Product liability claims could divert management attention from our core business, be expensive to defend, and result in sizable damage awards against us. We currently have product liability insurance, but it may not be adequate to cover us against potential liability and it may be subject to material deductibles. In addition, we may not be able to maintain insurance in amounts or scope sufficient to provide us with adequate coverage against all potential liabilities. Any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage, could harm our reputation in the industry, and could reduce product sales. Product liability claims in excess of our insurance coverage, as well as deductibles under insurance policies, would be paid out of cash reserves, harming our financial condition and reducing our operating results.
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Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
We rely on networks, information management software and other technology, or information systems, including the Internet and third-party hosted services, to support a variety of business processes and activities, including procurement and supply chain, manufacturing, distribution, invoicing, order processing and collection of payments. We use information systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. In addition, we depend on information systems for digital marketing activities and electronic communications among our locations around the world and between company personnel as well as customers and suppliers. Because information systems are critical to many of our operating activities, our business processes may be impacted by system shutdowns or service disruptions. These disruptions may be caused by failures during routine operations such as system upgrades or user errors, as well as network or hardware failures, malicious or disruptive software, computer hackers, geopolitical events, natural disasters, failures or impairments of telecommunications networks, or other catastrophic events. These events could result in unauthorized disclosure of material confidential information. If our information systems suffer severe damage, disruption or shutdown and our business continuity plans do not effectively resolve the issues in a timely manner, we could experience delays in reporting our financial results and we may lose revenue and profits as a result of our inability to timely manufacture, distribute, invoice and collect payments. Misuse, leakage or falsification of information could result in a violation of data privacy laws and regulations and damage our reputation and credibility, and could expose us to liability. We may also be required to spend significant financial and other resources to remedy the damage caused by a security breach or to repair or replace networks and information systems.
Like most major corporations, our information systems are a target of attacks. Although the disruptions to our information systems that we have experienced to date have not had a material effect on our business, financial condition or results of operations, there can be no assurance that such disruptions will not have a material adverse effect on us in the future.
We have increased the size of our company significantly and over a short period, and difficulties managing our growth could adversely affect our business, operating results, and financial condition.
We have increased our headcount from 208 at January 1, 2013, to 442 at March 31, 2015, and plan to continue to hire a substantial number of additional employees as we increase our commercialization and sales activities for CoolSculpting. This growth has placed and may continue to place a strain on our management and our administrative, operational, and financial infrastructure. Our ability to manage our operations and growth requires the continued improvement of our operational, financial and management controls, reporting systems, and procedures, particularly to meet the reporting requirements of the Securities Exchange Act of 1934. If we are unable to manage our growth effectively or if we are unable to attract additional highly qualified personnel, our business, operating results, and financial condition may be harmed.
We depend on skilled and experienced personnel to operate our business effectively. If we are unable to recruit, hire, and retain these employees, our ability to manage and expand our business will be harmed, which would impair our future revenue and profitability.
Our success largely depends on the skills, experience, and efforts of our executive officers and other key employees. We do not have employment contracts with any of our executive officers or other key employees that require these officers to stay with us for any period of time. Any of our executive officers and other key employees may terminate their employment with us at any time. The loss of any of our executive officers and other key employees could weaken our management expertise and harm our business operations.
In addition, our ability to retain our skilled employees and our success in attracting and hiring new skilled employees will be a critical factor in determining whether we will be successful in the future. We may not be able to meet our future hiring needs or retain our existing employees. We will face significant challenges and risks in hiring, training, managing, and retaining sales and marketing, product development, financial reporting, and regulatory compliance employees, many of whom are geographically dispersed. Failure to attract and retain personnel, particularly our sales and marketing, product development, financial reporting, and regulatory compliance personnel, would materially harm our ability to compete effectively and grow our business.
We may need to raise additional funds in the future, and such funds may not be available on a timely basis, or at all.
Until such time, if ever, as we can achieve significant and sustained positive cash flows from sales of our CoolSculpting system and from sales of cycles in the form of consumable procedure packs, we will be required to finance our operations with our cash resources. We may need to raise additional funds in the future to support our operations. We cannot be certain that additional capital will be available as needed on acceptable terms, or at all. If we require additional capital at a time when investment in our
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company, in medical technology or aesthetic product companies or the marketplace in general is limited, we may not be able to raise such funds at the time that we desire, or at all. If we do raise additional funds through the issuance of equity or convertible securities, the percentage ownership of holders of our common stock could be significantly diluted and these newly issued securities may have rights, preferences, or privileges senior to those of holders of our common stock. If we obtain debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, and the terms of the debt securities issued could impose significant restrictions on our operations. If we raise additional funds through collaborations and licensing arrangements, we could be required to relinquish significant rights to our technologies and products, or grant licenses on terms that are not favorable to us.
If we fail to manage our exposure to global financial and securities market risk successfully, our operating results and financial statements could be materially impacted.
The primary objective of most of our investment activities is to preserve principal. To achieve this objective, a majority of our marketable investments are investment grade, liquid, fixed-income securities and money market instruments denominated in U.S. dollars. If the carrying value of our investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, we will be required to write down the value of our investments, which could materially harm our results of operations and financial condition. Moreover, the performance of certain securities in our investment portfolio correlates with the credit condition of the U.S. financial sector. In our current unstable credit environment, we might incur significant realized, unrealized or impairment losses associated with these investments.
Our ability to use net operating losses and tax credit carryforwards to offset future tax liabilities may be limited.
We have substantial federal net operating loss carryforwards, or NOLs, and state and federal tax credit carryforwards. A lack of future taxable income would adversely affect our ability to utilize these NOLs and tax credit carryforwards. In addition, under Section 382 of the U.S. Internal Revenue Code, or the Code, a corporation that experiences a more-than 50% ownership change over a three-year testing period is subject to limitations on its ability to utilize its pre-change NOLs and tax credit carryforwards to offset future taxable income. Future changes in our stock ownership, many of the causes of which are outside of our control, could result in an ownership change under Section 382 of the Code. Our NOLs and tax credit carryforwards may also be impaired under state law. As a result of these limitations, we may not be able to utilize a material portion of the NOLs and tax credit carryforwards.
Risks Related to Regulation
The regulatory clearance and approval process is expensive, time-consuming, and uncertain, and the failure to obtain and maintain required regulatory clearances and approvals could prevent us from commercializing our CoolSculpting system and any future products we develop.
We are investing in the research and development of new products and procedures based on our proprietary controlled cooling technology platform. Our products are subject to 510(k) clearance by the FDA prior to their marketing for commercial use in the United States, and to any approvals required by foreign governmental entities prior to their marketing outside the United States. In addition, if we make any changes or modifications to our CoolSculpting system that could significantly affect its safety or effectiveness, or would constitute a change in its intended use, we may be required to submit a new application for 510(k) clearance, premarketing approval or foreign regulatory approvals. For example, we will be required to submit new 510(k) applications to expand our ability to market CoolSculpting for use on other areas of the body beyond the flanks, abdomen and thighs.
The 510(k) clearance process, as well as the process for obtaining foreign approvals, can be expensive, time-consuming, and uncertain. We anticipate that the direct clinical costs to support a 510(k) application for an additional indication for CoolSculpting will range from $0.25 million to $0.5 million. In addition to the time required to conduct clinical trials, it generally takes from four to twelve months from submission of an application to obtain 510(k) clearance; however, it may take longer, and 510(k) clearance may never be obtained. Delays in receipt of, or failure to obtain, clearances or approvals for any product enhancements or new products we develop would result in delayed, or no, realization of revenue from such product enhancements or new products and in substantial additional costs which could decrease our profitability.
In addition, we are required to continue to comply with applicable FDA and other regulatory requirements once we have obtained clearance or approval for a product. There can be no assurance that we will successfully maintain the clearances or approvals we have received or may receive in the future. Our clearances can be revoked if safety or effectiveness problems develop. Any failure to maintain compliance with FDA and applicable international regulatory requirements could harm our business, financial condition, and results of operations.
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We will be subject to significant liability if we are found to have improperly promoted CoolSculpting for off-label uses.
The FDA strictly regulates the promotional claims that may be made about FDA-cleared products. In particular, a product may not generally be promoted for uses that are not cleared or approved by the FDA as reflected in the product's labeling. Our current FDA labeling only permits marketing CoolSculpting in the United States for use on the flanks, for the abdomen and for the thigh area, and restricts us from promoting it for use on other parts of the body. The FDA does not regulate the practice of medicine however, and, we are aware that CoolSculpting is used by our customers on other parts of the body. If we are found to have inappropriately promoted such off-label uses, we may become subject to significant liability. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and entered agreements with several companies that require cumbersome reporting and oversight of sales and marketing practices. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed.
CoolSculpting may cause or contribute to adverse medical events that we are required to report to the FDA and if we fail to do so, we could be subject to sanctions that would materially harm our business.
Rare side effects have been reported after receiving CoolSculpting treatments, such as late-onset pain, subcutaneous induration, hernia, and paradoxical hyperplasia. There may be other new side effects that are reported to us as use of CoolSculpting increases. We may need to update our labeling, or take other regulatory action, in response to adverse event reports. In addition, FDA regulations require that we report certain information about adverse medical events if our medical devices may have caused or contributed to those adverse events, or if our device has malfunctioned. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events we become aware of within the prescribed timeframe. We may also fail to appreciate that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of our products. If we fail to comply with our reporting obligations, the FDA could take action including criminal prosecution, the imposition of civil monetary penalties, revocation of our device clearance or approval, seizure of our products, or delay in approval or clearance of future products.
We are currently, and in the future our contract manufacturers may be, subject to various governmental regulations related to the manufacturing of CoolSculpting, and we may incur significant expenses to comply with, experience delays in our product commercialization as a result of, and be subject to material sanctions if we or our contract manufacturers violate these regulations.
Our manufacturing processes and facilities are required to comply with the FDA's Quality System Regulation, or QSR, which covers the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage, and shipping of our devices. Although we believe we are compliant with the QSRs, the FDA enforces the QSR through periodic announced or unannounced inspections of manufacturing facilities. We have been, and anticipate in the future being, subject to such inspections, as well as to inspections by other federal and state regulatory agencies.
Failure to comply with applicable FDA requirements, or later discovery of previously unknown problems with our products or manufacturing processes, including our failure or the failure of one of our third-party contract manufacturers to take satisfactory corrective action in response to an adverse QSR inspection, can result in, among other things:
• | administrative or judicially-imposed sanctions; |
• | injunctions or the imposition of civil penalties; |
• | recall or seizure of our products; |
• | total or partial suspension of production or distribution; |
• | the FDA's refusal to grant pending future clearance or pre-market approval for our products; |
• | withdrawal or suspension of marketing clearances or approvals; |
• | clinical holds; |
• | warning letters; |
• | refusal to permit the import or export of our products; and |
• | criminal prosecution of us or our employees. |
Any of these actions, in combination or alone, could prevent us from marketing, distributing, or selling our products and would likely harm our business.
We could have to issue a correction or removal to reduce a risk to health posed by our device or to remedy a violation which may present a risk to health. In addition, a product defect or regulatory violation could lead to a government-mandated or voluntary recall by us. The FDA could request that we initiate a voluntary recall if a product was defective or presented a risk of injury or
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gross deception. The FDA could order a recall if there is a reasonable probability that our product would cause serious adverse health consequences or death. Regulatory agencies in other countries have similar authority to recall devices because of material deficiencies or defects in design or manufacture that could endanger health. Any recall would divert management attention and financial resources, could cause the price of our shares of common stock to decline and expose us to product liability or other claims, including contractual claims from parties to whom we sold products and harm our reputation with customers. A recall involving our CoolSculpting system would be particularly harmful to our business and financial results and, even if we remedied a particular problem, would have a lasting negative effect on our reputation and demand for our products.
Legislative or regulatory healthcare reforms may make it more difficult and costly for us to obtain regulatory clearance or approval of our products and to produce, market, and distribute our products after clearance or approval is obtained.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory clearance or approval, manufacture, and marketing of regulated products or the reimbursement thereof.
In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. For example, in the future, the FDA may require more burdensome premarket approval of our procedures rather than the 510(k) clearance process we have used to date and anticipate primarily using in the future. Our CoolSculpting Platform is also subject to state regulations which are, in many instances, in flux. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of our products. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require:
• | changes to manufacturing methods; |
• | recall, replacement, or discontinuance of certain products; |
• | additional record keeping; and |
• | additional warnings. |
Each of these would likely entail substantial time and cost and could materially harm our financial results. In addition, delays in receipt of or failure to receive regulatory clearances or approvals for our new products would harm our business, financial condition, and results of operations.
Federal and state governments in the United States are also undertaking efforts to control growing health care costs through legislation, regulation, and voluntary agreements with medical care providers, and third-party payers. In March 2010, Congress enacted comprehensive health care reform legislation known as the Patient Protection and Affordable Care Act of 2010, which, as amended is known as the ACA. Among other things, the ACA established the framework for new regulatory mandates and other measures designed to constrain medical costs. The ACA also established significant taxes on medical technology manufacturers that are expected to result in significant cost to the medical technology industry. The ACA imposes a 2.3% excise tax on certain sales of medical devices by manufacturers in the United States. There is no exemption for small companies, and we began paying the tax in 2013. We expect compliance with the ACA to continue to impose significant administrative and financial burdens on us, which may harm our results of operations.
We may be subject to various federal and state laws pertaining to health care marketing and promotional practices and other business practices, and any violations by us of such laws could result in fines or other penalties.
State and federal authorities have targeted medical technology companies for alleged violations of laws and regulations, based on off-label marketing schemes and other improper promotional practices. Companies targeted in such prosecutions have paid substantial fines in the hundreds of millions of dollars or more, have been forced to implement extensive corrective action plans, and have often become subject to consent decrees severely restricting the manner in which they conduct their business. If we become the target of such an investigation or prosecution based on our marketing and promotional practices, we could face similar sanctions which would materially harm our business.
To our knowledge, the CoolSculpting Platform is not reimbursed by any third party payors, including federal health care programs such as Medicare and Medicaid. This helps to limit our possible exposure under certain U.S. health regulatory laws that have been at issue in some other medical technology enforcement. This also means we are not required to track and report marketing expenditures under the federal physician payment “sunshine” provisions enacted under the ACA. However, in the event third party reimbursement were available (or was caused to be paid inappropriately), our business could potentially be subject to a range of broad-reaching health regulatory laws, including, for example, the federal health care anti-kickback statute, the ACA’s “sunshine” provisions, and the federal civil false claims act. In addition, even without third party reimbursement for the CoolSculpting Platform, state “consumer protection” laws generally prohibit unfair and deceptive marketing practices directed at consumers, and such laws
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are generally broad enough to prohibit a range of marketing activities with respect to health care products and services that may be acceptable in other industries.
We may be exposed to liabilities under the FCPA and other anti-corruption laws, and any determination that we violated these laws could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act of 1977, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. Also, similar worldwide anti-bribery laws, such as the U.K. Bribery Act and Chinese anti-corruption laws, generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Some of our distribution partners are located in parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. Although we have implemented policies and procedures to discourage these practices by our employees, our existing safeguards and any future improvements may prove to be less than effective, and our employees, consultants, sales agents or distributors may engage in conduct for which we might be held responsible. Violations of the FCPA or international anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold us liable for successor liability FCPA violations committed by companies in which we invest or that we acquire. We cannot assure you that our internal control policies and procedures will protect us from reckless or negligent acts committed by our employees, distributors, partners, consultants or agents.
We are subject to numerous environmental, health and safety laws and regulations, and must maintain licenses or permits, and non-compliance with these laws, regulations, licenses, or permits may expose us to significant costs or liabilities.
We are subject to numerous foreign, federal, state, and local environmental, health and safety laws and regulations relating to, among other matters, safe working conditions and environmental protection, including those governing the generation, storage, handling, use, transportation, and disposal of hazardous or potentially hazardous materials. Some of these laws and regulations require us to obtain licenses or permits to conduct our operations. Environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. If we violate or fail to comply with these laws, regulations, licenses, or permits, we could be fined or otherwise sanctioned by regulators. We cannot predict the impact on our business of new or amended laws or regulations or any changes in the way existing and future laws and regulations are interpreted or enforced, nor can we ensure we will be able to obtain or maintain any required licenses or permits.
Risks Related to Our Intellectual Property
If we are unable to obtain, maintain, and enforce intellectual property protection covering our CoolSculpting system and any future products we develop, others may be able to make, use, or sell products substantially the same as ours, which could adversely affect our ability to compete in the market.
Our commercial success is dependent in part on obtaining, maintaining, and enforcing our intellectual property rights, including our patents and the patents we exclusively license. If we are unable to obtain, maintain, and enforce intellectual property protection covering our CoolSculpting system and any other products we develop, others may be able to make, use, or sell products that are substantially the same as ours without incurring the sizable development and licensing costs that we have incurred, which would adversely affect our ability to compete in the market.
We seek to obtain and maintain patents and other intellectual property rights to restrict the ability of others to market products that compete with our products. As of March 31, 2015, our patent portfolio comprised 117 issued patents and 84 pending patent applications, each of which we own solely or license exclusively. However, patents may not be issued on any pending or future patent applications we file and, moreover, issued patents owned or licensed to us now or in the future may be found by a court to be invalid or otherwise unenforceable. Also, even if our patents are determined by a court to be valid and enforceable, they may not drafted or interpreted sufficiently broadly to prevent others from marketing products and services similar to ours or designing around our patents, and they may not provide us with freedom to operate unimpeded by the patent rights of others.
We have a number of foreign patents and applications, and expect to continue to pursue patent protection in the jurisdictions in which we do or intend to business. However, the laws of some foreign jurisdictions do not protect intellectual property rights to the same extent as laws in the United States, and many companies have encountered significant difficulties in obtaining, protecting, and defending such rights in foreign jurisdictions. If we encounter such difficulties or we are otherwise precluded from effectively protecting our intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed.
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The patent positions of medical technology companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in patents in these fields has emerged to date in the United States or in many foreign jurisdictions. Both the U.S. Supreme Court and the Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. Similarly, foreign courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. In addition, the U.S. Congress is currently considering legislation that would change provisions of the patent law. We cannot predict future changes U.S. and foreign courts may make in the interpretation of patent laws or changes to patent laws which might be enacted into law by U.S. and foreign legislative bodies. Those changes may materially affect our patents, our ability to obtain patents or the patents and applications of our collaborators and licensors.
Future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage, which could adversely affect our financial condition and results of operations. For example:
• | others may be able to make systems or devices that are similar to ours but that are not covered by the claims of our patents; |
• | others may assert that our licensors or we were not the first to make the inventions covered by our issued patents or pending patent applications; |
• | our pending patent applications may not result in issued patents; |
• | our issued patents may not provide us with any competitive advantages or may be held invalid or unenforceable as a result of legal challenges by third parties; |
• | the claims of our issued patents or patent applications when issued may not cover our CoolSculpting system or the future products we develop; |
• | there may be dominating patents relevant to our controlled cooling technology of which we are not aware; |
• | there may be prior public disclosures that could invalidate our inventions or parts of our inventions of which we are not aware; |
• | the laws of foreign countries may not protect our proprietary rights to the same extent as the laws of the United States; and |
• | we may not develop additional proprietary technologies that are patentable. |
From time to time, we analyze our competitors' products and services, and may in the future seek to enforce our patents or other rights to counter perceived infringement. However, infringement claims can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that the patent we seek to enforce is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that the patent in question does not cover the technology in question. An adverse result in any litigation could put one or more of our patents at risk of being invalidated or interpreted narrowly. Similarly, some of our competitors may be able to devote significantly more resources to intellectual property litigation, and may have significantly broader patent portfolios to assert against us if we assert our rights against them. Finally, because of the substantial discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be disclosed or otherwise compromised during this type of litigation.
For example, in January 2013, the Mercantile Court in Spain rendered its ruling on the merits of Massachusetts General Hospital's, or MGH, and our request for a permanent injunction against Clinipro's LipoCryo device based on Clinipro's infringement of two European patents owned by MGH and globally licensed exclusively to us. While the Mercantile Court had earlier granted in 2012 MGH's and our request for a preliminary injunction, the Court, in the January 2013 ruling, denied the request for a permanent injunction, and the Mercantile Court’s ruling has been upheld on appeal. The Mercantile Court's ruling affects only Clinipro's activities in Spain. Further, although we and MGH did prevail against Clinipro in a patent infringement case in France, holding that an MGH patent exclusively licensed to us is valid and enforceable and enjoining Clinipro and its distributors from selling LipoCryo in France, Clinipro has appealed that ruling, and there is no assurance that Clinipro will not prevail.
We rely on a license relationship with Massachusetts General Hospital for much of our core intellectual property, and this arrangement could restrict the scope and enforcement of our intellectual property rights and limit our ability to successfully commercialize our products.
We have exclusively licensed certain intellectual property from the General Hospital Corporation, a not-for-profit Massachusetts Corporation, which owns and operates MGH related to our CoolSculpting system. We rely on MGH to file and prosecute patent applications and maintain patents and otherwise protect the intellectual property we license. We have not had and do not have primary control over these activities for certain of our patents or patent applications and other intellectual property rights we license, and therefore cannot guarantee that these patents and applications will be prosecuted or immediately enforced in a manner consistent with the best interests of our business. We cannot be certain that such activities by third parties have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents and other intellectual property rights. Additionally, we cannot control the publication or other disclosures of research carried out by MGH relating to technology that could otherwise prove patentable.
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Pursuant to the terms of the license agreement with MGH, MGH has the right to control enforcement of our licensed patents or defense of any claims asserting the invalidity of these patents. Even if we are permitted to pursue such enforcement or defense, we will require the cooperation of MGH, and cannot guarantee that we would receive it. We cannot be certain that MGH will allocate sufficient resources or prioritize its or our enforcement of such patents or defense of such claims to protect our interests in the licensed patents. If we cannot obtain patent protection, or enforce existing or future patents against third parties, our competitive position and our financial condition could suffer.
We are exploring additional uses of our proprietary controlled cooling technology platform for the dermatology, plastic surgery, and aesthetic markets. We also plan to explore potential therapeutic uses for our platform technology, either directly or through collaborative arrangements with strategic partners. Although MGH cannot restrict our future product development efforts, the terms of our license agreement with MGH may require us to pay MGH a royalty of up to 7% of net sales of future products we develop or that may be developed by our strategic partners. Whether we are required to pay a royalty will depend on whether our future products incorporate the intellectual property we licensed from MGH. Any royalty we are required to pay will reduce our income from sales of such future products and may make it more difficult for us to successfully commercialize these products directly or through a strategic partner.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.
We rely on trade-secret protection to protect our interests in proprietary know-how and for processes for which patents are difficult or impossible to obtain or enforce. We may not be able to protect our trade secrets adequately. We have limited control over the protection of trade secrets used by our third-party contract manufacturers and suppliers. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors and outside scientific advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third-party illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. We rely, in part, on non-disclosure and confidentiality agreements with our employees, consultants and other parties to protect our trade secrets and other proprietary technology. These agreements may be breached and we may not have adequate remedies for any breach. Moreover, others may independently develop equivalent proprietary information, and third parties may otherwise gain access to our trade secrets and proprietary knowledge. We may now or in the future incorporate open source software in our products' firmware. Open source software licenses can be ambiguous, and there is a risk that these licenses could be construed to require us to disclose or publish, in source code form, some or all of our proprietary firmware code. Any disclosure of confidential information into the public domain or to third parties could allow our competitors to learn our trade secrets and use the information in competition against us, which could adversely affect our competitive advantage.
Our CoolSculpting system and any future products or services we develop could be alleged to infringe patent rights of others, which may require costly litigation and, if we are not successful, could cause us to pay substantial damages or limit our ability to commercialize our products.
Our commercial success depends on our ability to develop, manufacture, and market our CoolSculpting system and use our proprietary controlled cooling technology without infringing the patents and other proprietary rights of third parties. As the medical technology and aesthetic product industries expand and more patents are issued, the risk increases that there may be patents issued to third parties that relate to our products and technology of which we are not aware or that we must challenge to continue our operations as currently contemplated. Our products may infringe or may be alleged to infringe these patents.
In addition, because patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing (or, in some cases, are not published until they issue as patents) and because publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our issued patents or our pending applications. Another party may have filed, and may in the future file, patent applications covering our products or technology similar to ours. Any such patent application may have priority over our patent applications or patents, which could further require us to obtain rights to issued patents covering such technologies. If another party has filed a U.S. patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the Patent and Trademark Office, or PTO, to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful if the other party had independently arrived at the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position with respect to such inventions.
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There is substantial litigation involving patent and other intellectual property rights in the medical technology and aesthetic industries generally. If a third party claims that we or any collaborator infringes its intellectual property rights, we may face a number of issues, including, but not limited to:
• | infringement and other intellectual property claims which, regardless of merit, may be expensive and time-consuming to litigate and may divert our management's attention from our core business; |
• | substantial damages for infringement, which we may have to pay if a court decides that the product at issue infringes on or violates the third party's rights, and if the court finds that the infringement was willful, we could be ordered to pay treble damages and the patent owner's attorneys' fees; |
• | a court prohibiting us from selling or licensing our products unless the third party licenses its product rights to us, which it is not required to do at a commercially reasonable price or at all; |
• | if a license is available from a third party, we may have to pay substantial royalties, upfront fees or grant cross-licenses to intellectual property rights for our products; and |
• | redesigning our products or processes so they do not infringe, which may not be possible at all or may require substantial monetary expenditures and time, during which our products may not be available for sale. |
Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Finally, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.
Our intellectual property rights will further be affected in ways that are difficult to anticipate by the provisions of the America Invents Act (2011).
Enacted in September 2011, the America Invents Act, or AIA, is the first major overhaul of the U.S. patent system since 1952, and includes a number of changes to established practices, which came into effect between September 2011 and March 2013. The most significant changes include the transition to a modified first-to-file system, the availability of new post-grant review for issued patents, various procedural changes including the third-party submission of prior art and the availability of derivation proceedings and supplemental examination, and an expanded prior commercial user rights defense to a claim of patent infringement. The scope of these changes and the lack of experience with their practical implementation, suggest a transitional period with some uncertainty over the next few years. Several provisions of the AIA will likely be tested in U.S. federal courts over time.
The changes to the U.S. patent system in the AIA will have an impact on our intellectual property rights and how business is conducted in general. For example, the recently implemented modified first-to-file system places a premium on filing as early as possible and appears to increase what is available as prior art, by changing the applicable definitions. In particular, the grace period in the year prior to the filing date is now limited to an inventor’s own publications, and third party publications occurring after a publication by the inventor. For patent applications filed on or after March 16, 2013, we may expect post-grant review challenges initiated up to nine months after the corresponding patent issues.
While the AIA was intended to make the resolution of intellectual property disputes easier and less expensive, we may in the future have to prove that we are not infringing patents or we may be required to obtain licenses to such patents. However, we do not know whether such licenses will be available on commercially reasonable terms, or at all. Prosecution of patent applications, post-grant opposition proceedings, and litigation to establish the validity and scope of patents, to assert patent infringement claims against others and to defend against patent infringement claims by others will be expensive and time-consuming. There can be no assurance that, in the event that claims of any of our owned or licensed patents are challenged by one or more third parties, any court or patent authority ruling on such challenge will determine that such patent claims are valid and enforceable. An adverse outcome in such litigation or post grant proceeding could cause us to lose exclusivity relating to the subject matter delineated by such patent claims and may have a material adverse effect on our business. If a third party is found to have rights covering products or processes used by us, we could be forced to cease using the products or processes covered by the disputed rights, be subject to significant liabilities to such third party and/or be required to license technologies from such third party.
Risks Related to Our Common Stock
Our stock price has been and will likely continue to be volatile.
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Our stock price is volatile and from October 19, 2011, the first day of trading of our common stock, to April 30, 2015, our stock has had low and high sales prices per share in the range from $3.20 to $35.90 per share. Among the factors that may cause the market price of our common stock to fluctuate are the risks described in this “Risk Factors” section and other factors, including:
• | fluctuations in our operating results or the operating results of our competitors; |
• | changes in estimates of our financial results or recommendations or cessation of coverage by securities analysts; |
• | changes in the estimates of the future size and growth rate of our market opportunity; |
• | changes in accounting principles or changes in interpretations of existing principles, which could affect our financial results; |
• | conditions and trends in the markets we serve; |
• | changes in general economic, industry, and market conditions; |
• | success of competitive technologies and procedures; |
• | changes in our pricing policies; |
• | announcements of significant new technologies, procedures, or acquisitions by us or our competitors; |
• | changes in legislation or regulatory policies, practices or actions; |
• | the commencement or outcome of litigation involving our company, our general industry or both; |
• | recruitment or departure of our executives and other key employees; |
• | changes in our capital structure, such as future issuances of securities or the incurrence of debt; |
• | actual or expected sales of our common stock by the holders of our common stock; and |
• | the trading volume of our common stock. |
In addition, the stock market in general and the market for medical technology and aesthetic product companies in particular may experience a loss of investor confidence. The stock markets recently have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our common stock. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class-action litigation. Further, class-action litigation, even if unsuccessful, could be costly to defend and divert management's attention and resources, which could further materially harm our financial condition and results of operations.
The requirements of being a public company may strain our resources, divert management's attention, and affect our ability to attract and retain qualified board members.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act, the listing requirements of the securities exchange on which we trade and other applicable federal and state securities rules and regulations. Compliance with these rules and regulations has increased our legal and financial compliance costs, made some activities more difficult, time-consuming, or costly and increased demand on our business systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results.
As a public company in the United States, we and our independent registered public accounting firm are required pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, to furnish a report, among other things, on the effectiveness of our internal control over financial reporting. These controls may become inadequate because of changes in conditions or the degree of compliance with these policies or procedures may deteriorate and weaknesses in our internal control over financial reporting may be discovered. In the event that we are not able to demonstrate compliance with Section 404 in a timely manner, or are unable to produce timely or accurate financial statements, we may be subject to sanctions or investigations by regulatory authorities such as the SEC and the securities exchange on which we trade and investors may lose confidence in our operating results, which would have a material adverse effect on our business and on the price of our common stock and our ability to access the capital markets.
In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management's time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
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Our financial controls and procedures may not be sufficient to ensure timely and reliable reporting of financial information, which, as a public company, could materially harm our stock price and the listing of our common stock on the NASDAQ Global Select Market.
We cannot assure you that our finance department has or will maintain adequate resources to ensure that we will not have any future material weakness in our system of internal controls. The effectiveness of our controls and procedures may in the future be limited by a variety of factors, including:
• | faulty human judgment and simple errors, omissions or mistakes; |
• | fraudulent action of an individual or collusion of two or more people; |
• | inappropriate management override of procedures; and |
• | the possibility that any enhancements to controls and procedures may still not be adequate to assure timely and accurate financial control. |
If we fail to have effective controls and procedures for financial reporting in place, we could be unable to provide timely and accurate financial information and be subject to de-listing on the NASDAQ Global Select Market, SEC investigation, and civil or criminal sanctions.
We do not currently intend to pay dividends on our common stock.
We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. We currently intend to invest our future earnings, if any, to fund the development and growth of our business. The payment of dividends will be at the discretion of our Board of Directors and will depend on our results of operations, capital requirements, financial condition, future prospects, restrictions imposed by applicable law, any limitations on payments of dividends present in any debt agreements we may enter into and other factors our Board of Directors may deem relevant. If we do not pay dividends, your ability to achieve a return on our common stock will depend on any future appreciation in the market price of our common stock. There is no guarantee that our common stock will appreciate in value or even maintain the price at which our holders have purchased their common stock.
Our directors, executive officers, and entities with which they are affiliated hold a significant portion of our common stock, which may lead to conflicts of interest with other stockholders over corporate transactions and other corporate matters.
Our directors, executive officers, and entities with which they are affiliated beneficially own approximately 20% of our outstanding common stock as of April 30, 2015. This concentration of ownership may not be in the best interests of our other stockholders. We are not aware of any stockholder or voting agreements or understandings between or among our directors, officers, or holders of our outstanding common stock currently in place. However, these stockholders, acting together, would be able to exercise significant influence on all matters requiring stockholder approval, including the election of directors and significant corporate transactions such as mergers or other business combinations. This influence could delay, deter, or prevent a third party from acquiring or merging with us, which could adversely affect the market price of our common stock.
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Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current directors and management team, and limit the market price of our common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may delay or prevent a change of control, discourage bids at a premium over the market price of our common stock, and adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock. These provisions include:
• | dividing our board into three classes, with each class serving a staggered three-year term; |
• | prohibiting our stockholders from calling a special meeting of stockholders or acting by written consent; |
• | permitting our board to issue additional shares of our preferred stock, with such rights, preferences and privileges as they may designate, including the right to approve an acquisition or other changes in control; |
• | establishing an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our Board of Directors; |
• | providing that our directors may be removed only for cause; |
• | providing that vacancies on our Board of Directors may be filled only by a majority of directors then in office, even though less than a quorum; and |
• | requiring the approval of our Board of Directors or the holders of a super-majority of our outstanding shares of capital stock to amend our bylaws and certain provisions of our certificate of incorporation. |
Although we believe these provisions collectively provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management team by making it more difficult for stockholders to replace members of our board, which is responsible for appointing the members of our management.
Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. The restrictions contained in Section 203 are not applicable to any of our existing stockholders that currently own 15% or more of our outstanding voting stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
See the Exhibit Index immediately following the signature page to this Quarterly Report on Form 10-Q, which is incorporated by reference here.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ZELTIQ Aesthetics, Inc. | |||
Date: | May 5, 2015 | By: | /s/ Patrick F. Williams |
Patrick F. Williams | |||
Senior Vice President and Chief Financial Officer | |||
(Duly Authorized Officer, Principal Financial and Accounting Officer) | |||
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EXHIBIT INDEX
Listed and indexed below are all Exhibits filed as part of this report.
Incorporated by Reference | |||||||||||||
Exhibit No. | Description | Filed Herewith | Form | File No. | Exhibit No. | Date Filed | |||||||
3.1 | Amended and Restated Certificate of Incorporation of ZELTIQ Aesthetics, Inc. | 10-Q | 001-35318 | 3.1 | 4/26/2013 | ||||||||
3.2 | Amended and Restated Bylaws of ZELTIQ Aesthetics, Inc. | 8-K | 001-35318 | 3.1 | 2/20/2015 | ||||||||
4.1 | Reference is made to Exhibits 3.1 and 3.2. | ||||||||||||
4.2 | Form of Stock Certificate. | S-1/A | 333-175514 | 4.1 | 9/23/2011 | ||||||||
10.1 | Promotion Offer Letter, dated November 10, 2014, between Keith Sullivan and ZELTIQ Aesthetics, Inc. | X | |||||||||||
10.2 | Relocation Agreement, dated February 19, 2015, between Keith Sullivan and ZELTIQ Aesthetics, Inc. | X | |||||||||||
10.3 | Amended Relocation Agreement, dated March 12, 2015, between Keith Sullivan and ZELTIQ Aesthetics, Inc. | X | |||||||||||
10.4 | 2015 Compensation Arrangements for Named Executive Officers | 8-K/A | 001-35318 | Item 5.02 | 2/23/2015 | ||||||||
10.5 | Compensation Arrangement With Non-Employee Directors | X | |||||||||||
12.1 | Statement of Computation of Ratio of Earnings to Fixed Charges | X | |||||||||||
31.1 | Certification of Principal Executive Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. | X | |||||||||||
31.2 | Certification of Principal Financial Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. | X | |||||||||||
32.1 | Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350. | X | |||||||||||
101.INS | XBRL Instance Document | X | |||||||||||
101.SCH | XBRL Taxonomy Extension Schema Document | X | |||||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | X | |||||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | X | |||||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | X | |||||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | X | |||||||||||
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