S-1/A 1 d197669ds1a.htm AMENDMENT NO. 8 TO FORM S-1 Amendment No. 8 to Form S-1
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As filed with the Securities and Exchange Commission on October 18, 2011

Registration No. 333-175514

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 8

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

ZELTIQ Aesthetics, Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

 

3845

(Primary Standard Industrial

Classification Code Number)

4698 Willow Road, Suite 100

Pleasanton, CA 94588

(925) 474-2500

 

27-0119051

(I.R.S. Employer

Identification Number)

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Gordon E. Nye

President and Chief Executive Officer

ZELTIQ Aesthetics, Inc.

4698 Willow Road, Suite 100

Pleasanton, CA 94588

(925) 474-2500

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Jeffrey C. Thacker, Esq.

DLA Piper LLP (US)

2000 University Avenue

East Palo Alto, CA 94303

Tel: (858) 638-6728

Fax: (858) 638-5128

 

Alan F. Denenberg, Esq.

Davis Polk & Wardwell LLP

1600 El Camino Real

Menlo Park, CA 94025

Tel: (650) 752-2000

Fax: (650) 752-3604

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

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    ¨

Non-accelerated filer

  x    (Do not check if a smaller reporting company)    Smaller reporting company    ¨

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to completion, dated October 18, 2011

7,000,000 Shares

 

 

LOGO

Common Stock

 

 

ZELTIQ Aesthetics, Inc. is offering 6,693,000 shares of common stock and the selling stockholders are offering 307,000 shares of our common stock. The selling stockholders include certain members of our Board of Directors and management. We will not receive any proceeds from the sale of the shares offered by the selling stockholders. This is our initial public offering and no public market currently exists for our shares. Our common stock has been approved for quotation on the NASDAQ Global Select Market under the symbol “ZLTQ.” We estimate that the initial public offering price will be between $14.00 and $16.00 per share.

Investing in our common stock involves a high degree of risk. Before buying any shares, you should read carefully the discussion of the material risks of investing in our common stock under the headings “Risk Factors” starting on page 11 of this prospectus.

 

     
      Per Share      Total  

Public offering price

   $         $     

Underwriting discount

   $         $     

Proceeds, before expenses, to ZELTIQ Aesthetics, Inc.

   $                      $                        

Proceeds, before expenses, to the selling stockholders

   $         $     

We have granted the underwriters the right to purchase up to 1,050,000 additional shares of common stock to cover any over-allotments. The underwriters can exercise this right at anytime within 30 days after the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares on or about                     , 2011.

 

J.P. Morgan     Goldman, Sachs & Co.

 

 

 

William Blair & Company     Canaccord Genuity

The date of this prospectus is                     , 2011


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Table of Contents

Table of Contents

 

     Page  

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     11   

MARKET, INDUSTRY, AND OTHER DATA

     35   

USE OF PROCEEDS

     36   

DIVIDEND POLICY

     36   

CAPITALIZATION

     37   

SELECTED FINANCIAL DATA

     41   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     43   

BUSINESS

     67   

MANAGEMENT

     94   

EXECUTIVE COMPENSATION

     104   

PRINCIPAL AND SELLING STOCKHOLDERS

     126   

RELATED PARTY TRANSACTIONS

     129   

DESCRIPTION OF CAPITAL STOCK

     132   

SHARES ELIGIBLE FOR FUTURE SALE

     138   

MATERIAL U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS TO NON-U.S. HOLDERS

     141   

UNDERWRITING

     145   

LEGAL MATTERS

     150   

EXPERTS

     150   

WHERE YOU CAN FIND MORE INFORMATION ABOUT US

     150   

INDEX TO FINANCIAL STATEMENTS

     F-1   

Neither we, the selling stockholders, nor the underwriters have authorized anyone to provide you with information that is different from that contained in this prospectus. We and the selling stockholders take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the selling stockholders are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date on the front of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock.

Through and including                     , 2011 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

ZELTIQ®, CoolSculpting®, CoolCard, CoolCurve, CoolCore, CoolMax, and our logo are our some of our trademarks used in this prospectus. This prospectus also includes trademarks, trade names, and service marks that are the property of other organizations. Solely for convenience, our trademarks and tradenames referred to in this prospectus appear without the ® or ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or the right of the applicable licensor to these trademarks and tradenames.

 

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Prospectus Summary

The items in the following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all the information you should consider. Therefore, you should also read the more detailed information set out in this prospectus and the financial statements included elsewhere in this prospectus. In this prospectus, unless the context otherwise requires, references to “we,” “us,” “our,” or “ZELTIQ” refer to ZELTIQ Aesthetics, Inc. and our wholly-owned subsidiary.

Our Business

We are a medical technology company focused on developing and commercializing products utilizing our proprietary controlled-cooling technology platform. Our first commercial product, the CoolSculpting System, is designed to selectively reduce stubborn fat bulges that may not respond to diet or exercise. CoolSculpting is based on the scientific principle that fat cells are more sensitive to cold than the overlying skin and surrounding tissues. CoolSculpting utilizes precisely controlled cooling to reduce the temperature of fat cells in the treated area, which is intended to cause fat cell elimination through a natural biological process known as apoptosis, without causing scar tissue or damage to the skin, nerves, or surrounding tissues. We developed CoolSculpting to safely, noticeably, and measurably reduce the fat layer within a treated fat bulge without requiring the patient to diet or exercise. In our pivotal U.S. clinical trial involving 60 patients, physicians were able to accurately differentiate between pre- and post-treatment photographs in 88% of the patients, while unable to identify aesthetic benefits in the remaining 12%. There have been several published clinical studies conducted by us and independent physicians, involving more than 100 patients collectively, evaluating the efficacy of CoolSculpting. Certain of these published studies showed that patients achieved noticeable aesthetic benefits from a CoolSculpting procedure only 80% of the time.

We generate revenues from capital sales of our CoolSculpting System and from procedure fees our physician customers pay for each CoolSculpting procedure they perform. We received clearance from the U.S. 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.” We have received regulatory approval or are otherwise free to market CoolSculpting in 46 international markets, where use of the product is generally not limited to specific treatment areas. Physicians in these markets commonly perform CoolSculpting procedures on the abdomen, inner thighs, back, and chest, in addition to the flanks. As of June 30, 2011, we had an installed base of 629 CoolSculpting Systems worldwide and over 134,000 CoolSculpting procedures had been sold to our physician customers. We generated revenues of $25.5 million for the year ended December 31, 2010, and $31.6 million for the six months ended June 30, 2011. We had net losses of $13.5 million and $1.4 million, respectively, for the same periods.

We designed our CoolSculpting System to specifically treat fat bulges. While there are no technical or regulatory restrictions on the use of CoolSculpting based on patient weight, patients who are obese are not typically good candidates for CoolSculpting because these individuals may not have specific fat bulges but typically have body areas that require significant fat reduction. As a result, these individuals are unlikely to obtain noticeable aesthetic results from a CoolSculpting treatment. We offer training to our physician customers to better enable them to identify those patients whose aesthetic appearance will be noticeably improved by the reduction of their fat bulges through CoolSculpting.

We selectively market CoolSculpting to dermatologists, plastic surgeons, and aesthetic specialists. Aesthetic specialists are physicians who elect to offer aesthetic procedures as a significant part of their practices but are not board certified dermatologists or plastic surgeons. According to a market research study we commissioned through Easton Associates, there are currently over 70,000 physicians who perform aesthetic procedures at approximately 30,000 practice sites worldwide, including over 16,000 physicians and approximately 8,000 practice sites within the United States and Canada. We intend to place our CoolSculpting System with 4,000 to

 

 

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5,000 physician practice sites on a global basis. We utilize our direct sales organization to selectively market and sell CoolSculpting in the United States and Canada, our North American markets. In our markets located outside of North America, we market and sell CoolSculpting through a network of distributors and, opportunistically, intend to pursue direct sales in select markets. Our sales force and distributors target dermatologists, plastic surgeons, and aesthetic specialists who have practices focused on aesthetic procedures and who express a willingness to position CoolSculpting as a premium, differentiated treatment and participate in our practice marketing and support programs. Our 45 markets outside of North America are located in Asia-Pacific, Europe, the Middle East and Africa, and South America. Revenues from markets outside of North America comprised 34% and 26% of our total revenues for the year ended December 31, 2010 and the six months ended June 30, 2011, respectively, with Asia-Pacific representing 17.5% and 8.6%, Europe, the Middle East, and Africa representing 13.3% and 10.7%, and South America representing 2.9% and 6.6% of total revenues for these same periods, respectively. We are driving growth in CoolSculpting procedures through our physician marketing programs, which provide physicians with sales training, practice marketing, and support services. After we establish a significant installed base of CoolSculpting Systems in specific markets, we plan to use targeted consumer marketing, advertising, and promotional activities in these markets to drive demand for CoolSculpting.

Our business is dependent upon the success of CoolSculpting, and we cannot assure you that we will be successful in significantly expanding physician and patient demand for CoolSculpting. In addition, we will continue to incur significant expenses for the foreseeable future as we expand our commercialization and other business activities, and as a result, we cannot assure you that we will be to achieve or maintain our profitability.

Market Overview

The global market for aesthetic procedures is significant and growing. The American Society of Aesthetic Plastic Surgery, or the ASAPS, estimates that U.S. consumers spent more than $10.7 billion on 9.3 million aesthetic procedures in 2010. According to the ASAPS, total aesthetic procedures in the United States have experienced a 12% compound annual growth rate between 1997 and 2010, with non-surgical aesthetic procedures experiencing a 16% compound annual growth rate during this same period. The International Society of Aesthetic Plastic Surgery, or the ISAPS, conducted a survey of plastic surgeons in the top 25 countries for aesthetic procedures, including the United States, and reported that this group performed 17.1 million procedures, including 8.5 million surgical procedures and 8.6 million non-surgical procedures, in 2009. Of these total procedures, approximately 33% (5.7 million) were performed in Asia, 24% (4.2 million) were performed in North America, 20% (3.5 million) were performed in Europe, and 20% (3.4 million) were performed in South America. The aesthetic procedures reported by the ASAPS and ISAPS represent many different types of treatment options and technologies for a variety of conditions. According to the ASAPS, the top five surgical procedures in 2010 were breast augmentation, liposuction, eyelid surgery, abdominoplasty, and breast reduction, and the top five non-surgical procedures in 2010 were Botox® injections, hyaluronic acid injections, laser hair removal, laser skin resurfacing, and chemical peels. No one treatment procedure is offered by all physicians, and treatments vary in terms of the treatment goal and desired effect. As a result, the total aesthetic market as reported by the ASAPS and ISAPS does not represent the market potential for CoolSculpting or any other single product or treatment, but illustrates that each year patients elect to have millions of procedures to enhance their appearance.

Fat reduction and body contouring procedures, which include invasive, minimally-invasive, and non-invasive procedures, have become increasingly popular aesthetic procedures. Patients who are obese and 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. Although effective at reducing fat, these invasive and minimally-invasive procedures may involve patient pain, expense, downtime, and the risks typically associated with surgical procedures. As a result, 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.

 

 

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Our Solution

We developed CoolSculpting to provide patients with a safe, effective, non-invasive, and convenient procedure to reduce stubborn fat bulges. CoolSculpting is clinically proven to reduce fat bulges in a 60-minute procedure, allowing most patients to achieve noticeable and measurable aesthetic results without the pain, expense, downtime, and risks associated with existing invasive and minimally-invasive procedures. We designed CoolSculpting to address the aesthetic concerns of individuals who have stubborn fat bulges that may not respond to diet or exercise. Although there are no technical or regulatory restrictions on the use of CoolSculpting based on patient weight, we believe patients who are obese and who do not have specific fat bulges are not typically good candidates for CoolSculpting. These individuals typically have body areas that require significant fat reduction. As a result, these individuals are unlikely to obtain noticeable aesthetic results from a CoolSculpting treatment and are better candidates for invasive and minimally-invasive procedures. We offer training to our physician customers to better enable them to identify those patients whose aesthetic appearance will be noticeably improved by the reduction of their fat bulges through CoolSculpting.

We believe that CoolSculpting provides the following benefits to our physician customers and their patients:

 

 

Clinically proven, consistent, and durable results.    Clinical studies involving more than 300 patients demonstrate that a single CoolSculpting procedure can noticeably and measurably reduce the fat layer within a treated fat bulge without requiring diet or exercise. In our pivotal U.S. clinical trial involving 60 patients, physicians were able to accurately differentiate between pre and post treatment photographs in 88% of the patients. There have been several published clinical studies conducted by us and independent physicians, involving more than 100 patients collectively, evaluating the efficacy of CoolSculpting. Certain of these published studies showed that patients achieved noticeable aesthetic benefits from a CoolSculpting procedure only 80% of the time. Patients typically notice results as soon as three weeks following the CoolSculpting procedure, with the most dramatic results occurring over a period of two to four months for most patients. Because the fat layer in the treated area is reduced by eliminating fat cells that will not be replaced by the body, we believe the aesthetic benefits patients achieve in the treated area will be durable.

 

 

Safety profile.    CoolSculpting selectively targets fat cells. Our proprietary treatment algorithms are designed to ensure that fat cells in the treated area are sufficiently cooled to obtain the desired aesthetic results while preserving the skin and surrounding tissues. Since the commercial launch of CoolSculpting through August 31, 2011, we have received approximately 1.2 patient complaints per 1,000 CoolSculpting procedures. The most typical side effects include skin redness, bruising, and numbness or discomfort in the treatment area. These side effects are generally temporary and generally self-resolve within one week, provided, however, that in our pivotal clinical study some patients experienced these side effects for more than one week, including 7% of the patients experienced skin redness for more than one week, 5% of the patients experienced bruising for more than one week, and 50% of the patients experienced some degree of numbness (in no case marked) for more than one week, with that number decreasing to 7% after two months and no patients reported numbness at the six-month follow-up visit. In a limited number of complaint cases, patients have reported effects lasting longer than one week (in 0.08% of procedures), including pain (in 0.07% of procedures) in the treatment area during or after a CoolSculpting procedure, but in each of these cases these reported complaints self-resolved within four weeks of the onset of symptoms. In rare instances (in less than 0.01% of procedures), patients have reported hardness in the treatment area. The hardness was related to a heightened inflammatory process and spontaneously resolved in all reported cases within one to four months of the onset of the symptoms, except for one patient who claims that the hardness has not resolved.

 

 

Patient satisfaction.    CoolSculpting allows patients to achieve noticeable and measurable aesthetic results without the pain, expense, downtime, and risks associated with existing invasive and minimally-invasive procedures for fat reduction. In addition, unlike many other non-invasive procedures, patients are not required to undergo multiple treatment procedures or adopt special diet or exercise programs following the

 

 

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procedure to obtain aesthetic results. In our pivotal clinical study, 82% of the participating patients reported satisfaction with the CoolSculpting procedure. As a further indication of patient satisfaction, our physician customers reported that 45% of their patients returned for an additional CoolSculpting treatment, according to the market research study we commissioned through Easton Associates.

 

 

Repeatability enabled by natural biological process.    CoolSculpting is designed to reduce the fat layer in the treated area through apoptosis, a natural biological process that leads to gradual elimination of the fat cells from the body. Unlike other treatment methods, we designed CoolSculpting to avoid triggering the body’s wound-healing response, which can lead to the formation of scar tissue. As a result, patients can elect to have the CoolSculpting procedure repeated multiple times on the same treatment area if they desire further fat reduction. Because fat cells are gradually eliminated from the body following a CoolSculpting treatment over a three to 16 week period, we recommend that patients wait at least six weeks before repeating a CoolSculpting procedure on the same treatment area.

 

 

Results not technique-dependent.    The CoolSculpting procedure is not technique-dependent and requires limited training and skill to obtain successful aesthetic results. We designed the CoolSculpting System to be easy to operate and largely automated. Once the procedure is started, the clinician is not required to monitor or make any adjustments to the CoolSculpting System during the balance of the 60-minute procedure.

 

 

Differentiated, high-value product for physician practices.    Our selective distribution strategy is designed to enable our physician customers to market CoolSculpting as a premium, highly-differentiated, non-invasive fat reduction procedure. Based on our commercial data, we believe physicians can recoup their capital expenditures within six months assuming modest use. In addition, the physician can see and treat other patients or perform concurrent procedures, such as injections or other dermal treatments, on the same patient during the 60-minute CoolSculpting procedure.

 

 

Ability to expand the aesthetic market.    We believe there is strong consumer demand for a non-invasive procedure that can address the aesthetic concerns of individuals who have stubborn fat bulges that may not respond to diet or exercise. In a survey of 1,076 adults in the United States that we conducted through the Rabin Research Company, an independent full-service marketing research company, more than 40% of the participants indicated that they were likely to seek more information about the CoolSculpting procedure to enhance the shape of their body. We achieved this positive response despite the fact that 90% of the participants in our survey had never previously undergone an aesthetic procedure, individuals we refer to as “aesthetic neophytes.” We believe CoolSculpting’s appeal will allow physicians to target the aesthetic neophyte market and expand their aesthetic practices. According to the market research study we commissioned through Easton Associates, our physician customers participating in the study reported that 30% of their CoolSculpting patients were aesthetic neophytes.

Our Strategy

Our goal is to become a leading medical technology company focused on developing and commercializing products utilizing our proprietary controlled-cooling technology platform. To achieve this goal, we intend to:

 

 

Establish CoolSculpting as a premium, highly-differentiated treatment through selective distribution.    We intend to place our CoolSculpting System with 4,000 to 5,000 physician practice sites on a global basis. Our sales force and distributors target dermatologists, plastic surgeons and aesthetic specialists who have practices focused on aesthetic procedures and who express a willingness to position CoolSculpting as a premium, differentiated treatment and participate in our practice marketing and support programs.

 

 

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Increase utilization of CoolSculpting through our targeted physician marketing and support programs.    We are driving demand for CoolSculpting procedures through our targeted marketing and physician support programs. These programs provide our physician customers and their staff with sales training, practice marketing, and support services to help them make CoolSculpting a key component of their practices.

 

 

Increase consumer awareness and demand for CoolSculpting.    After we establish a significant installed base of CoolSculpting Systems in specific markets, we intend to employ a targeted and strategic direct-to-consumer marketing program in these markets to generate awareness of CoolSculpting among aesthetic veterans and aesthetic neophytes.

 

 

Increase our international presence.    We intend to grow our sales and marketing organization outside of North America to focus on increasing sales, strengthening our physician relationships, and building global brand recognition. As part of that strategy, we intend to opportunistically deploy a direct sales force in select international markets.

 

 

Expand our FDA-cleared indications for CoolSculpting.    We intend to seek additional regulatory clearances from the FDA to expand our marketable indications for CoolSculpting to areas of the body other than the flanks.

 

 

Leverage our technology platform.    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.

Recent Developments

We are currently finalizing our financial results for the three months ended September 30, 2011. While complete financial information and operating data as of and for such period are not available, based on the information and data currently available, our management preliminarily estimates that for the three months ended September 30, 2011 our total revenues were between $17.5 million and $17.7 million, consisting of between $13.1 million and $13.2 million of systems revenues and between $4.4 million and $4.5 million of procedure fees revenues, compared to total revenues of $17.4 million, consisting of $12.0 million of systems revenues and $5.4 million of procedure fees revenues for the three months ended June 30, 2011. As anticipated, both systems and procedure fees revenues during the three months ended September 30, 2011 were negatively impacted by seasonal trends during the summer months in the United States and Europe due to vacations taken by our physician customers and their patients. For more information related to the affects of seasonality on our business, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quarterly Results of Operations Data.” In addition, our management preliminarily estimates that for the three months ended September 30, 2011 our net loss was between $(2.7) million and $(3.0) million, compared to a net loss of $(559) thousand for the three months ended June 30, 2011. Our net loss increased materially in the three months ended September 30, 2011 compared to the three months ended June 30, 2011 principally as a result of increased operating expenses associated with growing our North American direct sales force, certain costs associated with preparing for this offering, expenses to develop marketing materials and collateral for our planned physician and consumer marketing initiatives, and increased research and development costs. The preliminary estimated range of net loss for the three months ended September 30, 2011 and the net loss for the three months ended June 30, 2011 presented above correspond to the net loss line item in our audited financial statements and exclude cumulative dividends on our convertible preferred stock.

 

 

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The preliminary financial data above has been prepared by, and is the responsibility of, our management. Our independent registered public accounting firm has not audited, reviewed, compiled, or performed any procedures with respect to this preliminary financial data and does not express an opinion or any other form of assurance with respect thereto. Because the three months ended September 30, 2011 has recently ended, the unaudited revenues and net loss information presented above for the three months ended September 30, 2011 reflects estimates based only upon preliminary information available to us as of the date of this prospectus and is not a comprehensive statement of our financial results for the three months ended September 30, 2011. Our financial statements and operating data as of and for the three months ended September 30, 2011 will not be available until after this offering is completed and may differ from the unaudited revenues and net loss information we have provided. Such differences may be material. Accordingly, you should not place undue reliance on these preliminary estimates. The estimates for the three months ended September 30, 2011 are not necessarily indicative of any future period and should be read together with “Risk Factors,” “Special Note Regarding Forward-looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Historical Financial Data” and our financial statements and related notes included elsewhere in this prospectus.

Risks Associated with Our Business

In addition to the risks discussed above, our business is subject to the risks and uncertainties discussed more fully in the section entitled “Risk Factors” immediately following this summary. In particular:

 

 

We have limited operating experience and a history of net losses, and we may never achieve or maintain profitability.

 

 

We are dependent upon the success of CoolSculpting, and if the market for CoolSculpting fails to grow significantly, our business and future prospects will be harmed.

 

 

Because we have limited operating experience, including limited commercial and operating experience in international markets, and plan to enter into the rapidly-evolving market for body contouring and aesthetic products, we may not be able to successfully predict or react to relevant industry developments and business trends.

 

 

We also generally compete against medical technology and aesthetic companies, including those offering products and technologies unrelated to fat reduction, for physician resources and mindshare, and these companies may have greater resources and well-established sales channels, which may make it difficult for us to achieve market penetration.

 

 

In addition, CoolSculpting will be subject to ongoing regulatory review, and any failure to comply with continuing regulation by the FDA or other regulatory bodies could subject CoolSculpting to a product recall or other regulatory action, which would seriously harm our business.

Corporate Information

We were originally incorporated in Delaware in March 2005 as Juniper Medical, Inc. In July 2007, we changed our name to ZELTIQ Aesthetics, Inc. Our principal corporate offices are located at 4698 Willow Road, Suite 100, Pleasanton, CA 94588, and our telephone number is (925) 474-2500. Our website is located at www.coolsculpting.com. The information contained on, or that can be accessed through, our website is not a part of this prospectus.

 

 

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The Offering

 

Issuer

ZELTIQ Aesthetics, Inc.

 

Common stock we are offering

6,693,000 shares of common stock

Common stock the selling stockholders are

offering

307,000 shares of common stock

Common stock outstanding after the

offering

32,758,082 shares of common stock

 

Offering price

The initial public offering price is $             per share of common stock

 

Use of proceeds

We intend to use up to $7.0 million of the net proceeds from this offering to pay our remaining milestone obligations to the General Hospital Corporation, which owns and operates the Massachusetts General Hospital, or MGH, pursuant to the terms of our exclusive license agreement with MGH. We intend to use the remainder of our net proceeds for general corporate purposes. We intend to prioritize our future expenditures on expanding our North American and international sales and distribution infrastructure, expanding our planned physician and consumer marketing initiatives, expanding our FDA-cleared indications for CoolSculpting, and obtaining additional regulatory approvals for CoolSculpting in key international markets. We also intend to use our remaining net proceeds to support our planned research and product development activities, including improving and enhancing the CoolSculpting System and the CoolSculpting procedure and exploring the development of additional aesthetic products utilizing our proprietary controlled-cooling technology platform. Other than the payment of our remaining milestone obligations to MGH, we have not yet identified the amounts we plan to spend on each of these areas or the timing of these expenditures. We will not receive any of the proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”

 

Risk factors

See “Risk Factors” beginning on page 11 and other information included in this prospectus for a discussion of factors that you should read carefully before deciding to invest in our common stock.

Proposed NASDAQ Global Select Market

Symbol

“ZLTQ”

Aisling Capital III, LP, or Aisling Capital, as of October 17, 2011, beneficially owned 13.1% of our outstanding common stock (assuming conversion of all outstanding shares of preferred stock). Dr. Andrew N. Schiff, a member of our Board of Directors, is a Managing Partner of Aisling Capital. Aisling Capital has indicated interest in purchasing up to $10,000,000 of our common stock in this offering at the initial public offering price. Because this indication of interest is not a binding agreement or commitment to purchase, Aisling

 

 

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Capital may elect not to purchase any shares in this offering, or the underwriters may elect not to sell any shares in this offering to Aisling Capital. Any shares purchased by Aisling Capital will be subject to a lock-up agreement similar to those signed by our officers, directors, and stockholders as described under “Shares Eligible for Future Sale—Lock-Up Agreements” except that the lock-up period will be only 45 days, subject to automatic extension in certain circumstances. After the expiration of such lock-up period, any shares purchased by Aisling Capital in this offering will be freely tradable, subject to volume restrictions applicable to our affiliates, as described under “Shares Eligible for Future Sale—Rule 144.”

The number of shares of our common stock outstanding immediately after this offering is based on 26,065,082 shares of our common stock (including preferred stock on an as-converted basis) outstanding as of September 30, 2011 and excludes, as of September 30, 2011:

 

 

65,319 shares of Series D-1 convertible preferred stock issuable upon exercise of outstanding warrants at an exercise price of $2.68 per share, which are convertible into 65,319 shares of common stock;

 

 

4,964,481 shares of our common stock subject to outstanding options granted pursuant to our 2005 Stock Incentive Plan, or our 2005 Plan, at a weighted-average exercise price of $2.81 per share, of which 3,194,116 shares remain subject to vesting requirements;

 

 

89,234 shares of common stock which will be available for issuance under our 2011 Equity Incentive Plan, or our 2011 Plan, which will become effective upon the completion of this offering and will serve as the successor equity incentive plan to our 2005 Plan, plus any shares of common stock issued pursuant to the 2005 Plan or subject to awards granted under the 2005 Plan that are forfeited, repurchased, returned or otherwise become available for issuance in accordance with the terms of the 2005 Plan, and plus the annual increases in the number of shares authorized under the 2011 Plan beginning January 1, 2012;

 

 

470,018 shares of our common stock available for future grant or issuance under our 2011 Employee Stock Purchase Plan, or our 2011 ESPP, which will become effective upon the completion of this offering, and the annual increases in the number of shares authorized under this plan beginning January 1, 2012; and

 

 

shares of our common stock that the General Hospital Corporation, a not-for-profit Massachusetts Corporation, which owns and operates the MGH may elect to receive in lieu of cash for up to 50% of each of the remaining $1 million and $6 million milestone payments we will owe MGH upon our achievement of certain milestones as described herein, subject to a cap of 3.5% of our common stock on a fully-diluted basis.

Unless otherwise indicated, all information in this prospectus assumes:

 

 

the automatic conversion of all outstanding shares of our preferred stock into 24,415,965 shares of common stock, which will become effective at the completion of this offering;

 

 

the exercise, on a cash basis, of options to purchase 241,000 shares of common stock by certain selling stockholders, which exercises occurred on October 12, 2011;

 

 

the underwriters do not exercise their option to purchase up to 1,050,000 additional shares of our common stock to cover over-allotments, if any;

 

 

no options, warrants, or shares of common stock were issued after September 30, 2011, and no outstanding options or warrants (except as set forth above) were exercised after September 30, 2011;

 

 

a 3.670069-for-1 reverse stock split of our outstanding common stock prior to the effectiveness of this offering; and

 

 

the amendment and restatement of our certificate of incorporation and bylaws, which will become effective prior to the effectiveness of this offering.

 

 

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Summary Historical Financial Data

The following table summarizes our historical financial data. You should read this summary in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Financial Data,” and our financial statements and related notes, all included elsewhere in this prospectus.

We have derived the statement of operations data for the years ended December 31, 2008, 2009, and 2010 from our audited financial statements included elsewhere in this prospectus. We have derived the statement of operations data for the six months ended June 30, 2010 and 2011, and the balance sheet data as of June 30, 2011 from our unaudited financial statements included elsewhere in this prospectus. We have prepared the unaudited financial information on the same basis as the audited financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair statement of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results to be expected in any future period, and the results for the six months ended June 30, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011.

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2008     2009     2010     2010     2011  
     (in thousands, except share and per share amounts)  

Statement of Operations Data:

        

Revenues

   $      $ 1,587      $ 25,461      $ 6,624      $ 31,626   

Cost of revenues(1)

            2,243        12,295        3,354        12,349   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

            (656     13,166        3,270        19,277   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development(1)

     13,699        8,034        8,222        4,244        4,607   

Sales and marketing(1)

     2,568        4,519        11,987        4,683        11,568   

General and administrative(1)

     5,192        3,966        5,873        2,464        4,031   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     21,459        16,519        26,082        11,391        20,206   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (21,459     (17,175     (12,916     (8,121     (929

Interest expense

            (516     (497     (403     (60

Other income (expense), net

     352        47        (120     22        (395
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (21,107     (17,644     (13,533     (8,502     (1,384

Cumulative dividends on convertible preferred stock

     (4,429     (4,208     (5,426     (2,343     (3,127
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (25,536   $ (21,852   $ (18,959   $ (10,845   $ (4,511
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(2)

   $ (36.17   $ (28.02   $ (20.19   $ (12.77   $ (3.48
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares of common stock outstanding used in computing net loss attributable to common stockholders—basic and diluted(2)

     706,029        779,841        939,028        849,194        1,294,597   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)

       $ (0.65     $ (0.04
      

 

 

     

 

 

 

Weighted-average shares of common stock outstanding used in computing the pro-forma net loss attributable to common stockholders—basic and diluted (unaudited)(2)

         20,562,039          25,710,562   
      

 

 

     

 

 

 

 

 

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     As of June 30, 2011  
     Actual     Pro
Forma(3)
     Pro Forma,
as  adjusted(4)
 
     (in thousands)  

Balance Sheet Data:

       

Cash and cash equivalents

   $ 8,700      $ 8,703       $ 97,951   

Restricted cash

     255        255         255   

Working capital

     5,836        5,839         95,087   

Total assets

     19,283        19,286         108,534   

Total notes payable

     965        965         965   

Convertible preferred stock warrant liability(5)

     633        633         633   

Convertible preferred stock

     81,164                  

Total stockholders’ equity (deficit)

     (72,272     8,895         98,143   

 

(1) The following table presents stock-based compensation included in each expense category:

 

     Year Ended December 31,      Six Months Ended
June 30,
 
         2008              2009              2010              2010              2011      
     (in thousands)  

Cost of revenues

   $       $ 14       $ 39       $ 11       $ 17   

Research and development

     94         98         100         51         156   

Sales and marketing

     79         65         89         35         181   

General and administrative

     147         266         1,059         329         379   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 320       $ 443       $ 1,287       $ 426       $ 733   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) See Notes 2 and 15 to our audited financial statements included elsewhere in this prospectus for an explanation of the calculations of our basic and diluted net loss per share of common stock attributable to common stockholders and pro forma net loss per share of common stock attributable to common stockholders.

 

(3) The pro forma column reflects (i) the assumed conversion of all outstanding shares of our preferred stock into shares of common stock upon the completion of this offering, and (ii) the exercise on a cash basis of outstanding warrants to purchase an aggregate of 5,340 shares of common stock at an exercise price of $0.55 per share upon the completion of this offering.

 

(4) On a pro forma as adjusted basis to reflect the sale of 6,693,000 shares of our common stock by us in this offering at the assumed initial public offering price of $15.00 per share, the midpoint of the range on the cover of this prospectus, after deducting the underwriting discounts and commissions, and estimated offering expenses payable by us in connection with this offering. A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the amount of cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $6.2 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

(5) Convertible preferred stock warrant liability at June 30, 2011 included a loss of $0.4 million due to a change in the fair value.

 

 

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Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below and all of the other information set forth in this prospectus, including our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding to invest in our common stock. If any of the events or developments described below occur, our business, financial condition, or results of operations could be negatively affected. In that case, the market price of our common stock could decline, and you could lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our operations.

Risks Related to Our Business

We have limited operating experience and a history of net losses, and we may never achieve or maintain profitability.

We have a limited operating history and have focused primarily on research and development, clinical trials, product engineering, building our manufacturing capabilities, and seeking regulatory clearances and approvals to market our first product, the CoolSculpting System. We have incurred significant net losses since our inception, including net losses of approximately $13.5 million in 2010, $17.6 million in 2009, $21.1 million in 2008, and $1.4 million for the six months ended June 30, 2011. At June 30, 2011, we had an accumulated deficit of approximately $75.4 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 revenues to achieve or sustain profitability. Even if we do achieve profitability, we may not be able 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. Before investing, you should consider an investment in our common stock in light of the risks, uncertainties, and difficulties frequently encountered by early-stage medical technology companies in rapidly evolving markets such as ours. 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 and whether the revenues from sales of our CoolSculpting System and procedure fees from CoolSculpting treatments will be sufficient to offset the expenses we incur in connection with our commercialization activities;

 

 

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 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 product liability or other lawsuits related to our products and the costs associated with defending them or the results of such lawsuits;

 

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the costs to attract and retain personnel with the skills required for effective operations; and

 

 

the costs associated with being a public company.

Our budgeted expense levels are based in part on our expectations concerning future revenues 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.

It is difficult to forecast our future performance, which may cause our financial results to fluctuate unpredictably.

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. A number of factors, many of which are outside of our control, may contribute to fluctuations in our financial results, such as:

 

 

physician demand for purchasing CoolSculpting Systems may vary from quarter to quarter;

 

 

the inability for physicians to obtain any necessary financing;

 

 

changes in the length of the sales process;

 

 

performance of our international distributors;

 

 

positive or negative media coverage of CoolSculpting, 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 manufacturers or suppliers;

 

 

seasonal or other variations in patient demand for aesthetic procedures;

 

 

introduction of new aesthetic procedures or products that compete with CoolSculpting; and

 

 

adverse changes in the economy that reduce patient demand for elective aesthetic procedures.

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 revenues we generate from sales of our CoolSculpting System and from CoolSculpting procedure fees will account for substantially all of our revenues for the next several years. Accordingly, our success depends on the acceptance among physicians 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 in the United States and are approved or are otherwise free to market CoolSculpting in 46 international markets, the degree of market acceptance of CoolSculpting by physicians and patients is unproven. We believe that market acceptance of CoolSculpting will depend on many factors, including:

 

 

the perceived advantages or disadvantages of CoolSculpting compared to other aesthetic products and treatments;

 

 

the safety and efficacy of CoolSculpting relative to other aesthetic products and alternative treatments;

 

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the price of CoolSculpting relative to other aesthetic products and alternative treatments;

 

 

our success in expanding our sales and marketing organization;

 

 

the effectiveness of our marketing, advertising, and commercialization initiatives;

 

 

our success in maintaining the premium pricing for CoolSculpting through our select distribution model and physician marketing initiatives;

 

 

the willingness of patients to wait up to two to four months post-treatment to notice the aesthetic results of a CoolSculpting procedure; and

 

 

our ability to obtain regulatory clearance to market CoolSculpting for additional treatment indications in the United States.

We cannot assure you that CoolSculpting will achieve broad market acceptance among physicians 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 procedure, any failure of this product to satisfy physician or patient demand or to achieve meaningful market acceptance will harm our business and future prospects.

Our ability to market CoolSculpting in the United States is limited to the non-invasive reduction of fat around the flanks, 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 only 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.” This clearance restricts our ability to market or advertise CoolSculpting treatment for other specific body areas, which could limit physician 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 continue to be a significant portion of our business 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.

Our success depends on growing physician adoption and use of CoolSculpting.

Our ability to increase the number of physicians willing to make a significant capital expenditure to purchase our CoolSculpting System 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 physician can derive from performing CoolSculpting procedures are compelling when compared to the costs and revenues associated with alternative aesthetic treatments the physician may offer. 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. In addition, we believe our marketing programs, including our co-op physician marketing programs, will be critical in driving additional CoolSculpting procedures, but these programs require physician commitment and involvement to succeed. If we are unable to increase physician 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-op physician marketing initiatives, as to which we have limited experience;

 

 

the extent to which our physician 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 physician customers in the use of CoolSculpting such that their patients do not experience excessive discomfort during treatment or adverse side effects;

 

 

the cost, safety, and effectiveness of CoolSculpting versus other aesthetic treatments;

 

 

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 financial performance will be materially harmed in the event we cannot generate significant patient demand for CoolSculpting.

Our success depends in part upon patient satisfaction with the effectiveness of CoolSculpting.

In order 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 but are not obese. Although there are no technical or regulatory restrictions on the use of CoolSculpting based on patient weight, we believe patients who are 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. 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 physician 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 physician 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 aesthetic benefits of CoolSculpting, or feel that it is too expensive for the results obtained, our reputation and future sales will suffer.

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 and Canada. In order to meet our anticipated sales objectives, we expect to grow our direct sales and marketing organization in these countries

 

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significantly over the next several years and 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 physician 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 revenues to be lower than expected and harm our results of operations.

To market and sell CoolSculpting in markets outside of North America, we depend on third-party distributors.

We currently depend exclusively on third-party distributors to sell, market, and service our CoolSculpting Systems in markets outside of North America and to train our physician customers in such 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 physicians to purchase CoolSculpting Systems or as effective in training physicians 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.

If we fail to establish and maintain satisfactory relationships with our third-party distributors, our revenues and market share may not grow as anticipated, and we could be subject to unexpected costs 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.

Sales in markets outside of North America accounted for approximately 34% of our revenue for 2010 and 26% of our revenue for the six months ended June 30, 2011, with Asia-Pacific representing 17.5% and 8.6%, Europe, the Middle East and Africa representing 13.3% and 10.7%, and South America representing 2.9% and 6.6% of total revenues for these same periods, respectively. 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 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;

 

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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;

 

 

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 and our revenue may decline.

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. We designed CoolSculpting to address the aesthetic concerns of individuals who have stubborn fat bulges that may not respond to diet or exercise. 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. This product does not eliminate fat cells, however, which is the key factor in CoolSculpting’s treatment results and durability. In addition, the patient is required to undergo multiple treatments and is required to adopt a special diet and exercise program as part of the treatment protocol. In September 2011, the FDA cleared the marketing of an ultrasound energy-based product for body contouring, which Solta Medical, Inc., a publicly traded company, recently announced it was acquiring. This ultrasound energy-based product utilizes heat to non-invasively eliminate fat cells in a single procedure. The ultrasound energy-based product has not been launched for sale in the United States as of the date of this prospectus. Due to

 

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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 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 generally compete against medical technology and aesthetic companies, including those offering products and technologies unrelated to fat reduction, for physician resources and mindshare. Some of our competitors have a broad range of product offerings, large direct sales forces, and long-term customer relationships with our target physicians, which could inhibit our market penetration efforts. Our potential physician 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.

We and our third-party manufacturing partners have limited experience in producing 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.

Prior to receiving FDA clearance in 2009, we manufactured our CoolSculpting System in limited quantities sufficient only to meet the needs of our clinical studies. We currently manufacture our CoolSculpting System and related procedure packs, containing disposable gel pads and liners, through a combination of direct manufacturing at our facility in Pleasanton, California and through third-party manufacturers. To manufacture our CoolSculpting System in the quantities that we believe will be required to meet anticipated market demand, we and our third-party manufacturers will need to increase manufacturing capacity, which will involve significant challenges and may require additional regulatory approvals. In addition, the development of commercial-scale manufacturing capabilities will require us and our third-party manufacturers to invest substantial additional funds and hire and retain the technical personnel who have the necessary manufacturing experience. Neither we nor our third-party manufacturers may successfully complete any required increase to existing manufacturing processes in a timely manner, or at all.

If there is a disruption to our or our third-party manufacturers’ operations, we will have no other means of producing our CoolSculpting Systems until we restore the affected facilities or develop alternative manufacturing facilities. Additionally, any damage to or destruction of our or our third-party manufacturers’ facilities or equipment may significantly impair our ability to manufacture CoolSculpting Systems on a timely basis.

If we or our third-party manufacturers are unable to produce CoolSculpting Systems in sufficient quantities to meet anticipated customer demand, our revenues, business, and financial prospects would be harmed. The lack of experience we and our manufacturing partners 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 revenues. 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.

 

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We outsource the manufacturing of key elements of our CoolSculpting System to a single third-party manufacturer.

OnCore Manufacturing LLC, or OnCore, manufactures our CoolSculpting control units, our CoolMax applicators, and our CoolCards used with our CoolSculpting System. In addition, our disposable liners are manufactured by Coastline International, Inc. in Tijuana, Mexico. If the operations of third-party manufacturers, especially OnCore, are interrupted or if they are unable to meet our delivery requirements due to capacity limitations 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 and those of our key third-party manufacturers are dependent upon third-party suppliers, making us vulnerable to supply shortages and price fluctuations, which could harm our business.

Our CoolSculpting System contains two critical components, the integrated circuit contained in the CoolSculpting control unit, which is manufactured by Renesas Electronics Corporation in Japan, and the connector that attaches our applicators to the control unit, which is manufactured by Hypertronics Corporation in Hudson, Massachusetts. The single source suppliers of these two 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 and, although we 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 at OnCore, our contract manufacturer, 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 with these manufacturers. In addition, several other non-critical components and materials that comprise our CoolSculpting System are currently manufactured 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 until new sources of supply are identified and qualified. 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;

 

 

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;

 

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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.

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 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. Our limited historical commercial experience and rapid growth may not provide us with enough data to consistently and accurately predict future demand. If our business expands, our demand for components and materials increase beyond our estimates, our 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. Any of these occurrences would negatively affect our financial performance and the level of satisfaction our physician customers have with our business.

Even though our CoolSculpting System is marketed solely to physicians, there exists a potential for misuse, which could harm our reputation and our business.

We and our independent distributors market and sell CoolSculpting solely to physicians. Under state law in the United States, our physician customers can generally allow nurse practitioners, technicians, and other non-physicians to perform CoolSculpting procedures under their direct supervision. Similarly, in markets outside of the United States, physicians 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, or workmanship, or misuse of our CoolSculpting System, 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 physician 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 or suffers unanticipated adverse events 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. Product liability claims could divert management’s 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. In addition, we may not be able to maintain insurance in amounts or scope sufficient to provide us with

 

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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 reduce product sales. Product liability claims in excess of our insurance coverage would be paid out of cash reserves, harming our financial condition and reducing our operating results.

Third parties may attempt to produce counterfeit versions of our products and may harm our ability to collect procedure fees, negatively affect our reputation, or harm patients and subject us to product liability.

Third parties may seek to develop counterfeit CoolCards and procedure packs that are compatible with our CoolSculpting System and available to practitioners at lower prices than our own. If security features incorporated into the design of our CoolSculpting System are unable to prevent the introduction of counterfeit CoolCards, we may not be able to monitor the number of procedures performed using our CoolSculpting System. Practitioners may be able to make unauthorized use of our CoolSculpting System and our ability to collect procedure fees may be compromised. Procedure fees constituted approximately 17% and approximately 31% of our revenues for the year ended December 31, 2010 and the six months ended June 30, 2011, respectively, and an inability to collect them in the future would have a material adverse affect on our results of operations.

In addition, if counterfeit products are used with or in place of our own, we could be subject to product liability lawsuits resulting from the use of damaged or defective goods and suffer damage to our reputation.

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 head count from 64 at January 1, 2010 to 148 at September 30, 2011, and plan to continue to hire a substantial number of additional employees as we increase our commercialization 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. We only maintain key man insurance for our chief executive officer.

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.

 

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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 generate substantial revenues from sales of our CoolSculpting System and from CoolSculpting procedure fees, 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 or on acceptable terms, or at all. If we require additional capital at a time when investment in our 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.

Our ability to use net operating losses and tax credit carryforwards to offset future tax liabilities may be limited.

As of June 30, 2011, we had federal net operating loss carryforwards, or NOLs, to offset future taxable income of approximately $65.4 million, which expire in various years beginning in 2025, if not utilized. We also have state and federal tax credit carryforwards that will begin to expire in 2025. 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. If we undergo an ownership change in connection with or after this offering, our ability to utilize NOLs and tax credit carryforwards could be limited by Section 382 of the Code. 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 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.

The 510(k) clearance processes, 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.

 

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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 revenues 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.

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 approved by the FDA as reflected in the product’s approved labeling. Our current FDA label only permits marketing CoolSculpting in the United States for use on the flanks and restricts us from promoting it for use on other parts of the body. We are aware that CoolSculpting is used by our physician customers on other parts of the body. If we are found to have inappropriately marketed for 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.

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. 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 the 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. In addition, we plan to move the entire manufacturing process for our CoolSculpting System to one or more third-party manufacturers. When we do so, such manufacturer(s) will be required to comply with the QSR, and will be subject to inspections. We will have limited ability to ensure that any such third-party manufacturer(s) will take the necessary steps to comply with applicable regulations, which could cause delays in the delivery of our products.

 

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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 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.

In addition, a product defect or regulatory violation could lead to a government-mandated or voluntary recall by us. We believe that the FDA would request that we initiate a voluntary recall or impose a mandatory recall if a product was defective or presented a risk of injury or gross deception. 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; and

 

 

additional record keeping.

 

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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 payors. In March 2010, Congress enacted comprehensive health care reform legislation known as the Patient Protection and Affordable Care Act of 2010, or the PPACA. While the PPACA involves expanding coverage to more individuals, it includes new regulatory mandates and other measures designed to constrain medical costs. The PPACA also imposes significant new taxes on medical technology manufacturers that are expected to cost the medical technology industry up to $20 billion over the next decade. The PPACA imposes a 2.3% excise tax on sales of medical devices by manufacturers. There is no exemption for small companies, and we expect to begin paying the tax in 2013. The PPACA also requires manufacturers to report to the Department of Health and Human Services detailed information about financial arrangements with physicians and teaching hospitals. These reporting provisions preempt state laws that require reporting of the same information, but not those that require reports of different or additional information. Failure to comply subjects the manufacturer to significant civil monetary penalties. We expect compliance with the PPACA to impose significant administrative and financial burdens on us, which may harm our results of operation.

We may be subject to various federal and state laws pertaining to health care fraud and abuse, including anti-kickback, self-referral, false claims, and fraud laws, and any violations by us of such laws could result in fines or other penalties.

Our commercial, research, and other financial relationships with healthcare providers and institutions may be subject to various federal and state laws intended to prevent health care fraud and abuse. The federal anti-kickback statute prohibits the offer, receipt, or payment of remuneration in exchange for or to induce the referral of patients or the use of products or services that would be paid for in whole or part by Medicare, Medicaid or other federal health care programs. Remuneration has been broadly defined to include anything of value, including cash, improper discounts, and free or reduced price items and services. Many states have similar laws that apply to their state health care programs as well as private payors. Violations of the anti-kickback laws can result in exclusion from federal health care programs and substantial civil and criminal penalties.

The federal False Claims Act, or FCA, imposes liability on persons who, among other things, present or cause to be presented false or fraudulent claims for payment by a federal health care program. The FCA has been used to prosecute persons submitting claims for payment that are inaccurate or fraudulent, that are for services not provided as claimed, or for services that are not medically necessary. The FCA includes a whistleblower provision that allows individuals to bring actions on behalf of the federal government and share a portion of the recovery of successful claims. If our marketing or other arrangements were determined to violate anti-kickback or related laws, including the FCA, then our revenues could be adversely affected, which would likely harm our business, financial condition, and results of operations.

State and federal authorities have aggressively targeted medical technology companies for alleged violations of these anti-fraud statutes, based on improper research or consulting contracts with doctors, certain marketing arrangements that rely on volume-based pricing, 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 contractual relationships with providers or institutions, or our marketing and promotional practices, we could face similar sanctions which would materially harm our business.

Also, the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of

 

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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. 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, or agents. Violations of these laws, or allegations of such violations, could result in fines, penalties, or prosecution and have a negative impact on our business, results of operations and reputation.

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 sizeable 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 September 30, 2011, our patent portfolio is comprised of five issued U.S. patents, 44 issued foreign counterpart patents, 18 pending U.S. patent applications, 60 pending foreign counterpart patent applications, and four pending patent applications under the Patent Cooperation Treaty, or PCT, 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.

 

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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 the Massachusetts General Hospital, or 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.

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 are incorporated on the intellectual propriety 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 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.

 

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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.

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.

 

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Risks Related to Our Common Stock and This Offering

Our stock price may be volatile and you may lose all or a part of your investment.

The public offering price for our common stock may vary from the market price of our common stock at the time of the offering. 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. A loss of investor confidence may result in extreme price and volume fluctuations in our common stock that are unrelated or disproportionate to the operating performance of our business, our financial condition, or results of operations. These broad market and industry factors may materially harm the market price of our common stock and expose us to securities class-action litigation. 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.

An active trading market for our common stock may not develop, and you may not be able to resell your common stock at or above the public offering price.

Prior to this offering, there has been no public market for our common stock. The initial public offering price has been determined by negotiation between the representatives of the underwriters and us. This price may not reflect

 

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the market price of our common stock following this offering. In addition, an active trading market may not develop following completion of this offering or, if it is developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other businesses, applications, or technologies using our shares as consideration.

Our management has broad discretion as to the use of the net proceeds from this offering.

We can not specify with certainty the particular uses of the net proceeds we will receive from this offering, and these uses may vary substantially from our current plans. Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in “Use of Proceeds.” Accordingly, you will have to rely upon the judgment of our management with respect to the use of the proceeds. Our management may spend a portion or all of the net proceeds from this offering in ways that holders of our common stock may not desire or that may not yield a significant return or any return at all. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may also invest the net proceeds from this offering in a manner that does not produce income or that loses value.

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 will be 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 will trade and other applicable federal and state securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly and increase 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 will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. Our first report on compliance with Section 404 is expected to be in connection with our financial statements for the year ending December 31, 2012. The controls and other procedures are designed to ensure that information required to be disclosed by us in the reports that we file with the Securities and Exchange Commission, or SEC, is disclosed accurately and is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. We are in the early stages of conforming our internal control procedures to the requirements of Section 404 and we may not be able to complete our evaluation, testing, and any required remediation needed to comply with Section 404 in a timely fashion. Our independent registered public accounting firm has not been engaged to perform an audit of our internal control over financial reporting. Our independent registered public accounting firm’s audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of our internal control over financial reporting. Accordingly, no such opinion was expressed. Even if we develop effective controls, these new controls may become inadequate because of changes in conditions or the degree of compliance with these policies or procedures may deteriorate. Even after we develop these new procedures additional weaknesses in our internal control over financial reporting may be discovered. In order to fully comply with Section 404, we will need to retain additional employees to supplement our current finance staff, and we may not be able to so in a timely manner, or at all. In addition, in the process of evaluating our internal control over financial reporting we expect that certain of our internal control practices will need to be updated to comply with the requirements of Section 404 and the regulations promulgated thereunder, and we may not be able to do so on a timely basis, or at all. 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

 

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confidence in our operating results and the price of our common stock could decline. Furthermore, if we or our independent registered public accounting firm are unable to certify that our internal control over financial reporting is effective and in compliance with Section 404 we may be subject to sanctions or investigations by regulatory authorities such as the SEC or the securities exchange on which we trade and we could lose investor confidence in the accuracy and completeness of our financial reports, 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.

We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and members of our Board of Directors, particularly to serve on our audit committee and compensation committee.

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 quotation on the NASDAQ Global Select Market.

As a public company, we will require greater financial resources than we have had as a private company. We cannot provide you with assurance 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 delisting on the NASDAQ Global Select Market, Securities and Exchange Commission investigation, and civil or criminal sanctions.

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of 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

 

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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 your investment in our company 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.

New investors in our common stock will experience immediate and substantial dilution.

The initial public offering price is substantially higher than the book value per share of our common stock. Investors purchasing common stock in this offering will, therefore, incur immediate dilution of $12.04 per share in net tangible book value per share of common stock, based on the assumed initial offering price of $15.00 per share, the mid-point of the range on the cover of this prospectus. Investors will incur additional dilution upon the exercise of outstanding stock options and warrants.

Our directors, executive officers, and significant stockholders will continue to hold a substantial portion of our stock after this offering, which may lead to conflicts of interest with other stockholders over corporate transactions and other corporate matters.

Following the completion of this offering, our directors, executive officers, and beneficial holders of 10% or more of our outstanding common stock will beneficially own approximately 53.7% of our outstanding common stock, including warrants and stock options exercisable within 60 days after October 17, 2011. One of our principal stockholders, Aisling Capital, an entity affiliated with one of our directors, has indicated interest in purchasing up to $10,000,000 of our common stock in this offering. If Aisling Capital purchases $10,000,000 of our common stock in this offering at the assumed initial public offering price of $15.00 per share, the midpoint of the range on the cover of this prospectus, Aisling Capital will beneficially own 4,070,177 shares of our common stock and approximately 12.4% of our outstanding common stock following completion of this offering, and the percentage of our outstanding common stock held by our directors, officers and significant stockholders following the completion of this offering would be approximately 55.6%. 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 which will be in place following our initial public offering. However, these stockholders, acting together, would be able to influence significantly all matters requiring stockholder approval, including the election of directors and significant corporate transactions such as mergers or other business combinations. This control 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.

There may be sales of substantial amounts of our common stock after this offering, which could cause our stock price to fall.

Our current stockholders hold a substantial number of shares, which they will be able to sell in the public market in the near future. Upon the completion of this offering, 32,758,082 shares of common stock will be outstanding, assuming conversion of our preferred stock into shares of common stock, no exercise of the underwriters’ over-allotment option and no exercise of outstanding options or other warrants after September 30, 2011. All of the shares sold in this offering will be freely tradable, except for shares purchased by any of our existing “affiliates,” as that term is defined in Rule 144 promulgated under the Securities Act of 1933, as amended, or the Securities Act, which generally includes officers, directors and 10% or greater stockholders. One of our principal stockholders, Aisling Capital, an entity affiliated with one of our directors, has indicated an interest in purchasing up to $10,000,000 of our common stock in this offering at the initial public offering price. Any shares purchased by Aisling Capital will be subject to a lock-up agreement in favor of the underwriters similar to those signed by our officers, directors and stockholders described below except that the restricted period shall be only 45 days, subject to extension in certain circumstances. After the expiration of this 45-day lock-up period, any shares purchased by Aisling Capital in this offering will be freely tradable, subject to volume and other restrictions applicable to our affiliates under Rule 144. Further, as soon as practicable following completion of this offering, we also intend to file

 

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a registration statement covering common stock issued or reserved for issuance under our share incentive plans. Our 2011 Plan provides for annual increases in the number of shares available for issuance under the 2011 Plan.

A significant portion of the shares of our common stock outstanding after this offering will continue to be restricted as a result of securities laws, or lock-up agreements with our underwriters. The lock-up agreements restrict holders’ ability to transfer their stock for 180 days after the date of this prospectus, subject to extension in certain circumstances. Of the outstanding restricted shares, no shares will be available for sale in the public market on the date of this offering, and an additional 25,758,082 shares will be available for sale in the public market beginning 180 days after the date of this prospectus, subject to extension in certain circumstances and to the requirements of Rule 144. The underwriters may, however, waive the lock-up period at any time for any stockholder. Sales of a substantial number of shares of our common stock within a short period of time after this offering, or after the expiration of applicable lock-up periods, could cause our stock price to fall. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional stock.

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 supermajority 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 will own 15% or more of our outstanding voting stock upon the closing of this offering.

 

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Special Note Regarding Forward-looking Statements

This prospectus contains forward-looking statements concerning our business, operations, and financial performance and condition as well as our plans, objectives, and expectations for our business operations and financial performance and condition. Any statements contained herein that are not of historical facts may be deemed to be forward-looking statements. You can identify these statements by words such as “aim,” “anticipate,” “assume,” “believe,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “should,” “target,” “will,” “would,” and other similar expressions that are predictions of or indicate future events and future trends. These forward-looking statements are based on current expectations, estimates, forecasts, and projections about our business and the industry in which we operate and management’s beliefs and assumptions and are not guarantees of future performance or development and involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this prospectus may turn out to be inaccurate. Factors that may cause such differences include, but are not limited to, the risks described under “Risk Factors,” including:

 

 

our failure to achieve or maintain profitability;

 

 

our failure to estimate or control our future expenditures on sales and marketing, research and development, and administrative activities;

 

 

the failure of CoolSculpting to gain market acceptance domestically or internationally;

 

 

our failure to obtain additional FDA clearances that would allow us to expand our marketing claims for CoolSculpting in the United States;

 

 

less than anticipated growth in the number of physicians willing to make a significant capital expenditure to purchase our CoolSculpting System and make CoolSculpting a significant part of their practices;

 

 

insufficient patient demand for CoolSculpting procedures;

 

 

the implementation of our business model and strategic plans for our business, products, and technology;

 

 

the scope of protection we are able to establish and maintain for intellectual property rights covering our CoolSculpting System and technology;

 

 

our inability to operate our business without infringing upon the intellectual rights of others, which could result in litigation and significant expenditures;

 

 

the timing or likelihood of regulatory filings and approvals and changes in the regulatory environment which may adversely impact the commercialization of our new products and result in significant additional capital expenditures;

 

 

our inability to attract or retain skilled personnel for our product development and commercialization efforts;

 

 

our use of proceeds from this offering; and

 

 

competition from other companies and technologies in and beyond our industry.

Potential investors are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on the forward-looking statements. These forward-looking statements speak only as of the date of this prospectus. Unless required by law, we do not intend to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this prospectus. See “Where You Can Find More Information.”

 

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Market, Industry, and Other Data

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations regarding the size of the aesthetics market, the number of and growth in aesthetic procedures, the number of physicians who perform aesthetic procedures, the number of physician practice sites, and the level of consumer interest in CoolSculpting is based on information from various sources, on assumptions that we have made that are based on those data and other similar sources and on our knowledge of the markets for our product. While we believe the market information included in this prospectus is based on reasonable and sound assumptions and is reliable as of the date of this prospectus, we have not and cannot independently verify the market, industry, and other data published or produced by third parties. In addition, information relating to the number of our potential physician customers, the number of physician practice sites, and projections, assumptions, and estimates of our future performance, and the future performance of the medical technology and aesthetic markets in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause our results and the state of the markets in which we operate to differ materially from those expressed in the estimates made by third parties and by us.

 

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Use of Proceeds

We estimate that the net proceeds from the sale of the 6,693,000 shares of our common stock that we are selling in this offering will be approximately $89.2 million, based on an assumed initial public offering price of $15.00 per share, the midpoint of the range on the front cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ overallotment option is exercised in full, we estimate that we will receive net proceeds of approximately $103.9 million. We will not receive any of the proceeds from the sale of the shares offered by the selling stockholders.

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $6.2 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Of the net proceeds that we will receive from this offering, we expect to use up to $7.0 million to pay our remaining milestone obligations to the General Hospital Corporation, a not-for-profit Massachusetts corporation, which owns and operates MGH. We are obligated to make two milestone payments to MGH including (i) $1 million due upon achieving cumulative net sales (as defined in our agreement with MGH) of $70 million and (ii) $6 million due upon the earlier to occur of achieving cumulative net sales of $200 million or the completion of this offering. In lieu of a cash payment, MGH may elect to receive up to 50% of each of the remaining milestone payments in our common stock, subject to a cap of 3.5% of our common stock on a fully-diluted basis.

We intend to use the remainder of our net proceeds for general corporate purposes. Our primary purpose for pursuing this offering is to raise funds to support the further commercialization of CoolSculpting. As a result, we intend to prioritize our future expenditures on expanding our North American and international sales and distribution infrastructure, expanding our planned physician and consumer marketing initiatives, expanding our FDA-cleared indications for CoolSculpting, and obtaining additional regulatory approvals for CoolSculpting in key international markets. We also intend to use our remaining net proceeds to support our planned research and product development activities, including improving and enhancing the CoolSculpting System and the CoolSculpting procedure and exploring the development of additional aesthetic products utilizing our proprietary controlled-cooling technology platform. We also may use a portion of our net proceeds to acquire complementary products, technologies, or businesses; however, we currently have no agreements or commitments to complete any such transaction and are not involved in negotiations to do so. Other than the payment of our remaining milestone obligations to MGH, we have not yet identified the amounts we plan to spend on each of these areas or the timing of the expenditures. Accordingly, our management will have broad discretion in the application of the net proceeds, and investors will be relying on the judgment of our management regarding the application of the proceeds in this offering. The amounts that we actually spend for the purposes described above may vary significantly and will depend, in part, on the timing and amount of our future revenue, our future expenses, and any future acquisitions that we may propose. Pending these uses, we plan to invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities.

Dividend Policy

We have never declared or paid any cash dividends on shares of our common stock. We currently intend to retain our earnings, if any, and cash to fund working capital and for general corporate purposes. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend upon our financial condition, results of operations, and capital requirements.

 

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Capitalization

The following table sets forth our capitalization as of June 30, 2011 on:

 

 

an actual basis;

 

 

a pro forma basis to reflect (i) the automatic conversion of our outstanding shares of convertible preferred stock into 24,415,965 shares of common stock upon the completion of this offering, (ii) the exercise, on a cash basis, of warrants to purchase an aggregate of 5,340 shares of common stock at an exercise price of $0.55 per share upon the completion of this offering, (iii) the filing of our amended and restated certificate of incorporation prior to the closing of this offering, and (iv) the exercise, on a cash basis, of options to purchase 241,000 shares of common stock by certain selling stockholders; and

 

 

a pro forma as adjusted basis to reflect (i) the automatic conversion of our outstanding shares of convertible preferred stock into 24,415,965 shares of common stock upon the completion of this offering, (ii) the exercise, on a cash basis, of warrants to purchase an aggregate of 5,340 shares of common stock at an exercise price of $0.55 per share upon the completion of this offering, (iii) the filing of our amended and restated certificate of incorporation prior to the closing of this offering, (iv) the exercise, on a cash basis, of options to purchase 241,000 shares of common stock by certain selling stockholders, and (v) the estimated net proceeds from the sale by us of 6,693,000 shares of common stock in this offering at the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

This table should be read in conjunction with our financial statements and related notes appearing elsewhere in this prospectus.

 

     As of June 30, 2011  
     Actual     Pro
Forma
    Pro Forma,
as adjusted
 
     (unaudited)  
     (in thousands, except share and per
share amounts)
 

Notes payable, including current portion

   $ 965      $ 965      $ 965   

Convertible preferred stock warrant liability

     633        633        633   
  

 

 

   

 

 

   

 

 

 

Convertible preferred stock, $0.01 par value per share: 86,163,074 shares authorized, 23,381,764 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     81,164                 
  

 

 

   

 

 

   

 

 

 

Stockholders’ equity (deficit):

      

Preferred stock, $0.01 par value per share; no shares issued or outstanding, actual; 50,000,000 shares authorized and no shares issued or outstanding, pro forma and pro forma as adjusted

                     

Common stock, $0.001 par value per share: 112,000,000 shares authorized, 1,351,296 shares issued and outstanding, actual; 500,000,000 shares authorized, 26,013,603 shares issued and outstanding, pro forma; and 500,000,000 shares authorized, 32,706,603 shares issued and outstanding pro forma as adjusted

     5        25        32   

Note receivable from a stockholder

     (245     (245     (245

Additional paid-in capital

     3,360        84,507        173,748   

Accumulated deficit

     (75,392     (75,392     (75,392
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (72,272     8,895        98,143   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 10,490      $ 10,493      $ 99,741   
  

 

 

   

 

 

   

 

 

 

 

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Outstanding shares of our common stock reflected in the discussion and table above is based on 26,013,603 shares of our common stock (including preferred stock on an as-converted basis) outstanding as of June 30, 2011 and excludes, as of June 30, 2011:

 

 

65,319 shares of Series D-1 convertible preferred stock issuable upon exercise of outstanding warrants at an exercise price of $2.68 per share, which are convertible into 65,319 shares of common stock;

 

 

4,336,906 shares of our common stock subject to outstanding options granted pursuant to our 2005 Plan at a weighted-average exercise price of $1.69 per share, of which 2,776,418 shares remain subject to vesting requirements;

 

 

211,949 shares of common stock which will be available for issuance under our 2011 Plan which will become effective upon the completion of this offering and will serve as the successor equity incentive plan to our 2005 Plan, plus any shares of common stock issued pursuant to the 2005 Plan or subject to awards granted under the 2005 Plan that are forfeited, repurchased, returned or otherwise become available for issuance in accordance with the terms of the 2005 Plan, and plus the annual increases in the number of shares authorized under the 2011 Plan beginning January 1, 2012;

 

 

470,018 shares of our common stock available for future grant or issuance under our 2011 ESPP, which will become effective upon the completion of this offering, and the annual increases in the number of shares authorized under this plan beginning January 1, 2012; and

 

 

shares of our common stock that the General Hospital Corporation, a not-for-profit Massachusetts Corporation, which owns and operates the Massachusetts General Hospital, or MGH, may elect to receive in lieu of cash for up to 50% of each of the remaining $1 million and $6 million milestone payments we will owe MGH upon our achievement of certain milestones as described herein, subject to a cap of 3.5% of our common stock on a fully-diluted basis.

 

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Dilution

If you invest in our common stock, your interest in our net tangible book value will be diluted to the extent of the difference between the public offering price and the net tangible book value per share of our common stock immediately after the completion of this offering. Dilution results from the fact that the assumed initial public offering price is substantially in excess of the book value per share attributable to the existing stockholders for the presently outstanding stock.

Our pro forma net tangible book value as of June 30, 2011 was approximately $7.5 million, or $0.29 per share. Pro forma net tangible book value per share is determined by dividing the amount of our total tangible assets less our total liabilities by the total number of shares outstanding, after giving effect to the automatic conversion upon the completion of this offering of all of our outstanding convertible preferred stock and the exercise of warrants to purchase common stock.

After giving effect to the sale by us of 6,693,000 shares of common stock in this offering at the assumed initial public offering price of $15.00 per share, the midpoint of the range set forth on the cover of this prospectus, and after deducting underwriting discounts and commissions and our estimated offering expenses totaling approximately $4.1 million, our pro forma net tangible book value as of June 30, 2011 would have been approximately $96.8 million, or $2.96 per share.

This amount represents an immediate increase in pro forma net tangible book value of $2.67 per share and an immediate dilution of $12.04 per share to new investors. The following table illustrates this calculation on a per share basis:

 

    Per Share  

Assumed initial public offering price per share

    $ 15.00   

Pro forma net tangible book value per share of common stock as of June 30, 2011

  $ 0.29     

Pro forma increase per share attributable to the offering

    2.67     
 

 

 

   

Pro forma as adjusted net tangible book value per share of common stock after this offering

      2.96   
   

 

 

 

Dilution per share to new investors

    $ 12.04   
   

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) our pro forma as adjusted net tangible book value after this offering by approximately $6.2 million, or approximately $0.19 per share and the dilution to new investors of common stock in this offering by approximately $0.19 per share.

If the underwriters exercise their over-allotment option of 1,050,000 shares in full, our pro forma as adjusted net tangible book value will increase to $3.30 per share, representing an increase to existing stockholders of $0.34 per share, and there will be an immediate dilution of $11.70 per share to new investors after giving effect to the underwriting discounts and commisions and estimated offering expenses payable by us.

 

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The following table summarizes, on a pro forma as adjusted basis, as of June 30, 2011, after giving effect to the sale of 6,693,000 shares in this offering and the pro forma adjustments referred to above, the total number of shares of our common stock purchased from us and the total consideration and average price per share paid by existing stockholders and by new investors at the assumed offering price of $15.00 per share:

 

    

 

Shares Purchased

   

 

Total Consideration

    Weighted
Average
Price Per
Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     26,013,603         79.5     79,406         44.3   $ 3.05   

New investors

     6,693,000         20.5        100,000         55.7      $ 15.00   
  

 

 

      

 

 

      

 

 

 

Total

     32,706,603         100     179,406         100  
  

 

 

      

 

 

      

Sales by the selling stockholders in this offering will cause the number of shares held by our existing stockholders to be reduced to 25,706,603 shares, or 78.6% of the total number of shares of our common stock outstanding after this offering, and will increase the number of shares held by new investors to 7,000,000 shares, or 21.4% of the total number of shares of our common stock outstanding after this offering, assuming no shares are purchased by Aisling Capital III, LP, one of our principal stockholders, in this offering.

If the underwriters exercise an over-allotment option to purchase shares in full, the following will occur:

 

 

the pro forma percentage of shares of our common stock held by existing stockholders will decrease to approximately 77.1% of the total number of pro forma as adjusted shares of our common stock outstanding after this offering; and

 

 

the pro forma number of shares of our common stock held by new investors will increase to 7,743,000, or approximately 22.9% of the total pro forma as adjusted number of shares of our common stock outstanding after this offering.

The above discussion and tables exclude as of June 30, 2011:

 

 

65,319 shares of Series D-1 convertible preferred stock issuable upon exercise of outstanding warrants at an exercise price of $2.68 per share, which are convertible into 65,319 shares of common stock;

 

 

4,577,906 shares of our common stock subject to outstanding options outstanding granted pursuant to our 2005 Plan at a weighted-average exercise price of $1.65 per share, of which 2,776,418 shares remain subject to vesting requirements;

 

 

211,949 shares of common stock which will be available for issuance under our 2011 Plan which will become effective upon the completion of this offering and will serve as the successor equity incentive plan to our 2005 Plan, plus any shares of common stock issued pursuant to the 2005 Plan or subject to awards granted under the 2005 Plan that are forfeited, repurchased, returned or otherwise become available for issuance in accordance with the terms of the 2005 Plan, and plus the annual increases in the number of shares authorized under the 2011 Plan beginning January 1, 2012;

 

 

470,018 shares of our common stock available for future grant or issuance under our 2011 ESPP, which will become effective upon the completion of this offering, and the annual increases in the number of shares authorized under this plan beginning January 1, 2012; and

 

 

shares of our common stock that the General Hospital Corporation, a not-for-profit Massachusetts Corporation, which owns and operates the Massachusetts General Hospital, or MGH, may elect to receive in lieu of cash for up to 50% of each of the remaining $1 million and $6 million milestone payments we will owe MGH upon our achievement of certain milestones as described herein, subject to a cap of 3.5% of our common stock on a fully-diluted basis.

The preceding discussion and tables assume no exercise of any options outstanding as of June 30, 2011. If all of our outstanding options as of June 30, 2011 were exercised, the pro forma net tangible book value per share after this offering would be $2.80 per share, representing a decrease to existing stockholders of $0.16 per share, and there would be an immediate dilution of $12.20 per share to new investors.

 

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Selected Financial Data

You should read the following selected financial data in conjunction with our financial statements, the notes to the financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The selected financial data included in this section are not intended to replace the financial statements and the related notes included elsewhere in this prospectus.

We derived the selected statement of operations data for the years ended December 31, 2008, 2009, and 2010 and the balance sheet data as of December 31, 2009 and 2010 from our audited financial statements appearing elsewhere in this prospectus. The selected statement of operations data for the six months ended June 30, 2010 and 2011, and the balance sheet data as of June 30, 2011 are derived from our unaudited financial statements appearing elsewhere in this prospectus. The selected statement of operations data for the years ended December 31, 2006 and 2007 and the balance sheet data as of December 31, 2006, 2007, and 2008 are derived from our audited financial statements not included in this prospectus. Our unaudited financial statements have been prepared on a basis consistent with our audited financial statements and include, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the financial information in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future, and our interim results are not necessarily indicative of the results to be expected for the full fiscal year.

 

          Six Months Ended
June 30,
 
  Year Ended December 31,    
    2006     2007     2008     2009     2010     2010     2011  
    (in thousands, except share and per share amounts)  

Revenues

  $      $      $      $ 1,587      $ 25,461      $ 6,624      $ 31,626   

Cost of revenues(1)

                         2,243        12,295        3,354        12,349   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

                         (656     13,166        3,270        19,277   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

             

Research and development(1)

    3,665        7,908        13,699        8,034        8,222        4,244        4,607   

Sales and marketing(1)

           697        2,568        4,519        11,987        4,683        11,568   

General and administrative(1)

    1,669        3,096        5,192        3,966        5,873        2,464        4,031   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    5,334        11,701        21,459        16,519        26,082        11,391        20,206   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (5,334     (11,701     (21,459     (17,175     (12,916     (8,121     (929

Interest expense

                         (516     (497     (403     (60

Other income (expense), net

    268        368        352        47        (120     22        (395
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (5,066     (11,333     (21,107     (17,644     (13,533     (8,502     (1,384

Cumulative dividends on convertible preferred stock

    (643     (1,525     (4,429     (4,208     (5,426     (2,343     (3,127
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (5,709   $ (12,858   $ (25,536   $ (21,852   $ (18,959   $ (10,845   $ (4,511
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(2)

  $ (34.86   $ (66.54   $ (36.17   $ (28.02   $ (20.19   $ (12.77   $ (3.48
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares of common stock outstanding used in computing net loss attributable to common stockholders—basic and diluted(2)

    163,757        193,238        706,029        779,841        939,028        849,194        1,294,597   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders—basic and diluted (unaudited)(2)

          $ (0.65     $ (0.04
         

 

 

     

 

 

 

Weighted-average shares of common stock outstanding used in computing the pro-forma net loss attributable to common stockholders—basic and diluted (unaudited)(2)

            20,562,039          25,710,562   
         

 

 

     

 

 

 

 

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Table of Contents
     As of December 31,     As of
June 30,
 
     2006     2007     2008     2009     2010     2011  
     (in thousands)  

Balance Sheet Data:

            

Cash and cash equivalents

   $ 9,936      $ 8,661      $ 12,181      $ 3,100      $ 12,667      $ 8,700   

Restricted cash

     20        272        352        341        425        255   

Working capital (deficit)

     9,568        7,749        11,220        (3,346     7,694        5,836   

Total assets

     10,245        9,876        14,225        6,928        19,283        19,283   

Total notes payable

                          7,784        1,596        965   

Convertible preferred stock warrant liability

                          146        257        633   

Convertible preferred stock

     17,640        29,420        58,846        63,054        93,888        81,164   

Total stockholders’ deficit

     (7,921     (20,760     (45,860     (67,142     (84,493     (72,272

 

(1) The following table presents stock-based compensation in each expense category:

 

    Year Ended December 31,     Six Months Ended
June 30,
 
        2006             2007             2008             2009             2010               2010                 2011        
   

(in thousands)

 

Cost of revenues

  $      $      $      $ 14      $ 39      $ 11      $ 17   

Research and development

    3        52        94        98        100        51        156   

Sales and marketing

           17        79        65        89        35        181   

General and administrative

    19        70        147        266        1,059        329        379   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

  $   22      $ 139      $ 320      $ 443      $ 1,287      $ 426      $ 733   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(2) See Notes 2 and 15 to our audited financial statements for an explanation of the calculations of our basic and diluted net loss per share of common stock attributable to common stockholders and pro forma net loss per share of common stock attributable to common stockholders.

 

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Management’s Discussion and Analysis of Financial Condition and

Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” included elsewhere in this prospectus.

Overview

We are a medical technology company focused on developing and commercializing products utilizing our proprietary controlled-cooling technology platform. Our first commercial product, the CoolSculpting System, is designed to selectively reduce stubborn fat bulges that may not respond to diet or exercise. We generate revenues from capital sales of our CoolSculpting System and from procedure fees our physician customers pay for each CoolSculpting procedure they perform. We received clearance from the FDA in September 2010 to market CoolSculpting for the selective reduction of fat around the flanks, an area commonly referred to as the “love handles.” We have received regulatory approval or are otherwise free to market CoolSculpting in 46 international markets, where use of the product is generally not limited to specific treatment areas. Physicians in these markets commonly perform CoolSculpting procedures on the abdomen, inner thighs, back, and chest, in addition to the flanks. We generated revenues of $25.5 million for the year ended December 31, 2010, and $31.6 million for the six months ended June 30, 2011.

We selectively market CoolSculpting to dermatologists, plastic surgeons, and aesthetic specialists. According to a market research study we commissioned through Easton Associates, there are currently over 70,000 physicians who perform aesthetic procedures at approximately 30,000 practice sites worldwide, including over 16,000 physicians and approximately 8,000 practice sites within the United States and Canada. We intend to place our CoolSculpting System with 4,000 to 5,000 physician practice sites on a global basis. We target dermatologists, plastic surgeons, and aesthetic specialists who have practices focused on aesthetic procedures and who express a willingness to position CoolSculpting as a premium, differentiated treatment and participate in our practice marketing and support programs. Some of our target practices have and may purchase more than one CoolSculpting System. Our selective distribution strategy is designed to enable our physician customers to market CoolSculpting as a premium, highly-differentiated, non-invasive fat reduction procedure. Based on our commercial data, we believe physicians can recoup their capital expenditures within six months assuming modest use. In addition, we designed our CoolSculpting System to allow a physician to see and treat other patients or perform concurrent procedures, such as injections or other dermal treatments, on the same patient during the 60-minute CoolSculpting procedure.

In the United States and Canada, we use our direct sales organization to selectively market CoolSculpting. As of June 30, 2011, our direct sales force consisted of 31 professionals. To support the continued roll-out of CoolSculpting, we anticipate that our North America direct sales force will increase to between 50 and 70 sales professionals in the next 12 months. We also intend to seek additional regulatory clearances from the FDA to expand our U.S. marketed indications for CoolSculpting to areas on the body other than the flanks.

In markets outside of North America, we sell CoolSculpting through a network of distributors. We intend to grow our international sales and marketing organization to focus on increasing sales and strengthening our physician relationships. As part of that strategy, we intend to opportunistically deploy a direct sales force in select international markets. We also intend to seek regulatory approval to market CoolSculpting in key additional international markets, including China. Revenues from markets outside of North America comprised 34% of our total revenues for the year ended December 31, 2010, and 26% of our total revenues for the six months ended June 30, 2011, with Asia-Pacific representing 17.5% and 8.6%, Europe, the Middle East, and Africa representing 13.3% and 10.7%, and South America representing 2.9% and 6.6% of total revenues for these same periods, respectively.

 

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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.

Our revenues increased from $1.6 million in 2009, the first year of CoolSculpting sales, to $25.5 million in 2010. Our revenues increased to $31.6 million during the six months ended June 30, 2011 from $6.6 million for the same period in 2010. We incurred net losses of $21.1 million, $17.6 million, and $13.5 million in the years ended December 31, 2008, 2009, and 2010, respectively, and $1.4 million for the six months ended June 30, 2011. As of June 30, 2011, we had an accumulated deficit of $75.4 million. We expect to continue to incur losses as we invest in building our sales and marketing organization, expand our commercialization and marketing activities, and increase our research and development activities to enhance CoolSculpting and to expand our product line.

Basis of Presentation

Revenues

We generate revenues from capital sales of our CoolSculpting System and from procedure fees our physician customers pay for each CoolSculpting procedure they perform.

Systems revenues.    Sales of our CoolSculpting System include the CoolSculpting control unit and our CoolSculpting vacuum applicators. We intend to place our CoolSculpting System with 4,000 to 5,000 physician practice sites on a global basis. We target dermatologists, plastic surgeons and aesthetic specialists who have practices focused on aesthetic procedures and who express a willingness to position CoolSculpting as a premium, differentiated treatment and participate in our practice marketing and support programs. Some of our target practices may purchase more than one CoolSculpting System. Our standard terms do not allow for trial or evaluation periods, rights of return, or refund payments contingent upon the customer obtaining financing or other terms that could impact the customer’s obligation. We increased our worldwide installed base of CoolSculpting Systems from 346 units as of December 31, 2010 to 629 units as of June 30, 2011.

Procedure fees revenues.    We generate revenues from procedure fees through sales of CoolSculpting procedure packs, each of which includes our consumable gelpads and liners and a disposable computer cartridge that we market as the CoolCard. The CoolCard contains enabling software that permits our physician customer to perform a fixed number of CoolSculpting procedures. Procedure fees comprised approximately 17% of our total revenues for the year ended December 31, 2010, and approximately 31% of our total revenues for the six months ended June 30, 2011. As of June 30, 2011, we had sold over 134,000 CoolSculpting procedures to our physician customers.

Our business plan focuses on expanding our base of physician customers, and increasing our procedure fees revenues by driving demand for CoolSculpting procedures through our physician and consumer marketing programs. We anticipate that as we implement our business plan our revenues from procedure fees will increase as a percentage of our total revenues.

Cost of revenues

Cost of revenues consist primarily of costs of finished and semi-finished products purchased from our third-party manufacturers, labor, material, and overhead involved in our internal manufacturing processes, technology amortization and royalty fees, and cost of product warranties.

We manufacture our CoolSculpting System through a combination of direct manufacturing at our facility in Pleasanton, California and through third-party manufacturers. We perform final testing and distribution of our CoolSculpting System and procedure packs at our Pleasanton facility. We also manufacture our CoolCurve and CoolCore applicators at our Pleasanton facility. We use third-party manufacturers to produce our CoolSculpting control units, our CoolMax applicators, our CoolCards and our disposable gelpads and liners. Our arrangements with our third-party finished and semi-finished product manufacturers allow us to minimize the need to procure

 

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and store raw materials, and allow us to order just-in-time finished goods. As a result, we are only required to maintain a limited inventory. We plan to outsource all manufacturing and distribution of our CoolSculpting System and procedure packs to third-party manufacturers by 2013, and will use our available manufacturing space at our Pleasanton facility to support our product development and clinical activities.

Our cost of revenues includes royalty fees and milestone payments payable to the General Hospital Corporation, a not-for-profit Massachusetts corporation, which owns and operates MGH. In 2005, we secured an exclusive license to develop and commercialize the patent and the core technology underlying our CoolSculpting System from MGH. We are obligated to make various payments to MGH, including (i) a 7% royalty on net sales (as defined in the agreement) of CoolSculpting and (ii) milestone payments. During the year ended December 31, 2010, we paid MGH a $1.1 million milestone payment upon achievement of FDA clearance to market CoolSculpting for the selective reduction of fat. The remaining milestone payments include (i) $1 million due upon achieving cumulative net sales of $70 million and (ii) $6 million due upon achieving cumulative net sales of $200 million, or completion of this offering, if earlier. MGH may elect to receive up to 50% of each of the remaining milestone payments in our common stock, subject to a cap of 3.5% of our common stock on a fully-diluted basis. Milestone payments are capitalized and amortized into cost of revenues 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. Royalty payments are accrued as we recognize net sales.

We anticipate that our total cost of revenues will increase in absolute dollars as we sell additional CoolSculpting Systems. We believe cost of revenues as a percentage of total revenues will decrease as we implement manufacturing cost reduction initiatives for our CoolSculpting System, continue to outsource our manufacturing to third parties and realize economies of scale as volume increases, and drive procedure fees revenues, which have better overall margins than our systems revenues.

Operating Expenses

Research and development.    Our research and development costs primarily consist of salaries, benefits, incentive compensation, stock-based compensation, and allocated facilities costs for employees and contractors engaged in research, clinical studies, regulatory affairs, and development. We expense all research and development costs in the periods in which they are incurred.

We expect our research and development expenses will increase in the future in absolute dollars as we continue to invest in research, clinical studies, regulatory affairs, and development activities. Our ongoing research and development activities are primarily focused on improving and enhancing our CoolSculpting System and the CoolSculpting procedure. We are exploring additional uses of our proprietary controlled-cooling technology platform. We are also exploring potential therapeutic uses for our platform technology, either directly or through collaborative arrangements with strategic partners.

Sales and marketing.    Our sales and marketing costs primarily consist of salaries, benefits, incentive compensation, stock-based compensation, and allocated facilities costs for our sales and marketing employees. Costs also include expenses for travel, trade shows, and other promotional and marketing activities, including direct and online marketing. We expect our sales and marketing expenses to increase as we scale up our commercial efforts to increase our base of physician customers and drive demand for CoolSculpting procedures through our physician and consumer marketing programs. We intend to increase the size of our direct sales force in North America from 31 professionals as of June 30, 2011, to between 50 and 70 sales professionals in the next 12 months. We intend to grow our international sales and marketing organization to focus on increasing sales and strengthening our physician relationships. As part of that strategy, we intend to opportunistically deploy a direct sales force in select international markets.

General and administrative.    Our general and administrative costs primarily consist of expenses associated with our executive, accounting and finance, legal, intellectual property, and human resource departments. These

 

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expenses consist of personnel-related expenses, including salaries, benefits, incentive compensation, stock-based compensation, and allocated facilities costs, independent registered public accounting firm costs, legal fees, consultants, travel, insurance, and relocation. We expect our general and administrative expenses to increase in absolute dollars due to the anticipated growth of our business and infrastructure and the costs associated with becoming a public company, such as costs associated with SEC reporting and compliance, listing fees on the NASDAQ Global Select Market, stock transfer agent fees, and similar expenses.

Critical Accounting Policies and Estimates

Our financial statements have been prepared in accordance with accounting principles generally accepted, or GAAP, in the United States. The preparation of our financial statements requires management to make estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the applicable periods. Management bases its estimates, assumptions, and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our financial statements, which, in turn, could materially change our results from those reported. Management evaluates its estimates, assumptions, and judgments on an ongoing basis. Historically, our critical accounting estimates have not differed materially from actual results. However, if our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material adverse effect on our statements of operations, liquidity, and financial condition.

We believe the following critical accounting policies involve significant areas where management applies judgments and estimates in the preparation of our financial statements.

Revenue Recognition

We recognize revenues from sales of our CoolSculpting System and CoolSculpting procedure packs when persuasive evidence of an arrangement exists, delivery to the physician customer or distributor has occurred, the sales price is fixed or determinable, and collectability is probable. We do not offer product return rights or price protection.

When a CoolSculpting System or CoolSculpting procedure pack is sold, we recognize revenue upon shipment of the products. We generally do not extend credit terms. By exception when we do extend credit terms, we assess whether collection is probable based on a number of factors including the physician customer’s or distributor’s past transaction history and credit worthiness. Over 90% of all CoolSculpting procedure packs purchased by our physician customers in North America are paid for using approved credit cards. Distributors generally prepay for their purchases using wire transfers.

Shipping and handling costs are expensed as incurred and included in cost of revenues. In those cases where we bill shipping and handling costs to customers, the amounts billed are classified as revenue.

Management judgments and estimates must be made in connection with determination of the revenue to be recognized in any accounting period.

Warranty

We provide a limited warranty on our products, including three years for our CoolSculpting control units and one year for our CoolSculpting vacuum applicators. In the event of a warranty claim, our Customer Care department arranges for a prompt service call. Our goal is to minimize the disruption caused by a service event, and we strive to repair a customer’s CoolSculpting System or provide the customer with a replacement CoolSculpting System

 

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promptly after notifying us of a problem. In markets outside of North America, our CoolSculpting System is serviced and supported through our independent distributors and certified third-party service providers.

We estimate and provide for future costs for initial product warranties upon shipment. We base product warranty costs on related freight, material, technical support labor, and overhead costs. We provide for the estimated product warranty costs by considering our historical costs and applying the experience rates to the outstanding warranty period for products sold. We must exercise judgment in estimating our expected product warranty costs. If actual product failure rates, freight, material, technical support, labor, and overhead costs differ from our estimates, we will be required to revise our estimated warranty liability. We have recorded a liability of $519,000 and $533,000 as of December 31, 2010 and June 30, 2011, respectively, for future warranty expense.

We offer an extended warranty of up to two years on both our CoolSculpting control units and CoolSculpting vacuum applicators. We recognize the revenues from the sale of an extended warranty over the extended warranty coverage period. Our revenue from sale of extended warranties to date has been insignificant.

Stock-Based Compensation

We recognize compensation costs related to stock-based awards granted to employees based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards.

The Black-Scholes model requires the use of subjective and complex assumptions which determine the fair value of stock-based awards. We used the following assumptions for stock-based awards granted in the fiscal years ended December 31, 2008, 2009, and 2010, and the six months ended June 30, 2010 and 2011:

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2008    2009        2010             2010             2011      
     (unaudited)  

Expected term (in years)

   6.1    6.2      5.9        5.9        6.0   

Expected volatility

   67%    66%      61 %     62 %     59 %

Risk-free interest rate

   2.8%-3.4%    1.5%-3.5%      1.9 %     2.7 %     2.4 %

Expected dividend rate

   0%    0%      0 %     0 %     0 %

Expected term.    The expected term represents the period that our stock-based awards are expected to be outstanding and was primarily determined using the simplified method in accordance with guidance provided by the SEC. For option grants considered to be “plain vanilla,” the simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options.

Expected volatility.    Because we do not have trading history on which to base volatility calculations, the expected volatility is derived from historical volatilities of several unrelated public companies. These companies operate within industries comparable to our business, including companies with significant involvement in the aesthetics industry. In addition we focused our volatility estimates to companies that had sufficient trading history and trading volume in order to provide reliable volatility measures. The peer companies used in determining our expected volatility were, at the time of volatility determination, generally larger and operationally further developed than us. However, the operational and financial growth and development of the peer companies during the period in which historical volatility were considered were determined to be sufficiently similar to our expectations for future growth to provide a reasonable basis on which to establish our expected volatility.

Risk-free interest rate.    The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to each award’s expected term.

 

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Expected dividend rate.    The expected dividend was assumed to be zero as we have never paid dividends and have no current plans to do so.

Expected forfeiture rates.    We are also required to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from our estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. To the extent actual forfeitures differ from our estimates, the difference is recorded as a cumulative adjustment in the period and estimates are revised.

We will continue to use judgment in evaluating the expected term, expected volatility, and forfeiture rates related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to the estimates of our expected volatility, expected terms, and forfeiture rates, which could materially impact our future stock-based compensation expense.

The following table sets forth our total stock-based compensation expense for awards granted in the years ended December 31, 2008, 2009, and 2010 and the six months ended June 30, 2010 and 2011:

 

     Year Ended December 31,      Six Months Ended
June 30,
 
       2008          2009          2010            2010              2011      
     (in thousands)  
            (unaudited)  

Cost of revenues

   $       $ 14       $ 39       $ 11       $ 17   

Research and development

     94         98         100         51         156   

Sales and marketing

     79         65         89         35         181   

General and administrative

     147         266         1,059         329         379   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 320       $ 443       $ 1,287       $ 426       $ 733   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2011, we had $5.2 million of unrecognized stock-based compensation expense, net of estimated forfeitures, that is expected to be recognized over a weighted-average period of 3.3 years. In future periods, our stock-based compensation expense is expected to increase as a result of our existing unrecognized stock-based compensation to be recognized as these awards vest and as we issue additional stock-based awards to attract and retain our employees.

Common stock valuations.     We are required to estimate the fair value of the common stock underlying our stock options when performing the fair value calculations of our outstanding stock options using the Black-Scholes option-pricing model. Our Board of Directors, with input from management, determined the fair value of our common stock on the grant date for each outstanding stock option. In determining the fair value of our common stock, our Board of Directors used valuation methods intended to comply with Federal income tax regulations that create a presumption that the resulting valuation is reasonable. In addition, these common stock valuations were performed in accordance with the guidance set forth in the American Institute of Certified Public Accountants, or AICPA, Audit and Accounting Practice Aid Series: Valuation of Privately Held Company Equity Securities Issued as Compensation. Our Board of Directors and management intended all options granted to be exercisable at a price per share not less than the fair value per share of our common stock on the date of grant based on the facts and circumstance known on the date of grant.

For all granted stock options, our Board of Directors determined the fair value of our common stock on each grant date based on its evaluation of the factors listed below:

 

 

the most recent valuation available to our Board of Directors at the time of each grant;

 

 

prices for our convertible preferred stock sold to outside investors in arm’s-length transactions;

 

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our capital structure, including the rights, preferences, and privileges of our convertible preferred stock relative to those of our common stock;

 

 

our operating and financial performance;

 

 

regulatory status of our CoolSculpting System;

 

 

business conditions and projections;

 

 

hiring of key personnel and the experience of our management;

 

 

risks inherent in the development and deployment of our products;

 

 

our likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our company given prevailing market conditions and the nature and history of our business;

 

 

market value of comparable public companies;

 

 

illiquidity of stock-based awards involving securities in a private company;

 

 

industry information such as market size and growth; and

 

 

U.S. and global capital market conditions.

To assist our Board of Directors, our management provided our Board of Directors with an estimate of the fair value of our common stock on each grant date.

To determine the fair value of our common stock, we first analyzed the equity value of the company using a weighted combination of several methodologies, each of which can be categorized under either of the following two valuation approaches: the income approach and the market approach. The income approach estimates the value of the company based on our expected future cash flows discounted to present value at a rate of return commensurate with the risks associated with the cash flows. Management determined a financial forecast for each valuation date to be used in the computation of the equity value under the income approach. These financial forecasts took into account our past experience and future expectations. The discount rate is related generally to market required rates of return observed in the venture capital industry as well as the specific perceived risks of achieving the forecasted financial performance. The market approach incorporates several methodologies, including (i) the guideline company method, (ii) the transaction method, and (iii) the initial public offering method. Generally, the market approach estimates the equity value of a company by applying: (i) market multiples of comparable companies that are publicly traded, (ii) multiples achieved in comparable industry mergers and acquisition transactions, and/or (iii) multiples observed in initial public offerings of companies that are in industries related to ours. We selected comparable companies, transactions, and initial public offerings on the basis of operational and economic similarity to our business at the time of the valuation. We then calculated a multiple of key metrics implied by the enterprise values or acquisition values of these comparable companies. Based on our historical and expected performance as compared to the comparable companies and transactions, we selected appropriate multiples and applied them to our metrics to derive an indication of equity value. For grant dates where transactions in our convertible preferred stock were reasonably recent, we also calculated the implied equity value based on the pricing of the most recent convertible preferred stock transaction.

Specifically, we considered several factors affecting our equity value, including:

Probability-weighted liquidation scenarios.    We considered several liquidation and financing scenarios that were evaluated based upon timing and likelihood of occurrence. The scenarios were based upon management’s considerations at the time and included one or more of the following: an initial public offering, a merger and acquisition scenario, and remaining as a private stand-alone company.

 

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Common stock pricing indications implied from our most recent sales of preferred securities.    We used arm’s-length private transactions involving our convertible preferred stock, including the closings of the sale of our Series C convertible preferred stock at a purchase price of $1.40 per share in April 2008, the sale of our Series D-1 convertible preferred stock at a purchase price of $0.73 per share in May 2010 and our Series D-2 convertible preferred stock at a purchase price of $0.90 per share in September 2010, adjusted to reflect our capitalization structure, the prevailing risk-free interest rate as of the dates for the sale of our Series D-1 and Series D-2 convertible preferred stock, estimates of expected equity volatility and the expected time to liquidity.

Market pricing information from companies and merger and acquisition transactions that we considered to be comparable or that we believed would be priced in a similar fashion.    The companies and transactions selected had significant operations in the aesthetics industry. We analyzed market equity values from these selected companies and applied appropriate multiples to our projected financial metrics to determine the future equity value or future common stock value. These values were then discounted to the valuation date at a risk adjusted rate of return to determine a current common stock value.

Discounted cash flow models.    Discounted cash flow models were based on our then existing financial projections. These cash flows were discounted to the present to determine a present common stock value indication, using a risk-adjusted equity rate. During the period December 31, 2009 to July 31, 2011, the equity rates of return used in our assumptions have fluctuated from a low of 26% to a high of 41%.

Risks.    Specific risks we considered in the assessment of our equity value included our probability of receiving a favorable decision from the FDA on our 510(k) application to market CoolSculpting for the selective reduction of fat, our ability to raise additional funds even assuming we received a favorable decision from the FDA, the market acceptance of CoolSculpting in markets outside of North America, our ability to retain key management and employees, and our ability to consummate a liquidity event.

Market volatility.    We factored prevailing market conditions into our analysis when deriving the equity value indications. More specifically, we evaluated the volatility of companies we consider to be comparable to determine the equity value.

Pricing from initial public offerings in the aesthetics industry.    We also considered pricing information from initial public offerings of companies in the aesthetics industry in determining our equity value. Specifically, we used initial public offering pricing multiples of aesthetics companies to determine the future equity value at the time of a potential initial public offering. The future equity value was then discounted to the present to determine the present equity value.

Liquidity considerations.    We considered the liquidity of our securities in determining our equity value and common stock value. Because our stockholders have not had access to an organized exchange on which to trade their securities, the appropriate adjustment to the value to account for this lack of liquidity was assessed. During the period December 31, 2009 to July 31, 2011, the adjustments for illiquidity of our common stock have fluctuated from a low of 8% to a high of 41%.

Once we determined an equity value, we utilized one of the following two methods to allocate the equity value to each of our classes of stock: the option pricing method and the probability weighted expected return method. The option pricing method values each equity class by creating a series of call options on our equity value, with exercise prices based on the liquidation preferences, participation rights, and strike prices of derivatives. This method is generally preferred when future outcomes are difficult to predict and dissolution or liquidation is not imminent. The probability weighted expected return method involves a forward-looking analysis of possible future outcomes. This method is particularly useful when discrete future outcomes can be predicted at a high confidence level within a probability distribution. Discrete future outcomes considered under the probability weighted expected return method included non-initial public offering market-based outcomes as well as initial public offering scenarios. Prior to starting our preparation for this offering in June 2011, we utilized the option pricing method because we could not reasonably estimate the form and timing of potential liquidity events. We

 

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intend to use the probability-weighted expected return method (PWERM) to allocate our equity value for any valuations we conduct after June 2011.

No single event caused the valuation of our common stock to increase or decrease through July 31, 2011. Instead, a combination of the factors described below in each period led to the changes in the fair value of our common stock.

Options Granted on March 15, 2010

For the March 15, 2010 option grants, we based the fair value on a combination of the market approach and the income approach as well as the pricing indicated by our Series C preferred round and the estimated pricing of our upcoming Series D preferred round. Specifically, a discounted cash flow model was utilized, applying a Gordon Growth model to determine the terminal value and a Guideline Public Company Method using pricing multiples from publicly traded comparables. The estimated equity values in the scenarios were discounted from the terminal date to the valuation date using a discount rate of 41%. The equity value was allocated among the various classes of our securities, including preferred stock, common stock and options and warrants to purchase common stock using the option-pricing model. A discount of 36.0% was applied to account for the lack of marketability in the valuation approaches. The illiquidity adjustment was based on an estimated time to liquidity of three years. In addition, we analyzed the implied common stock value based on the sales of Series C preferred stock as well as on the projected Series D preferred stock financing. We used illiquidity adjustments of 26% and 27% for the indications from the Series C and D preferred rounds of financing, respectively. Based on our best estimate of various exit scenarios, and the strengths of each value indication we assigned a 50% weight to the combined indications from the market and income methods, and 50% weight to the indications from the preferred rounds of financing. In addition to the quantitative analysis, we took the following factors into account:

 

 

general, albeit slow, improvement in overall economic environment, and a corresponding slight increase in the valuation of public company comparables;

 

 

uncertainty surrounding the likelihood that we would receive a favorable decision from the FDA on our 510(k) application to market CoolSculpting for the selective reduction of fat;

 

 

revision of our financing forecast to reflect updated probability of an FDA approval;

 

 

successful close of $5.0 million in bridge loan financing from our investors in February 2010; and

 

 

our estimate of the probability of a possible liquidation event in the three year horizon.

Based on the above analysis and qualitative factors, the fair value of our common stock was deemed to be $1.54 per share as of March 15, 2010.

Options Granted on July 27, 2010

At the time of our July 27, 2010 option grants, we had raised $18.5 million in net proceeds through the sale of our Series D-1 preferred stock at a price per share of $2.68. Our valuation methodology continued to incorporate a combination of the market approach and the income approach. In addition, we relied on the implied pricing of our common stock based on the per share sale price of our Series D-1 convertible preferred stock. The equity discount rate remained at 41% and the illiquidity adjustment changed marginally to 37% for the market and income approaches and to 28% for the implied common stock value from the Series D-1 pricing. The estimated time to liquidity was 3.1 years. We continued to assign a 50% weight to the combined indications from the market and income approaches and 50% to the common stock value indication from the Series D-1 preferred pricing. In our determination of the grant price we also considered the following factors:

 

 

decline in the overall economic environment and a corresponding decline in the valuation of public company comparables;

 

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increased uncertainty surrounding the likelihood that we would receive a favorable decision from the FDA on our 510(k) application to market CoolSculpting for the selective reduction of fat;

 

 

successful close of our $18.5 million Series D-1 convertible preferred stock financing round, which included the conversion of $10.0 million in bridge loans to Series D-1 convertible preferred stock at $0.73 per share;

 

 

in connection with the closing of the Series D-1 convertible preferred financing, a Series D-2 convertible preferred financing was identified that would allow the investors participating in the Series D-1 convertible preferred financing to invest an additional $7.1 million at a $3.30 per share price contingent upon our receipt of 510(k) FDA clearance to market CoolSculpting for the selective reduction of fat; and

 

 

a slight delay in the perceived horizon to a liquidity event.

Based on the above analysis and qualitative factors, the fair value of our common stock was deemed to be $1.25 per share as of July 27, 2010.

Options Granted on September 28, 2010, November 30, 2010, and February 17, 2011

At the time of the September 28, 2010, November 30, 2010, and February 17, 2011 option grants we continued to use valuation approaches that were similar to those used at the time of our July 27, 2010 option grants. At this time, we had received notice from the FDA regarding the clearance to market CoolSculpting for the selective reduction of fat on the flanks. However, at this early stage in the marketing process, we were uncertain about what levels, if any, of increased market acceptance of CoolSculpting we would see based on this FDA clearance. We had previously been selling CoolSculpting to physicians based on a 510(k) clearance we had received from the FDA in May 2009 which authorized us to market CoolSculpting for dermal cooling. Consequently, we had no facts to suggest that our forecast model should be updated. We made two significant changes in the valuation methodology for these grant dates; the first was the inclusion of the implied common stock value based on our Series D-2 preferred round of financing, replacing the prior indication from the Series D-1 preferred round; and secondly we lowered our discount rate to 33.4% to reflect the lower risk of the company after receiving the FDA notice. The discount for lack of marketability ranged from 29% to 38% based on a time to liquidity of 2.75 years. We continued to put equal weight on the market and income approaches on the one hand and the indicated common stock pricing from the Series D-2 preferred on the other hand. We also considered the following factors in the final determination of the fair value.

 

 

slight improvement in the overall economic environment and a corresponding slight increase in the valuation of public company comparables; and

 

 

updated assumptions for our liquidity scenarios, which reflected the possibility of a liquidity event in a somewhat shorter time frame.

Based on the above analysis and qualitative factors, we set the fair value at $1.43 per share of common stock as of the respective grant dates on September 28, 2010, November 30, 2010 and February 17, 2011. Subsequently, after assessing our December 31, 2010 fair value which included the impact of our stronger than expected revenue performance during fiscal 2010, we determined to retrospectively update the fair value of our common stock to $2.83 per share as of September 28, 2010 and November 30, 2010 solely for purposes of calculating the fair value of our outstanding stock options using the Black-Scholes option-pricing model. Moreover, in preparing for this offering we reviewed our February 2011 fair value solely for purposes of calculating the fair value of our outstanding stock options using the Black-Scholes option-pricing model. During this review, we considered our February 17, 2011 fair value, strong revenue performance during the first quarter of 2011, a slight decrease in market valuations for the public guideline companies, two additional comparable M&A transactions, and adjusted our estimates to reflect a lower time to liquidity. Based on this review completed in June 2011, we determined to update the fair value of our common stock to $3.01 per share as of February 17, 2011.

 

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Options Granted on May 18, 2011

By May 18, 2011, we were observing initial positive market reception and acceptance of CoolSculpting following our FDA clearance to market CoolSculpting for the selective reduction of fat on the flanks. For these option grants, we made several changes to our valuation methods, most notably including transaction and IPO methodologies reflecting the possibility of an exit event as a result of the positive market reception of CoolSculpting. In addition, we used our updated forecasts which included the impact of our better than planned revenue performance to date. We no longer incorporated the implied pricing from prior rounds as those indications were considered dated. Our discount rate was 32.2%. We continued to assign 50% weight to the combined indication from the DCF and the Public Guideline Company methods, and assigned the remaining 50% weight to the M&A and IPO methods. The M&A method was given comparably greater weight than the IPO method to reflect our belief that an M&A was the most likely exit scenario at this time. The discount for lack of marketability was 28% based on a weighted-average time to liquidity of close to two years. We also considered the following factors in the final determination of the grant price:

 

 

slight improvement in the overall economic environment and a corresponding slight increase in the valuation of public company comparables;

 

 

initial positive market reception and acceptance of CoolSculpting following receipt of FDA clearance in September 2010;

 

 

an increase in our sales force and operating expenses to support the roll-out of CoolSculpting; and

 

 

the possibility of a liquidity event in less than two years.

Based on the above analysis and qualitative factors, we set the fair value at $2.83 as of May 18, 2011. Subsequently, in preparing for this offering we reviewed our May 2011 fair values solely for purposes of calculating the fair value of our outstanding stock options using the Black-Scholes option-pricing model. During this review we considered the effects of altering our allocation method from an option based method to a PWERM model, thereby reflecting our decision at the May 18, 2011 board meeting to pursue an initial public offering. In addition, we wanted the fair value of the common stock for purposes of calculating the fair value of our option grants to reflect the potentially shorter time to liquidity under any IPO scenario. Additionally, we incorporated the impact of lower execution risk as a result of continued strong revenue performance. The above discussed factors led us to use a fair value of common stock of $9.73 for the options granted on May 18, 2011. This value has been used solely for purposes of calculating the fair value of our outstanding stock options using the Black-Scholes option-pricing model.

Options Granted on July 27, 2011 and July 29, 2011

By the July 27 and 29, 2011 option grants, we had filed our registration statement, of which this prospectus forms a part. Consequently, our valuation methodology changed from an allocation method based on the option pricing model to a PWERM model. We included an IPO and an M&A method as well as a stay private scenario reflecting possible outcomes over the next three months to five years. We also updated our forecast incorporating the effects of continued strong market performance for CoolSculpting during fiscal 2011. At this time, we also strengthened our company by identifying and hiring additional members of our executive team. We lowered our discount rate to 25.9% reflecting lower execution risk as well as reduced risk of achieving our projections. The adjustment for illiquidity ranged from 8% to 42% based on times to liquidity ranging from 0.25 years to 4.5 years. In addition to the quantitative analysis we took the following factors into account:

 

   

the decision by our Board of Directors to file a registration statement and pursue an initial public offering of our common stock;

 

   

our assessment that completing a public offering is a more likely scenario than completing an M&A transaction or remaining private;

 

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our need to raise additional funds in the event that an IPO is not successfully completed;

 

   

the hiring of additional key executives;

 

   

the commencement of our research and development activities to develop enhancements to our CoolSculpting System and procedure and develop additional products utilizing our proprietary controlled-cooling technology;

 

   

our revised five-year projections presented to our Board of Directors; and

 

   

our strong revenue growth during the second quarter of 2011.

Based on the above analysis and qualitative factors, the fair value of our common stock was deemed to be $10.20 per share.

Awards Granted on September 2, 2011

We continued to rely on the PWERM model we first used in July 2011 to determine the fair value of our common stock for the awards granted on September 2, 2011. Despite making progress in preparing for our IPO, capital market conditions significantly weakened during the period between our July valuation and the September awards. In addition, we considered the Company’s financial performance during the third fiscal quarter through September 2, 2011. As a result, in determining the fair value of our common stock for the September awards, we considered the factors and analysis from our July valuation as well as an analysis of the following factors:

 

   

The capital markets declined during the period between our July and September valuations. Between July 29, 2011 and September 2, 2011, the Nasdaq Composite Index declined by more than 10%, the Dow Jones Industrial Average declined by more than 7.0% and the S&P 500 declined by more than 9.0%.

 

   

The seven publicly traded companies in our valuation peer group recorded a median decline of approximately 17% in market capitalization between July 27, 2011 and September 2, 2011.

 

   

The IPO market was also adversely affected by volatility and declines in the capital markets. Based on our research of IPOs in which the issuer raised more than $25 million, 14 IPOs priced in July 2011, four IPOs priced in August 2011 and no IPOs priced in September 2011.

 

   

As anticipated, the Company’s financial performance during the third quarter of fiscal 2011 reflected seasonality due to vacations taken by its physician customers and their patients during the summer months in the United States and Europe, and at the time of the September equity awards the Board was unsure whether the Company would be able to meet its revenue target for the third quarter of fiscal 2011.

Based on the July valuation and the above analysis of changes in market conditions and the Company’s financial performance during the third fiscal quarter through the date of the September 2nd grants, the fair value of our common stock was deemed to remain at $10.20 per share for the September equity awards.

 

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The following table summarizes the fair value of the common stock underlying our stock options granted between January 1, 2010 and September 2, 2011, including the subsequent update to the fair value solely by using the Black-Scholes option-pricing model:

 

Grant Date

   Number of Options
Granted
    Restricted
Stock
Issued
    Fair Value Per  Share
of Common Stock
    Updated Fair
Value Per Share
of Common Stock
 

March 15, 2010

     253,993        $ 1.54      $ 1.54   

July 27, 2010

     1,570,591          1.25        1.25   

September 28, 2010

     207,792          1.43        2.83   

November 30, 2010

     271,102          1.43        2.83   

February 17, 2011

     234,434          1.43        3.01   

May 18, 2011

     346,036          2.83        9.73   

July 27, 2011

     559,771          10.20        10.20   

July 29, 2011

     40,871          10.20        10.20   

September 2, 2011

     91,270        4,684        10.20        10.20   

The intrinsic value of the options outstanding as of June 30, 2011 was $60.8 million, of which $24.1 million related to vested options based on an assumed initial public offering price of $15.00 per share, the midpoint of the range set forth on the cover of the prospectus.

Convertible Preferred Stock Warrants

We account for warrants to purchase shares of our convertible preferred stock as liabilities at fair value because these warrants may obligate us to transfer assets to the holders at a future date under certain circumstances, such as a change of control. We re-measure these warrants to current fair value at each balance sheet date, and any change in fair value is recognized as a component of interest income and other income (expense), net in our statement of operations. We estimated the fair value of these warrants at the respective balance sheet dates using the Black-Scholes option-pricing model. We use a number of assumptions to estimate the fair value including the remaining contractual terms of the warrant, risk-free interest rates, expected dividend yield, and expected volatility of the price of the underlying stock. These assumptions are subjective and the fair value of these warrants may have differed significantly had we used different assumptions. We will continue to adjust the convertible preferred stock warrant liability for changes in fair value until the earlier of the exercise or expiration of the convertible preferred stock warrants or until holders of our outstanding convertible preferred stock can no longer trigger a deemed liquidation event.

Income Taxes

We are subject to income taxes in the United States, and we use estimates in determining our provision for income taxes. We use the asset and liability method of accounting for income taxes. Under this method, we calculate deferred tax asset or liability account balances at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect our taxable income.

Recognition of deferred tax assets is appropriate when realization of such assets is more likely than not. We recognize a valuation allowance against our net deferred tax assets if it is more likely than not that some portion of the deferred tax assets will not be fully realizable. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction. At December 31, 2010, we had a full valuation allowance against all of our deferred tax assets.

Effective January 1, 2007, we adopted the new authoritative guidance to account for uncertain tax positions. None of our currently unrecognized tax benefits would affect our effective income tax rate if recognized, due to the valuation allowance that currently offsets our deferred tax assets. We do not anticipate the total amount of unrecognized income tax benefits relating to tax positions existing at December 31, 2010 will significantly increase or decrease in the next 12 months.

 

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We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether the factors underlying the sustainability assertion have changed and whether the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Our judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.

As of December 31, 2010, we had federal and state net operating loss carryforwards of $64.8 million and $64.2 million, respectively. The federal net operating loss carryforwards will begin to expire in 2026, and the state net operating loss carryforwards will begin to expire in 2016. In addition, as of December 31, 2010, we had federal and state research and development tax credit carryforwards of approximately $1.6 million and $1.7 million, respectively. The federal research and development tax credit carryforwards will begin to expire in 2026, if not used, and the state research and development tax credit carryforwards do not expire. Because of the net operating loss and credit carryforwards, all of our tax years, dating to inception in 2005, remain open to federal and California examinations.

Under federal and similar state tax statutes, substantial changes in our ownership, including ownership changes resulting from the offering contemplated by this prospectus, may limit our ability to use our available net operating loss and tax credit carryforwards. The annual limitation, as a result of a change of control, may result in the expiration of net operating losses and credits before utilization. We conducted an analysis through December 31, 2010 to determine whether ownership changes occurred. We concluded no ownership change had occurred.

Results of Operations

Comparison of Six Months Ended June 30, 2010 and 2011 (unaudited)

The following table shows the amounts of the listed items from our statements of operations for the periods presented, showing period-over-period changes.

 

     Six Months Ended
June 30,
    Change  
     2010     2011     $     %  
     (in thousands, except for percentages)  

Revenues

   $ 6,624      $ 31,626      $ 25,002        377

Cost of revenues

     3,354        12,349        8,995        268   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     3,270        19,277        16,007        490   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Research and development

     4,244        4,607        363        9   

Sales and marketing

     4,683        11,568        6,885        147   

General and administrative

     2,464        4,031        1,567        64   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     11,391        20,206        8,815        77   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (8,121     (929     7,192        89   

Interest expense

     (403     (60     343        85   

Other income (expense), net

     22        (395     (417     (1,895
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (8,502   $ (1,384   $ 7,118        84
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Revenues.    Total revenues increased by $25.0 million, or 377%, to $31.6 million in the six months ended June 30, 2011 compared to $6.6 million during the same period in 2010.

Systems revenues.    Systems revenues increased by $16.1 million to $21.7 million in the six months ended June 30, 2011 compared to $5.7 million during the same period in 2010. Systems revenues represented 69% and 85% of total revenues for the six months ended June 30, 2011 and 2010, respectively. The increase in systems revenues was primarily due to growing physician demand for CoolSculpting Systems driven by our physician marketing programs, obtaining our 510(k) clearance to market our CoolSculpting System for the selective reduction of fat, and an increased number of direct sales representatives in North America and distributors outside of North America promoting CoolSculpting.

Procedure fees revenues.    Procedure fees revenues increased $8.9 million to $9.9 million for the six months ended June 30, 2011 compared to $1.0 million during the same period in 2010. Procedure fees revenues represented 31% and 15% of total revenues for the six months ended June 30, 2011 and 2010, respectively. The increase in procedure fees revenues was primarily due to the growth of our installed base of worldwide CoolSculpting Systems, and an increased number of procedures performed by our physician customers driven by our targeted physician and consumer marketing programs.

Cost of revenues.    Cost of revenues increased by $9.0 million, 268%, to $12.3 million in the six months ended June 30, 2011 compared to $3.4 million during the same period in 2010. The increase in cost of revenues was primarily due to the increase in volume of CoolSculpting Systems and procedure packs sold. Cost of revenues as a percentage of total revenues decreased from 51% to 39% of total revenues for the six months ended June 30, 2011 compared to the same period in 2010 due to improved utilization of personnel, benefits, and manufacturing overhead costs which increased at a much lower rate than the increase in revenues.

Research and development.    Research and development expenses increased by $0.4 million, or 9%, to $4.6 million in the six months ended June 30, 2011 compared to $4.2 million in the same period in 2010. The increase in research and development expenses was primarily due to an increase of $0.6 million in personnel related costs and an increase in development and clinical costs of $0.2 million, partially offset by a decrease in consulting expense of $0.3 million.

Sales and marketing.    Sales and marketing expenses increased by $6.9 million, or 147%, to $11.6 million in the six months ended June 30, 2011 compared to $4.7 million for the same period in 2010. The increase in sales and marketing expenses was primarily due to a $3.5 million increase in personnel related costs, a $0.8 million increase in travel expenses, a $0.2 million increase in consulting expense and a $1.7 million increase in marketing expenses for tradeshows, website development, and increased public relations and advertising activities.

General and administrative.    General and administrative expenses increased by $1.6 million, or 64%, to $4.0 million for the six months ended June 30, 2011, compared to $2.5 million for the same period in 2010. The increase in general and administrative expenses was primarily due to increases in our accounting and human resource personnel to support the growth in our overall organization.

Interest expense.    Interest expense decreased by $0.3 million to $60,000 for the six months ended June 30, 2011 compared to $0.4 million for the same period in 2010. The decrease in interest expense was primarily due to the conversion of our bridge loan into the Series D-1 convertible preferred stock financing in May 2010.

Other income (expense), net.    Other income (expense), net, for 2011 was an expense of $0.4 million compared to $22,000 of income in 2010. The increase in the expense is related to the loss incurred on the change in the fair value of the convertible preferred stock warrant of $0.4 million during 2011.

 

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Comparison of Years Ended December 31, 2008, 2009, and 2010

The following table shows the amounts of the listed items from our statements of operations for the periods presented, showing period-over-period changes.

 

     Year Ended December 31,     2009 vs. 2008     2010 vs. 2009  
     2008     2009     2010     $ Change     % Change     $ Change     % Change  
     (in thousands, except for percentages)  

Revenues

   $      $ 1,587      $ 25,461      $ 1,587        *      $ 23,874        1,504

Cost of revenues

            2,243        12,295        2,243        *        10,052        448   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

            (656     13,166        (656     *        13,822        2,107   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

              

Research and development

     13,699        8,034        8,222        (5,665     (41 )%      188        2   

Sales and marketing

     2,568        4,519        11,987        1,951        76        7,468        165   

General and administrative

     5,192        3,966        5,873        (1,226     (24     1,907        48   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     21,459        16,519        26,082        (4,940     (23     9,563        58   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (21,459     (17,175     (12,916     4,284        20        4,259        25   

Interest expense

            (516     (497     (516     *        19        4   

Other income (expense), net

     352        47        (120     (305     (87     (167     (355
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (21,107   $ (17,644   $ (13,533   $ 3,463        16   $ 4,111        23
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* Not meaningful

Revenues.    Total revenues increased by $23.9 million to $25.5 million in 2010 compared to $1.6 million in 2009. We had no revenues in 2008.

Systems revenues.    Systems revenues increased by $19.6 million to $21.1 million in 2010 compared to $1.5 million in 2009. Systems revenues represented 83% and 92% of total revenues for 2010 and 2009, respectively. The increase in systems revenues was primarily due to growing physician demand for CoolSculpting Systems driven by our physician marketing programs, obtaining our 510(k) clearance to market our CoolSculpting System for the reduction of fat, and an increased number of direct sales representatives in North America and distributors outside North America promoting CoolSculpting.

Procedure fees revenues.    Procedure fees revenues increased $4.2 million to $4.4 million in 2010 compared to $0.1 million in 2009. Procedure fees revenues represented 17% and 8% of total revenues for 2010 and 2009, respectively. The increase in procedure fees revenues was primarily due to the growth of our installed base of worldwide CoolSculpting Systems and an increased number of CoolSculpting procedures performed by our physician customers driven by our physician and consumer marketing programs.

Cost of revenues.    Cost of revenues increased by $10.1 million to $12.3 million in 2010 compared to $2.2 million in 2009 primarily due to the volume of CoolSculpting Systems and procedure packs sold. Cost of revenues as a percentage of total revenues decreased from 141% to 48% for 2010 compared to 2009. This decrease is primarily due to fixed overhead costs being absorbed over a larger revenue base.

Research and development.    Research and development expenses increased by $0.2 million, or 2%, to $8.2 million in 2010 compared to $8.0 million during 2009 primarily as a result of increases in personnel-related costs of $1.2 million offset by lower clinical, consulting, and license fees of $0.7 million. Research and development expenses decreased by $5.7 million, or 41%, to $8.0 million in 2009 compared to $13.7 million in 2008 primarily due to completion of key clinical studies and development activities, including activities performed by outside service companies that resulted in the commercial launch of the CoolSculpting System.

Sales and marketing.    Sales and marketing expenses increased by $7.5 million, or 165%, to $12.0 million in 2010 compared to $4.5 million in 2009 due to the increase in personnel-related costs of $4.1 million, an increase in travel-related expenses of $1.7 million, and an increase in marketing activities of $1.3 million. Sales and

 

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marketing expenses increased $2.0 million, or 76%, to $4.5 million in 2009 compared to $2.6 million in 2008 primarily due to an increase in headcount, leading to an increase in costs related to personnel of $1.0 million due to an increase in headcount and $0.8 million due to increased travel and marketing expenditures.

General and administrative.    General and administrative expenses increased by $1.9 million, or 48%, to $5.9 million in 2010 compared to $4.0 million in 2009 due to increases in personnel-related costs of $1.0 million and $0.8 million in stock-based compensation expense. General and administrative expenses decreased by $1.2 million, or 24%, to $4.0 million in 2009 compared to $5.2 million in 2008 due primarily to a reduction of $0.4 million in personnel expenses, $0.4 million in legal costs, and $0.2 million in consulting costs. General and administrative expenses included stock-based compensation expense of $0.1 million, $0.3 million, and $1.1 million in 2008, 2009, and 2010, respectively.

Interest expense.    Interest expense reflected a slight decrease at $0.5 million for 2010. The decrease in interest expense was primarily due to lower interest expense related to our notes payable due to lower average outstanding balance during 2010 offset by higher interest expense related to our $10.0 million bridge loans we entered into in October 2009 and converted to Series D-1 convertible preferred stock in May 2010. There was no interest expense in 2008 as we did not have any borrowings outstanding during the year.

Other income (expense), net.    Other income (expense), net, for 2010 was an expense of $0.1 million compared to $47,000 of income in 2009. The increase in the expense is primarily related to the loss incurred on the change in fair value of the convertible preferred stock warrant of $0.1 million during 2010. Other income (expense), net, in 2008 was primarily due to interest income from cash and cash equivalents balances as we had a larger overall invested balance in 2008 compared to 2009.

 

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Quarterly Results of Operations Data

The following table sets forth our unaudited quarterly statements of operations data and our unaudited statements of operations data for each of the six most recent quarters to the period ended June 30, 2011. We have prepared the quarterly data on a consistent basis with our audited consolidated financial statements included in this prospectus, and the financial information reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this data. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.

Seasonality

Our business is affected by seasonal trends during the summer months in the United States and Europe due to vacations taken by our physician customers and their patients. Specifically, we believe that both systems and procedure fees revenues during the third quarter, or the period ended September 30, will continue to be negatively impacted by seasonality. See “Prospectus Summary—Recent Developments” for our estimated range of revenues for the three months ended September 30, 2011. In addition, we expect the fourth quarter, or the period ending December 31, to continue to be a relatively strong revenue quarter as compared to our other quarterly periods because of our internal plan to consistently release our new product lines/enhancements in this quarter beginning in 2012 and because physicians in the United States historically make capital equipment purchases during the fourth quarter to take advantage of favorable tax credits that expire at the end of the year. Our operating expenses are not materially impacted by seasonality.

 

     Quarter Ended  
     Mar. 31,
2010
    June 30,
2010
    Sept. 30,
2010
    Dec. 31,
2010
    Mar. 31,
2011
    June 30,
2011
 
Statement of Operations Data:   

(in thousands)

       

Revenues

   $ 2,030      $ 4,594      $ 6,439      $ 12,398      $ 14,272      $ 17,354   

Cost of revenues

     1,256        2,098        3,060        5,881        5,649        6,700   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     774        2,496        3,379        6,517        8,623        10,654   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

            

Research and development

     1,900        2,344        2,003        1,975        2,281        2,326   

Sales and marketing

     2,264        2,419        2,951        4,353        5,736        5,832   

General and administrative

     1,252        1,212        1,381        2,028        1,389        2,642   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     5,416        5,975        6,335        8,356        9,406        10,800   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (4,642     (3,479     (2,956     (1,839     (783     (146

Interest expense

     (225     (178     (50     (44     (40     (20

Other income (expense), net

     2        20        (40     (102     (2     (393
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (4,865   $ (3,637   $ (3,046   $ (1,985   $ (825   $ (559
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liquidity and Capital Resources

Since our inception, we have incurred net losses and negative cash flows from our operations. For the year ended December 31, 2010 and the six months ended June 30, 2011, we incurred net losses of $13.5 million and $1.4 million, respectively, and used $7.7 million and $1.8 million of cash flows from our operating activities, respectively. At December 31, 2010 and June 30, 2011, we had accumulated deficits of $84.3 million and $75.4 million, respectively.

As of December 31, 2010 and June 30, 2011, we had working capital of $7.7 million and $5.8 million, respectively. Historically, we have principally financed our operations through the issuance of convertible preferred stock, cash provided by our operating activities, and borrowings under our term loan. Since 2009, we have also financed our operations through cash flows from sales of our CoolSculpting System and procedure packs. Our cash flows from operating activities are significantly affected by our investments in operations, including working capital and corporate infrastructure to support and expand our ability to generate revenues, research and development, sales and marketing, and general and administrative activities.

 

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We believe that our existing cash and cash equivalents together with cash flows from our operating activities and the net proceeds from this offering will be sufficient to fund our operations for at least the next 12 months. If events or circumstances occur such that we do not meet our operating plan as expected, we may be required to reduce certain spending related to employee headcount, our sales and marketing initiatives, or other expenses to meet our obligations as they become due. This could have an adverse effect on our ability to achieve our intended business objectives.

Our ability to continue to meet our obligations and to achieve our business objectives is dependent primarily upon our ability to execute on our business plan, including generating sufficient revenues and cash flows from operating activities. If we are unable to execute on our business plan and adequately fund our operations, we may need to seek additional financing and/or reduce our investment in growing our business. The sale of additional equity could result in additional dilution to our stockholders. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operating flexibility, and would also require us to incur interest expense. There can be no assurance, however, that we will be able to generate sufficient cash from operations to adequately fund our operating needs or ultimately achieve profitability, or that additional financing will be available on terms acceptable to us, if at all.

Summary Statement of Cash Flows

The following table summarizes our cash flows for the years ended December 31, 2008, 2009, and 2010 and the six months ended June 30, 2010 and 2011.

 

    Year Ended December 31,     Six Months Ended
June 30,
 
    2008     2009     2010     2010     2011  
    (in thousands)  
                      (unaudited)  

Net cash used in operating activities

  $ (20,394   $ (16,737   $ (7,651   $ (7,147   $ (1,798

Net cash used in investing activities

    (1,116     (261     (1,870     (41     (1,066

Net cash provided by (used in) financing activities

    25,030        7,917        19,088        12,518        (1,103
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

  $ 3,520      $ (9,081   $ 9,567      $ 5,330      $ (3,967
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows for the Six Months Ended June 30, 2010, and 2011

Operating activities.    Net cash used in operating activities was $1.8 million during the six months ended June 30, 2011 and consisted of a net loss of $1.4 million, offset by non-cash items of $1.5 million and a net decrease in operating assets and liabilities of $1.9 million. Non-cash items for the six months ended June 30, 2011 consisted primarily of stock-based compensation expense of $0.7 million, change in fair value of preferred stock warrant liability of $0.4 million and depreciation and amortization expense of $0.4 million. The significant items in the change in operating assets and liabilities include the increase in accounts payable, accrued and other non-current liabilities of $1.4 million due to purchases and expenses incurred as a result of the growth in our business activities and a decrease of $0.2 million in prepaid expenses and other current assets partially offset by an increase in accounts receivable of $1.7 million and an increase in inventory of $1.4 million.

Net cash used in operating activities was $7.1 million during the six months ended June 30, 2010 and consisted of a net loss of $8.5 million, offset by non-cash items of $0.7 million and a net increase in operating assets and liabilities of $0.7 million. Non-cash items for the six months ended June 30, 2010 consisted primarily of stock-based compensation expense of $0.4 million and depreciation expense of $0.3 million. The significant changes in operating assets and liabilities include the increase in accounts payable, accrued and other non-current liabilities of $1.6 million due to purchases and expenses incurred as a result of the growth in our business activities partially offset by an increase in inventory of $0.6 million and an increase in prepaid and other current assets of $0.1 million.

 

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Investing activities.    Net cash used in investing activities was less than $0.1 million and $1.1 million for the six months ended June 30, 2010 and 2011, respectively. The amounts related entirely to purchases of property and equipment and the change in our restricted cash balances. Purchases of property and equipment were primarily for tooling equipment to support our research and development and manufacturing activities. Restricted cash is comprised of certificates of deposit that collateralize our available credit for our corporate credit cards and default risk on the building lease agreement.

Financing activities.    Net cash used in financing activities during the six months ended June 30, 2011 of $1.1 million consisted of $0.9 million in repayments of our outstanding notes payable, $0.4 million in deferred initial public offering costs partially offset by proceeds of $0.1 million from the issuance of common stock upon the exercise of stock options.

Net cash provided by financing activities during the six months ended June 30, 2010 of $12.5 million consisted primarily of $8.1 million in proceeds from issuance of preferred stock, net of issuance costs and $5.0 million in proceeds from bridge loans from investors. These proceeds were offset by the repayment of notes payable of $0.6 million.

Cash Flows for the Years Ended December 31, 2008, 2009, and 2010

Operating activities.    Net cash used in operating activities was $7.7 million during the year ended December 31, 2010 and consisted of a net loss of $13.5 million, offset by non-cash items of $1.9 million and a net change in operating assets and liabilities of $3.9 million. Non-cash items for the year ended December 31, 2010 consisted primarily of depreciation expense of $0.6 million and stock-based compensation expense of $1.3 million. The significant items in the change in operating assets and liabilities include an increase in inventory of $1.2 million offset by increases of $5.4 million in accounts payable, accrued and other non-current liabilities and a decrease in accounts receivable of $0.4 million. The increase in inventory was due to purchases of inventory component parts and finished goods to fulfill customer orders as demand for our system increased. The increase in accounts payable and accrued liabilities during 2010 was due to the increased purchases and expenses incurred as product demand increased and higher accrued compensation due to higher headcount and sales related expenses such as commissions and bonuses.

Net cash used in operating activities was $16.7 million for the year ended December 31, 2009 and consisted of a net loss of $17.6 million, offset by non-cash items of $1.0 million and a net decrease in operating assets and liabilities of $0.1 million. Non-cash items for the year ended December 31, 2009 consisted primarily of depreciation expense of $0.5 million and stock-based compensation expense of $0.4 million. The significant changes in operating assets and liabilities include increases in accounts receivable of $1.0 million and inventory of $1.0 million, partially offset by an increase accounts payable, accrued and other non-current liabilities of $1.2 million. The change in accounts receivable and inventory was due to our launch of product sales in the third quarter of 2009. The increase in accounts payable during 2009 was due to increased purchases associated with the start-up of our production of product during 2009.

Net cash used in operating activities was $20.4 million for the year ended December 31, 2008 and consisted of a net loss of $21.1 million, offset by non-cash items of $0.6 million and net increases in operating assets and liabilities of $0.1 million. Non-cash items for the year ended December 31, 2008 consisted mainly of depreciation and amortization expense of $0.3 million and stock-based compensation expense of $0.3 million. Changes in operating assets and liabilities consisted primarily of an increase in accrued liabilities of $0.1 million.

Investing activities.    Net cash used in investing activities was $1.1 million, $0.3 million and $1.9 million for the years ended December 31, 2008, 2009, and 2010, respectively. For 2008 and 2009, the amounts related entirely to purchases of property and equipment. In 2010, we capitalized a $1.1 million milestone payment under our license agreement with MGH and purchased $0.7 million of property and equipment. Purchases of property and equipment were primarily for tooling equipment to support our research and development and manufacturing activities.

 

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Financing activities.    Net cash provided by financing activities during the year ended December 31, 2010 of $19.1 million consisted of net proceeds from the sale of our Series D convertible preferred stock of $15.1 million, proceeds from the issuance of the second tranche of a bridge loan of $5.0 million and $0.3 million from the issuance of common stock upon the exercise of stock options offset by repayment of notes payable of $1.2 million.

Net cash provided by financing activities during the year ended December 31, 2009 of $7.9 million consisted primarily of proceeds from the issuance of the first tranche of a bridge loan of $5.0 million and the issuance of notes payable with a financial institution of $3.5 million, offset by repayment of notes payable of $0.6 million.

Net cash provided by financing activities during the year ended December 31, 2008 of $25.0 million consisted primarily of net proceeds from the issuance of convertible preferred stock of $25.0 million.

Contractual Obligations and Commitments

We have certain fixed contractual obligations and commitments that include future estimated payments for milestone payments under our license agreement with MGH, operating lease obligations, and payment of our outstanding indebtedness. Changes in our business needs, fluctuating interest rates, and other factors may result in actual payments differing from the estimates. Although certain payments occur on a fixed schedule (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness”), we cannot provide certainty regarding the timing and amounts of all these payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the table in order to assist in the review of this information within the context of our consolidated financial position and results of operations. The following table summarizes our fixed contractual obligations and commitments, as of December 31, 2010.

 

     Payment Due by Period  
     Total      Less than
1 year
     1-3
years
     3-5
years
     More than
5 years
 
     (in thousands)  

Contractual Obligations:

              

Milestone payments

   $ 7,000       $ 7,000       $       $       $   

Operating lease obligations

     2,483         791         1,692                   

Indebtedness

     1,730         1,411         319                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,213       $ 9,202       $ 2,011       $       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Milestone Payments to MGH

In May 2005, we entered into the MGH Agreement to obtain an exclusive license to develop and commercialize the patent and the core technology that underlies our CoolSculpting System. We are obligated to make various payments to MGH, including (i) a 7% royalty on net sales (as defined in the agreement) of CoolSculpting and (ii) milestone payments. During the year ended December 31, 2010, we paid MGH a $1.1 million milestone payment upon receipt of FDA clearance to market our CoolSculpting System for the selective reduction of fat. The remaining milestone payments include (i) $1 million due upon achieving cumulative net sales of $70 million and (ii) $6 million due upon the earlier to occur of achieving cumulative net sales of $200 million, or the completion of a qualifying initial public offering (which this offering will be). The offering contemplated by this prospectus would be a qualifying initial public offering under the MGH Agreement. MGH may elect to receive up to 50% of each of the remaining milestone payments in our common stock, subject to a cap of 3.5% of our common stock on a fully-diluted basis.

All payments made to MGH prior to the FDA clearance for CoolSculpting were expensed as incurred as research and development costs. Milestone payments made beginning with the FDA clearance date are capitalized and amortized into cost of revenues 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. Royalty payments are accrued as we recognize net sales, and are included in cost of revenues.

 

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Operating Lease Obligations

Our facility lease agreement was amended in September 2010 to add additional office space and a warehouse and to extend the lease term through November 30, 2013. Rent expense for non-cancellable operating leases with scheduled rent increases is recognized on a straight-line basis over the lease term. Rent expense for each of the years ended December 31, 2008, 2009, and 2010 was $0.7 million per year.

Future minimum lease payments under the non-cancelable operating lease as of December 31, 2010 are as follows (in thousands):

 

Year Ending December 31,

      

2011

   $ 791   

2012

     797   

2013

     895   
  

 

 

 

Total future minimum lease payments

   $ 2,483   
  

 

 

 

Loan Agreement

In January 2009, we entered into a loan and security agreement, or the Loan Agreement, with Silicon Valley Bank. The Loan Agreement provides for total borrowings of $5.0 million to be made available to us in three separate tranches. We received tranche A in the amount of $1.5 million in January 2009 and tranche B in the amount of $2.0 million in April 2009. Tranche C in the amount of $1.5 million was available until September 30, 2009, but we did not draw it down. The notes payable are collateralized by substantially all of our assets, excluding our intellectual property. The notes carry an interest rate of 7.28% per annum. The repayment of principal, plus interest, is via monthly installments over a 36 month period for each tranche, beginning with the disbursement date of each tranche. As of December 31, 2010, we were in compliance with the terms of the Loan Agreement, except for the covenant to deliver audited financial statements to the lender within 180 days from December 31, 2010. We obtained a waiver of this covenant from the lender and subsequently delivered audited financial statements to the lender in accordance with the term of the waiver. As of June 30, 2011, we were in compliance with the terms of the Loan Agreement.

In accordance with the Loan Agreement, we issued a warrant to the financial institution in January 2009 to purchase 47,683 shares of Series C preferred stock at $3.67 per share. We recorded the fair value of this warrant as debt discount at issuance and amortized it to interest expense over the term of the notes. The exercise price and number of warrants were subject to change upon the closing of our Series D-1 convertible preferred stock financing agreement. Upon the issuance of Series D-1 convertible preferred stock at $2.68 per share, the warrants were automatically adjusted to instead be exercisable for Series D-1 convertible preferred stock with the exercise price adjusted to record the per share purchase price of Series D-1 convertible preferred stock. Subsequently, the number of such shares subject to these warrants was adjusted to equal 65,319 shares.

The following is a schedule of payments due on notes payable as of December 31, 2010 (in thousands).

 

Year Ending December 31,

   Amount  

2011

   $ 1,411   

2012

     319   
  

 

 

 

Total payments due

     1,730   

Less:

  

Unamortized discount and interest

     (134

Current portion

     (1,334
  

 

 

 

Notes payable, net of current portion

   $ 262   
  

 

 

 

 

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Convertible Notes Payable

In October 2009, we entered into a bridge loan agreement with related parties. The lenders committed to issue to us, on an unsecured basis, up to $10 million in unsecured convertible promissory notes. The convertible promissory notes carried an interest rate of 8% per annum. In October 2009, we received $5.0 million through the first closing of the convertible promissory notes, and in February 2010, we received an additional $5.0 million through the second closing of the convertible promissory notes. In May 2010, we completed a preferred stock financing and converted the outstanding convertible promissory notes, including accrued interest, into our Series D-1 convertible preferred stock.

Note Receivable from a Stockholder

In December 2007, we issued 445,509 shares of our common stock to an executive in exchange for full-recourse promissory notes in the aggregate principal amount of approximately $245,000 bearing interest from the date of issuance until January 1, 2010 at a rate of 4.72% per annum compounded annually and currently bearing interest at a rate of 4.00% per annum compounded annually. The promissory notes are collateralized by the related common stock. The promissory notes are due and payable in full upon the earlier of a change of control, December 31, 2015, or nine months following our initial public offering. The executive separated from us in 2010. These notes receivable are related to a prior exercise of stock options, and has been recorded as a contra to stockholders’ equity account.

Purchase Commitments

We have no material non-cancelable purchase commitments with contract manufacturers as we work on a cancelable purchase order basis.

Off-balance Sheet Arrangements

As of December 31, 2008, 2009, and 2010 and June 30, 2011, 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.

In the normal course of business, we enter into contracts that contain a variety of representations and warranties and provide for general indemnifications. Our exposure under these agreements is unknown because it involves claims that may be made against us in the future, but have not yet been made. To date, we have not paid any claims or been required to defend any action related to our indemnification obligations, and accordingly, we believe that the estimated fair value of these indemnification obligations is minimal and we have not accrued any amounts for these obligations.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate fluctuations and inflation. We are not exposed to foreign currency exchange risk in that we invoice revenues in U.S. dollars and receive payments in U.S. dollars.

Interest Rate Fluctuations

Our investments include cash and cash equivalents, which consist of cash and money market accounts, and are held for working capital purposes. We had cash and cash equivalents of $12.7 million and $8.7 million as of December 31, 2010 and June 30, 2011, respectively. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. We do not enter into investments

 

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for trading or speculative purposes. Our investments are exposed to market risks due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. Due to the short-term nature of our investment portfolio, we do not believe an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio, and therefore, we do not expect our operating results or cash flows to be materially affected to any degree by a sudden change in market interest rates.

We also have fixed interest rate notes payable which are collateralized by substantially all of our assets, excluding our intellectual property. Because of the fixed interest rate, a hypothetical 10% change in interest rates would have no impact on our borrowing or results of operations.

Inflation

We do not believe that inflation has had a material effect on our business, financial condition, or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, and our results of operations.

Foreign Exchange

We are not exposed to foreign currency exchange risk because both our revenues and expenses are incurred and paid in U.S. dollars.

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board, or the FASB, issued guidance for revenue recognition of transactions with multiple deliverables. This guidance impacts the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, this guidance modifies the manner in which the transaction consideration is allocated across the separately identified deliverables by requiring the use of the relative selling price allocation method. We adopted this guidance retrospectively from the date we began selling products during the second half of the year ended December 31, 2009. The adoption of this accounting guidance did not have a material impact on our financial statements.

In May 2011, the FASB issued new guidance for fair value measurements to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. The guidance changes certain fair value measurement principles and enhances the disclosure requirements, particularly for level three fair value measurements. The guidance is effective for us prospectively beginning in the first quarter of fiscal 2012. We are currently evaluating the impact this guidance may have on our financial position, results of operations, and cash flows.

 

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Business

Overview

We are a medical technology company focused on developing and commercializing products utilizing our proprietary controlled-cooling technology platform. Our first commercial product, the CoolSculpting System, is designed to selectively reduce stubborn fat bulges that may not respond to diet or exercise. CoolSculpting is based on the scientific principle that fat cells are more sensitive to cold than the overlying skin and surrounding tissues. CoolSculpting utilizes precisely controlled cooling to reduce the temperature of fat cells in the treated area, which is intended to cause fat cell elimination through a natural biological process known as apoptosis, without causing scar tissue or damage to the skin, nerves, or surrounding tissue. We developed CoolSculpting to safely, noticeably, and measurably reduce the fat layer within a treated fat bulge without requiring the patient to diet or exercise. In our pivotal U.S. clinical trial involving 60 patients, physicians were able to accurately differentiate between pre- and post-treatment photographs in 88% of the patients, while unable to identify aesthetic benefits in the remaining 12%. There have been several published clinical studies conducted by us and independent physicians, involving more than 100 patients collectively, evaluating the efficacy of CoolSculpting. Certain of these published studies showed that patients achieved noticeable aesthetic benefits from a CoolSculpting procedure only 80% of the time. We received clearance from the FDA in September 2010 to market CoolSculpting for the selective reduction of fat around the flanks, an area commonly referred to as the “love handles.” We sell our CoolSculpting System to select dermatologists, plastic surgeons, and aesthetic specialists and generate revenue from capital sales of our CoolSculpting System and from procedure fees our physician customers pay us for each CoolSculpting procedure they perform.

The global market for aesthetic procedures is significant and growing. In the United States alone, the ASAPS estimates that consumers spent more than $10.7 billion on aesthetic procedures in 2010. Fat reduction and body contouring are popular aesthetic procedures. Invasive procedures (such as liposuction and tummy, arm, and thigh tucks) and minimally-invasive procedures (such as laser assisted liposuction) effectively reduce fat but involve surgical procedures that require significant physician skill and resources, may involve pain, downtime, and expense for the patient, and carry the risks associated with any surgical procedure. Existing non-invasive procedures, which currently include those based on radiofrequency, laser, or ultrasound energy, avoid the patient downtime and high costs of invasive and minimally-invasive procedures, but often are painful, produce limited or inconsistent results, and require multiple treatments, ongoing maintenance treatments, or special patient diet or exercise programs. In addition, existing non-invasive procedures are not capable of selectively targeting fat cells, which can lead to damage to the surrounding tissues. Further, the treatment methods used by many existing invasive, minimally-invasive, and non-invasive procedures acutely injure fat cells in the treated area, which leads to fat cell elimination through a biological process known as necrosis. Unlike apoptosis, necrosis triggers the body’s wound-healing response and can result in scar tissue formation in the treated area. This scar tissue can lead to stiffening of the treated area and limits the number of times a patient can undergo these types of procedures in one area or the efficacy of any repeat treatments.

We developed CoolSculpting to provide patients with a safe, effective, non-invasive, and convenient procedure to reduce stubborn fat bulges that are not satisfactorily served by existing fat reduction and body contouring procedures. CoolSculpting is clinically proven to reduce fat bulges in a 60-minute procedure, allowing most patients to achieve noticeable and measurable aesthetic results without the pain, expense, downtime, and risks associated with invasive and minimally-invasive procedures. Further, these results are achieved without the pain, multiple procedures, maintenance, and diet and exercise programs required with other non-invasive procedures. Because the fat layer in the treated area is reduced by eliminating fat cells that will not be replaced by the body, we believe the aesthetic benefits patients achieve through CoolSculpting will be durable. In addition, patients can elect to repeat the CoolSculpting procedure multiple times on the same treatment area if they desire further fat reduction. Due to these advantages, we believe CoolSculpting is appealing to both aesthetic veterans, those existing consumers who have previously had one or more aesthetic procedures, and to aesthetic neophytes, those consumers who have not previously elected to undergo an aesthetic procedure.

 

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We designed our CoolSculpting System to specifically treat fat bulges. While there are no technical or regulatory restrictions on the use of CoolSculpting based on patient weight, patients who are obese are not typically good candidates for CoolSculpting because these individuals may not have specific fat bulges but typically have body areas that require significant fat reduction. As a result, these individuals are unlikely to obtain noticeable aesthetic results from a CoolSculpting treatment. We offer training to our physician customers to better enable them to identify those patients whose aesthetic appearance will be noticeably improved by the reduction of their fat bulges through CoolSculpting.

Physicians can market CoolSculpting as a premium, highly-differentiated, non-invasive fat reduction procedure. Based on our commercial data, we believe physicians can recoup their capital expenditures within six months on average assuming modest use. In addition, the CoolSculpting procedure is not technique-dependent, does not require significant training or skill, and is largely automated. Once the procedure is initiated, the CoolSculpting System is self-monitoring, allowing the physician to see and treat other patients or perform concurrent procedures (such as injections or other dermal treatments) on the same patient during the balance of the 60-minute CoolSculpting procedure. Further, we believe CoolSculpting’s appeal will allow physicians to target the aesthetic neophyte market and expand their aesthetic practices.

We selectively market CoolSculpting to dermatologists, plastic surgeons, and aesthetic specialists. Aesthetic specialists are physicians who elect to offer aesthetic procedures as a significant part of their practices but are not board-certified dermatologists or plastic surgeons. According to a market research study we commissioned through Easton Associates, there are currently over 70,000 physicians who perform aesthetic procedures at approximately 30,000 practice sites worldwide, including over 16,000 physicians and approximately 8,000 practice sites within the United States and Canada. We intend to place our CoolSculpting System with 4,000 to 5,000 physician practice sites on a global basis. Some of our target practices have purchased or may elect to purchase more than one CoolSculpting System. We utilize our direct sales organization to selectively market and sell CoolSculpting in the United States and Canada, our North American markets. In our markets located outside of North America, we market and sell CoolSculpting through a network of distributors and, opportunistically, intend to pursue direct sales in select markets. Our sales force and distributors target dermatologists, plastic surgeons and aesthetic specialists who have practices focused on aesthetic procedures and who express a willingness to position CoolSculpting as a premium, differentiated treatment and participate in our practice marketing and support programs. Our 45 markets outside of North America are located in Asia-Pacific (including Korea and Singapore), Europe, the Middle East, and Africa (including Russia, the United Kingdom and Germany), and South America (including Brazil). Revenues from markets outside of North America comprised 34% and 26% of our total revenues for the year ended December 31, 2010 and six months ended June 30, 2011, respectively, with Asia-Pacific representing 17.5% and 8.6%, Europe, the Middle East and Africa representing 13.3% and 10.7%, and South America representing 2.9% and 6.6% of total revenues for these same periods, respectively. We are driving growth in CoolSculpting procedures through our physician marketing programs, which provide physicians with sales training, practice marketing, and support services. After we establish a significant installed base of CoolSculpting Systems in specific markets, we plan to use targeted consumer marketing, advertising, and promotional activities in these markets to drive demand for CoolSculpting.

We generate revenues from capital sales of our CoolSculpting System and from procedure fees our physician customers pay for each CoolSculpting procedure they perform. We had an installed base of 346 and 629 CoolSculpting Systems as of December 31, 2010 and June 30, 2011, respectively. As of June 30, 2011, over 134,000 CoolSculpting procedures had been sold to our physician customers. We generated revenues of $25.5 million for the year ended December 31, 2010 and $31.6 million for the six months ended June 30, 2011. Procedure fees comprised 17% of our revenues for the year ended December 31, 2010 and 31% of our revenues for the six months ended June 30, 2011. We had net losses of approximately $13.5 million and $1.4 million, respectively, for the same periods.

Our business is dependent upon the success of CoolSculpting, and we cannot assure you that we will be successful in significantly expanding physician and patient demand for CoolSculpting. In addition, we will

 

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continue to incur significant expenses for the foreseeable future as we expand our commercialization and other business activities, and as a result, we cannot assure you that we will be to achieve or maintain our profitability.

Market Overview

The global market for aesthetic procedures is significant and growing. The ASAPS estimates that U.S. consumers spent more than $10.7 billion on 9.3 million aesthetic procedures in 2010. According to the ASAPS, total aesthetic procedures in the United States have experienced a 12% compound annual growth rate between 1997 and 2010, with non-surgical aesthetic procedures experiencing a 16% compound annual growth rate during this same period. The ISAPS conducted a survey of plastic surgeons in the top 25 countries for aesthetic procedures, including the United States, and reported that this group performed 17.1 million procedures, including 8.5 million surgical procedures and 8.6 million non-surgical procedures, in 2009. Of these total procedures, approximately 33% (5.7 million) were performed in Asia, 24% (4.2 million) were performed in North America, 20.5% (3.5 million) were performed in Europe, and 19.8% (3.4 million) were performed in South America. The aesthetic procedures reported by the ASAPS and ISAPS represent many different types of treatment options and technologies for a variety of conditions. According to the ASAPS, the top five surgical procedures in 2010 were breast augmentation, liposuction, eyelid surgery, abdominoplasty, and breast reduction, and the top five non-surgical procedures in 2010 were Botox® injections, hyaluronic acid injections, laser hair removal, laser skin resurfacing, and chemical peels. No one treatment procedure is offered by all physicians, and treatments vary in terms of the treatment goal and desired effect. As a result, the total aesthetic market as reported by the ASAPS and ISAPS does not represent the market potential for CoolSculpting or any other single product or treatment, but illustrates that each year patients elect to have millions of procedures to enhance their appearance.

We believe several factors are contributing to the ongoing growth in aesthetic procedures, including:

 

 

Continuing focus on body image and appearance.    Both women and men continue to be concerned with their body image and appearance, fueled in part by popular culture’s perpetuation of the ideal thin body type for women and the ideal lean and defined body type for men. Research data indicates that the current media ideal of thinness is achieved by less than 5% of the American population. In addition, the size and wealth of the aging “baby boomer” demographic segment and its desire to retain a youthful appearance have driven the growth in aesthetic procedures.

 

 

Wide acceptance of aesthetic procedures.    According to the ASAPS survey in 2010, 51% of Americans (including 53% of women and 49% of men) approved of cosmetic surgery, and 67% of Americans responded that they would not be embarrassed if their friends or family knew they had undergone a cosmetic procedure.

 

 

Broader availability of safe non-invasive procedures.    Technological developments have resulted in the introduction of a broader range of safe non-invasive aesthetic procedures. According to the ASAPS, non-invasive treatments are growing faster than invasive surgical procedures.

 

 

Increased physician focus on aesthetic procedures.    Increased restrictions imposed by managed care and government agencies on reimbursement for medical treatments are motivating physicians to establish or expand their elective aesthetic practices, which generally consist of procedures paid for directly by patients. We expect this trend to continue as physicians look for ways to expand their practices and improve profitability.

Limitations of Existing Fat Reduction and Body Contouring Procedures

Fat reduction and body contouring procedures, including invasive, minimally-invasive, and non-invasive procedures, have become increasingly popular. The following discussion outlines the benefits of these existing procedures, as well as our opinion of the inherent limitations of these procedures when compared to CoolSculpting. Many of the companies marketing these procedures have greater resources and brand recognition than we do. In addition, some of the procedures offered by our competitors have broad market acceptance with our target physician customers and their patients.

 

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Invasive and Minimally-Invasive Procedures

Physicians currently perform a number of invasive surgical procedures for fat reduction and body contouring, including liposuction, abdominoplasty (tummy tucks), gluteoplasty (buttock lifts), brachioplasty (arm lift), and thighplasty (thigh lift). Laser-assisted liposuction, laser lipolysis, and ultrasound lipolysis are minimally-invasive alternatives for fat reduction and body contouring. These minimally-invasive procedures require the physician to surgically insert a cannula, or metal tube, into the area to be treated and to use heat or ultrasound energy from the cannula to damage fat cells. Patients who are obese and require significant fat reduction to achieve aesthetic results are candidates for invasive and minimally-invasive procedures. Although effective at reducing a significant amount of fat, these invasive and minimally-invasive procedures present the following limitations:

 

 

Surgical risks.    Like all surgical procedures, invasive and minimally-invasive procedures carry risks of infection, local or widespread scarring, perforation, and hemorrhage. These procedures generally require a general or local anesthesia, which carries additional risks.

 

 

Pain and downtime.    Invasive procedures may involve pain and may require weeks of post-surgical recovery. As a result, patients may need to spend significant time away from work and take prescribed pain medications for extended periods of time post-surgery. In addition, body lifts may severely limit muscle movement in the treated area during recovery, which can limit a patient’s mobility for a significant period of time. Minimally-invasive procedures require a surgical incision, and may cause patient pain. Patients generally require at least two days of recovery time after a minimally-invasive procedure, which may require the patient to miss work and necessitate prescribed pain medications post-surgery.

 

 

Potentially undesired results.    Invasive procedures may cause non-uniform fat reduction, dimpling, lumpiness, numbness, scarring, discoloration, or sagging skin in the treated area. Follow-up surgeries may be required to correct these problems. Minimally-invasive procedures can cause skin or tissue damage if, among other things, the physician does not carefully control the heat or ultrasound energy delivered in the treatment area.

 

 

Limited repeatability.    The process of removing or destroying fat cells with invasive or minimally-invasive procedures triggers the body’s wound healing response, which leads to the formation of scar tissue in the treated area. If a patient desires further fat reduction or is not satisfied with the aesthetic results from a procedure, the scar tissue in the treated area may prevent the patient from undergoing follow-up procedures to enhance or correct the original treatment results.

 

 

Physician skill and technique dependent.    The aesthetic results achieved through invasive and minimally-invasive procedures are dependent upon a physician’s skill and training, which can vary from physician to physician. In addition, these procedures require a significant amount of direct physician time to perform.

 

 

High cost.    Invasive and minimally-invasive procedures are significantly more expensive for patients than non-invasive aesthetic procedures. In addition, there is an opportunity cost for physicians as these procedures require direct physician involvement and supervision.

Non-Invasive Procedures

Patients who do not require significant fat reduction to achieve 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. Existing non-invasive procedures used for body contouring or fat reduction, other than CoolSculpting, currently include those based on various forms of energy, including radiofrequency, laser, or ultrasound. Although these procedures are generally safer and less expensive than invasive and minimally-invasive procedures, these procedures have the following limitations:

 

 

Limited, inconsistent, and unpredictable results.    We believe existing non-invasive procedures have limited efficacy and produce inconsistent fat reduction results. In addition, these procedures are not

 

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capable of selectively targeting fat cells, which can lead to unpredictable results, including damage to surrounding tissue.

 

 

Multiple steps required.    Existing non-invasive procedures based on radio frequency or laser energy often require multiple steps spread over several weeks before the patient obtains noticeable aesthetic results, requiring the patient to schedule and coordinate multiple, time-consuming office visits.

 

 

Maintenance or diet and exercise required.    Some existing non-invasive procedures have only a temporary treatment effect, and thus require periodic maintenance treatments to sustain the desired aesthetic results. Additionally, some of these procedures require the patient to change their diet habits and exercise routines during the several-week treatment period.

 

 

Technique dependent.    Existing non-invasive procedures often require highly trained personnel to conduct the treatment. Poor technique may lead to reduced efficacy and inconsistent aesthetic results.

 

 

Limited repeatability and pain.    Ultrasound energy-based products utilize heat or mechanical energy to acutely injure fat cells in the treatment area, causing fat cell elimination through a biological process known as necrosis. Unlike apoptosis, necrosis triggers the body’s wound-healing response and can result in scar tissue formation. This scar tissue can lead to stiffening of the treated area and limit the number of times a patient can undergo these types of procedures in one area or the efficacy of any repeat treatments if a patient desires further fat reduction or is not satisfied with the initial aesthetic results. In addition, these procedures may involve patient pain.

Our Solution

CoolSculpting is a fat reduction procedure that is clinically proven to be safe and effective and provides most patients with noticeable and measureable aesthetic results. CoolSculpting utilizes our proprietary controlled-cooling technology to selectively reduce stubborn fat bulges that may not respond to diet or exercise. CoolSculpting is based on the scientific principle that fat cells are more sensitive to cold than the overlying skin and surrounding tissues. CoolSculpting precisely cools the targeted fat bulge, and is designed to eliminate fat cells through a natural biological process known as apoptosis, without causing scar tissue or damage to the skin, nerves, or surrounding tissues. As of June 30, 2011, we have sold over 134,000 CoolSculpting procedures to our physician customers.

We designed our CoolSculpting System to address the aesthetic concerns of individuals who have stubborn fat bulges that may not respond to diet or exercise. Although there are no technical or regulatory restrictions on the use of CoolSculpting based on patient weight, we believe patients who are obese and who do not have specific fat bulges are not typically good candidates for CoolSculpting. These individuals typically have body areas that require significant fat reduction. As a result, these individuals are unlikely to obtain noticeable aesthetic results from a CoolSculpting treatment and are better candidates for invasive and minimally invasive procedures. We offer training to our physician customers to better enable them to identify those patients whose aesthetic appearance will be improved by the reduction of their fat bulges through CoolSculpting.

We believe that CoolSculpting provides the following benefits to our physician customers and their patients:

 

 

Clinically proven, consistent, and durable results.    Clinical studies involving more than 300 patients demonstrate that a single CoolSculpting procedure can noticeably and measurably reduce the fat layer within a treated fat bulge without requiring diet or exercise. In our pivotal U.S. clinical trial involving 60 patients, physicians were able to accurately differentiate between pre and post treatment photographs in 88% of the patients. There have been several published clinical studies conducted by us and independent physicians, involving more than 100 patients collectively, evaluating the efficacy of CoolSculpting. Certain of these published studies showed that patients achieved noticeable aesthetic benefits from a CoolSculpting procedure only 80% of the time. Patients typically notice results as soon as three weeks following the CoolSculpting procedure, with the most dramatic results occurring over a period of two to four months for most patients. Because the

 

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fat layer in the treated area is reduced by eliminating fat cells that will not be replaced by the body, we believe the aesthetic benefits patients achieve in the treated area will be durable.

 

 

Safety profile.    CoolSculpting selectively targets fat cells. Our proprietary treatment algorithms are designed to ensure that fat cells in the treated area are sufficiently cooled to obtain the desired aesthetic results while preserving the skin and surrounding tissues. We designed the CoolSculpting System to constantly monitor the controlled-cooling process and to automatically terminate the procedure if it detects any errors and warm the treated area if the detected temperature falls below our cooling algorithms. Since the commercial launch of CoolSculpting through August 31, 2011, we have received approximately 1.2 patient complaints per 1,000 CoolSculpting procedures. The most typical side effects include skin redness, bruising, and numbness or discomfort in the treatment area. These side effects are generally temporary and generally self-resolve within one week, provided, however, that in our pivotal clinical study some patients experienced these side effects for more than one week, including 7% of the patients experienced skin redness for more than one week, 5% of the patients experienced bruising for more than one week, and 50% of the patients experienced some degree of numbness (in no case marked) for more than one week, with that number decreasing to 7% after two months and no patients reported numbness at the six-month follow-up visit. In a limited number of complaint cases, patients have reported effects lasting longer than one week (in 0.08% of procedures), including pain (in 0.07% of procedures) in the treatment area during or after a CoolSculpting procedure, but in each of these cases these reported complaints self-resolved within four weeks of the onset of the symptoms. In rare instances (in less than 0.01% of procedures), patients have reported hardness in the treatment area. The hardness was related to a heightened inflammatory process and spontaneously resolved in all reported cases within one to four months of the onset of the symptoms, except for one patient who claims that the hardness has not resolved.

 

 

Patient satisfaction.    CoolSculpting allows most patients to achieve noticeable and measurable aesthetic results without the pain, expense, downtime, and risks associated with invasive and minimally-invasive procedures for fat reduction. In addition, unlike many other non-invasive procedures, patients are not required to undergo multiple treatment procedures or adopt special diet or exercise programs following the procedure to obtain aesthetic results. Patients have the flexibility to undergo a CoolSculpting procedure discreetly, scheduling an appointment for the 60-minute procedure in the morning before work, during a lunch break, or in the evening. In our pivotal clinical study, 82% of the participating patients reported satisfaction with the CoolSculpting procedure. As a further indication of patient satisfaction, our physician customers reported that 45% of their patients returned for an additional CoolSculpting treatment, according to the market research study we commissioned through Easton Associates.

 

 

Repeatability enabled by natural biological process.    CoolSculpting is designed to reduce the fat layer in the treated area through apoptosis, a natural biological process that leads to gradual elimination of the fat cells from the body. Unlike other treatment methods, we designed CoolSculpting to avoid triggering the body’s wound-healing response, which can lead to the formation of scar tissue. As a result, patients can elect to have the CoolSculpting procedure repeated multiple times on the same treatment area if they desire further fat reduction. Because fat cells are gradually eliminated from the body following a CoolSculpting treatment over a three to 16 week period, we recommend that patients wait at least six weeks before repeating a CoolSculpting procedure on the same treatment area.

 

 

Results not technique-dependent.    The CoolSculpting procedure is not technique-dependent and requires limited training and skill to obtain successful aesthetic results. We designed the CoolSculpting System to be easy to operate and largely automated. Once the procedure is started, the clinician is not required to monitor or make any adjustments to the CoolSculpting System during the balance of the 60-minute procedure. The CoolSculpting System also pages the clinician a few minutes prior to the conclusion of the procedure.

 

 

Differentiated, high-value product for physician practices.    Our selective distribution strategy is designed to enable our physician customers to market CoolSculpting as a premium, highly-differentiated, non-invasive fat reduction procedure. Based on our commercial data, we believe physicians can recoup their capital expenditures within six months assuming modest use. In addition, the physician can see and treat other patients or perform concurrent procedures, such as injections or other dermal treatments, on the same patient during the 60-minute CoolSculpting procedure.

 

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Ability to expand the aesthetic market.    We believe there is strong consumer demand for a non-invasive procedure that can address the aesthetic concerns of individuals who have stubborn fat bulges that may not respond to diet or exercise. In a survey of 1,076 adults in the United States that we conducted through Rabin Research Company, an independent full-service marketing research company, more than 40% of the participants indicated that they were likely to seek more information about the CoolSculpting procedure to enhance the shape of their body. We achieved this positive response despite the fact that 90% of the participants in our survey had never previously elected to undergo an aesthetic procedure and exactly 50% were men, a group that accounted for less than 10% of the total aesthetic procedures performed in the United States in 2010. According to the market research study we commissioned through Easton Associates, our physician customers participating in the study reported that 30% of their CoolSculpting patients were aesthetic neophytes. Based on these results, we believe physicians will be able to target the aesthetic neophyte market and expand their aesthetic practice due to CoolSculpting’s appeal.

Our Strategy

Our goal is to become a leading medical technology company focused on developing and commercializing products utilizing our proprietary controlled-cooling technology platform. To achieve this goal, we intend to:

 

 

Establish CoolSculpting as a premium, highly-differentiated treatment through selective distribution.    We selectively market and sell our CoolSculpting System to dermatologists, plastic surgeons, and aesthetic specialists. A market research study we commissioned from Easton Associates estimates that there are currently over 70,000 physicians that perform aesthetic procedures at approximately 30,000 practice sites worldwide, and we expect to target 4,000 to 5,000 of these physician practice sites on a global basis. Some of our target practice sites have purchased or may elect to purchase more than one CoolSculpting System. Our sales force and distributors target dermatologists, plastic surgeons and aesthetic specialists who have practices focused on aesthetic procedures and who express a willingness to position CoolSculpting as a premium, differentiated treatment and participate in our practice marketing and support programs. As of June 30, 2011, we had an installed base of 629 CoolSculpting Systems worldwide.

 

 

Increase utilization of CoolSculpting through our targeted physician marketing and support programs.     We are driving demand for CoolSculpting procedures through our targeted marketing and physician support programs. Our Sales Training and Enhanced Practices (S.T.E.P.) Program provides physicians with patient training and sales, practice marketing, and support services to help our physician customers make CoolSculpting a key component of their practices. We also plan to implement a co-op advertising program designed to encourage our physician customers to promote CoolSculpting to aesthetic patients. We will also continue to participate in industry tradeshows, clinical workshops, and company-sponsored conferences with expert panelists.

 

 

Increase consumer awareness and demand for CoolSculpting.    After we establish a significant installed base of CoolSculpting Systems in specific markets, we intend to employ a targeted and strategic direct-to-consumer marketing program in these markets to generate awareness of CoolSculpting among aesthetic veterans and aesthetic neophytes. We also intend to continue our active media presence and our social media programming, such as Facebook, Twitter, YouTube, and targeted blogs through pay-per-click advertising, testimonials, and video presentations.

 

 

Increase our international presence.    There is strong global demand for aesthetic procedures outside of North America, especially in Asia, Latin America, and Europe. We intend to increase our market penetration outside of North America and build global brand recognition. We have received regulatory approval or are otherwise free to market CoolSculpting in 46 international markets, where use of the product is generally not limited to specific treatment areas. Physicians in these markets commonly perform CoolSculpting procedures on the abdomen, inner thighs, back, and chest, in addition to the flanks. We intend to seek regulatory approval to market CoolSculpting in additional international markets, including China. We also intend to grow our international sales and marketing organization to

 

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focus on increasing sales and strengthening our physician relationships. As part of that strategy, we intend to opportunistically deploy a direct sales force in select international markets.

 

 

Expand our FDA-cleared indications for CoolSculpting.    We currently have FDA clearance to market CoolSculpting in the United States for the selective reduction of fat in the flanks, an area commonly known as the “love handles.” We intend to seek additional regulatory clearances from the FDA to expand our U.S. marketable indications for CoolSculpting to other areas on the body.

 

 

Leverage our technology platform.     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.

The CoolSculpting Experience

Patient Consultation

The first step of the CoolSculpting process is a patient consultation. We designed our CoolSculpting System to address the aesthetic concerns of individuals who are not considered obese but have stubborn fat bulges that may not respond to diet or exercise. We train our physician customers to properly identify those patients who would be good candidates for CoolSculpting and explain to their patients the aesthetic results they should expect from a CoolSculpting procedure. We also instruct our physician customers to advise their patients regarding the natural process of fat cell elimination triggered by a CoolSculpting procedure, so that they understand the expected time period before they will notice the full aesthetic results as well as the potential to repeat the procedure for additional aesthetic results. While some patients may notice results as soon as three weeks following a CoolSculpting procedure, the full aesthetic results are generally achieved over a period of two to four months following treatment. Because we believe the consultation process is an important step in ensuring patients are pleased with their CoolSculpting procedure, we encourage our physician customers to personally conduct the patient consultation. Our physician customers participating in the market research study we commissioned through Easton Associates reported that 95% of their patients were happy with the results of their CoolSculpting procedure, with the degree of satisfaction based in part on the physician’s management of the patient’s expectations.

The CoolSculpting Procedure

CoolSculpting is a single 60-minute, non-invasive procedure that is clinically proven to be safe and effective and provides most patients with noticeable and measureable aesthetic results. Once the desired treatment area has been identified, the clinician applies our consumable gelpad to the skin surface of the treatment area to ensure consistent thermal contact and to protect the skin from freezing. The CoolSculpting vacuum applicator is then positioned on the treatment area over the gelpad, and the fat bulge is drawn into the vacuum applicator and positioned between its two cooling panels. Once the vacuum applicator is affixed on the treatment area, no further clinician intervention is required for the duration of the procedure. The rate of the controlled cooling is modulated by thermoelectric cooling elements and controlled by sensors in the vacuum applicator that monitor the cooling of the fat bulge. Just prior to the end of the 60-minute procedure, the CoolSculpting System signals the clinician to return to the treatment room. When the procedure is completed, the CoolSculpting System automatically terminates the cooling, and the clinician then removes the CoolSculpting vacuum applicator from the treatment area.

Patient Experience

Our surveys indicate that most patients find the CoolSculpting procedure easy to tolerate. Generally, anesthesia and pain medications are not required before, during, or after a CoolSculpting procedure. Patients feel a tugging sensation from the suction created when the CoolSculpting vacuum applicator is placed on the treatment area. At the onset of the procedure, patients also experience a chilling sensation in the treatment area that subsides after a few minutes, as the cooling produces an anesthetic effect. Patients can talk on their cell phones, read, listen to music, work on their laptop, relax, or sleep during the 60-minute procedure.

 

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After completion of a CoolSculpting procedure, patients may resume their normal activities, including work and exercise. CoolSculpting patients generally do not experience any significant adverse side effects. Since our commercial launch of CoolSculpting through August 2011, we have received approximately 1.2 patient complaints per 1,000 CoolSculpting procedures. The most typical side effects after CoolSculpting include skin redness, bruising, and numbness or discomfort in the treatment area, which are generally temporary and generally self-resolve within one week provided, however, that in our pivotal clinical study some patients experienced these side effects for more than one week, including 7% of the patients experienced skin redness for more than one week, 5% of the patients experienced bruising for more than one week, and 50% of the patients experienced some degree of numbness (in no case marked) for more than one week, with that number decreasing to 7% after two months and no patients reported numbness at the six-month follow-up visit. In a limited number of complaint cases, patients have reported effects lasting longer than one week (in 0.08% of procedures) including pain (in 0.07% of procedures) in the treatment area during or after a CoolSculpting procedure, but in each of these cases these reported complaints self-resolved within four weeks of the onset of the symptoms. In rare instances (in less than 0.01% of procedures), patients have reported hardness in the treatment area. The hardness was related to a heightened inflammatory process and spontaneously resolved in all reported cases within one to four months of the onset of the symptoms, except for one patient who claims that her hardness has not resolved.

Our CoolSculpting System

We generate revenues from capital sales of our CoolSculpting System and from procedure fees our physician customers pay for each CoolSculpting procedure they perform. Capital sales of our CoolSculpting System include the CoolSculpting control unit and our CoolSculpting vacuum applicators. We generate procedure fees through sales of CoolSculpting procedure packs, which include our consumable gelpads and liners and a disposable computer cartridge that we market as the CoolCard. The CoolCard contains enabling software that permits our physician customer to perform a fixed number of CoolSculpting procedures.

CoolSculpting Control Unit

The CoolSculpting control unit is the base of the CoolSculpting System and contains the simple user interface, power management and control functions, and chiller unit that is responsible for the controlled cooling. Our CoolSculpting control unit also contains software that tracks and collects data about each procedure performed and any error messages that may be generated during the procedure. We collect and analyze this information to help physicians better understand their usage patterns and improve their marketing plans, utilization, and profitability.

 

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1.      The color touch screen on the CoolSculpting control unit provides operators with clear visual directions to initiate a CoolSculpting procedure, continuous status updates, and easy to follow notifications or corrective actions in the rare event of a procedure interruption.

 

2.      Vents are built into the CoolSculpting control unit to provide airflow and reduce heat build-up. Our CoolSculpting System can be used in a standard physician treatment room without any special ventilation requirements or room modifications.

 

3.      The drawer provides storage space for our CoolSculpting gelpads and liners and user documentation.

 

4.      The unit is mobile, allowing a physician to easily transfer the CoolSculpting unit between treatment rooms and reach different treatment areas on a patient.

  
  
  

 

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CoolSculpting Vacuum Applicators

Our CoolSculpting System includes three CoolSculpting vacuum applicators.

 

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1.      The CoolSculpting vacuum applicator delivers vacuum suction and cooling to the fat bulge being treated.

 

2.      Controls on the CoolSculpting vacuum applicator can be used to start and stop a CoolSculpting procedure and to turn the vacuum suction on and off.

 

3.      Thermoelectric cooling panel with temperature and pressure sensors provide precise thermal control and monitoring of the fat bulge being treated and automatically stop the procedure if a problem is detected.

  
  

We currently offer three CoolSculpting vacuum applicators for use with our CoolSculpting System. Each CoolSculpting vacuum applicator is designed to allow the physician to treat a different size fat bulge.

 

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CoolCurve

 

1.      Our CoolCurve applicator is designed to fit tightly curved contours.

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CoolCore

 

2.      Our CoolCore applicator is designed for use on small and medium fat bulges.

 

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CoolMax

 

3.      Our CoolMax applicator is designed for use on larger fat bulges.

 

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CoolSculpting Procedure Packs

Our CoolSculpting procedure packs facilitate the pay-per-procedure feature of our CoolSculpting System. Our CoolSculpting procedure packs include our CoolCard and our consumable gelpads and liners.

 

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1.      A CoolCard is required to operate the CoolSculpting control unit. Each CoolCard is programmed with enabling software that permits the CoolSculpting control unit to perform a fixed number of procedures. In addition, each CoolCard is programmed with an encrypted security certificate that prevents the performance of a CoolSculpting procedure unless the CoolCard is recognized and authenticated by the specific CoolSculpting control unit and CoolSculpting vacuum applicator. The security certificate is designed to ensure that physicians pay for each CoolSculpting procedure and prevent the use of counterfeit CoolCards.

 

2.      Our consumable gelpads are cotton sheets saturated in a solution that protects the skin and ensures proper thermal coupling during a CoolSculpting procedure. One gelpad is required for each treated area and is not reusable.

 

3.      Our consumable plastic liners protect the applicator from gel contact. One liner is recommended per patient for hygienic reasons.

Our Technology

Our Technology Platform

Our controlled-cooling technology platform is based on the scientific principle that cooling can be delivered safely and non-invasively to achieve specific biological outcomes, selectively affecting certain cells, tissues, or structures in and below the skin. The ability to predict and control the impact of cold exposure by developing algorithms to control the rate and period of the cooling is well established in the field of cryobiology and cryogenic medicine. Moderate cold has been demonstrated to trigger cellular apoptosis (programmed cell death), whereas more extreme cold causes cellular necrosis. Additionally, certain cells and tissue types exhibit particular sensitivity or resistance to cold injury. This principle enables the selective elimination of certain cells or tissues via a desired biologic pathway using precise cooling temperatures. In addition, the function of certain biological systems can be affected by cold exposure. Cold is known to reduce nerve conduction, and can produce either a transient or a prolonged interruption in nerve function depending on the specific thermal parameters applied. We believe the ability to control tissue effects by modulating the cooling algorithm with our technology platform enables multiple potential therapeutic applications in addition to our CoolSculpting fat reduction application.

Our CoolSculpting Technology

Our CoolSculpting technology utilizes the sensitivity of fat cells to cold injury in order to selectively eliminate subcutaneous fat tissue without affecting the skin or other surrounding tissues. Termed cryolipolysis, this technology enables a non-invasive alternative for subcutaneous fat reduction through cellular apoptosis. Cellular apoptosis is a normally occurring biological process whereby cells are eliminated as part of normal cell turnover. When injurious external stimuli (such as cold) are applied to a target cell, the apoptotic process may be triggered. If triggered, the injured cell consequently enters an orderly, regulated process of gradual degradation into smaller bodies which are absorbed by the body’s immune system over time. This pathway to cellular elimination is in contrast to cellular necrosis, or uncontrolled cell death, in which an acute injury to the cell leads to lysis of the

 

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cell. Cellular necrosis triggers an aggressive inflammatory response leading to fibrotic scar tissue formation, which is not observed with cellular apoptosis. The cold treatment algorithm implemented by the CoolSculpting technology is designed to trigger apoptosis, eliminating fat cells without generating a wound healing reaction.

The CoolSculpting technology has been clinically demonstrated to cause reductions in fat layer thickness without impacting the skin or other tissues or structures in the treatment area. Fat cells are particularly sensitive to cold injury due to their composition; they contain a large lipid droplet within the cell membrane which constitutes the majority of the cell’s volume. When cooled, lipids crystallize (undergo phase transition to an ordered molecular state) at a temperature well above the freezing point of water. Exposure of fat cells to these moderately cold temperatures causes the lipid droplets to crystallize, causing a subtle molecular injury which triggers the apoptotic sequence. However, the cooling does not affect cell types without high lipid content, preserving the health of the epidermis, dermis, and the underlying tissue. The interactions between cold and different cell and tissue types have been investigated extensively in scientific studies and are well documented in the literature.

A simplified description of the CoolSculpting process is as follows:

 

Step 1. The cooling applicator is applied and the fat bulge being treated is suctioned into the applicator head.

 

Step 2. The subcutaneous fat in the treatment area is precisely cooled at a rate that does not cause scar tissue or damage to the skin, nerves, or surrounding tissues.

 

Step 3. Maintained cooling causes lipid crystallization in the fat cells and triggers apoptosis of the fat cells.

 

Step 4. The body’s natural immune response leads to gradual elimination of the fat cells, resulting in a reduction in the fat layer thickness and an improvement in the appearance of the treated fat bulge.

Clinical History and Development of CoolSculpting

The founding principles of controlled cooling for the non-invasive and selective reduction of fat cells were originated at the Wellman Center for Photomedicine at MGH, a teaching affiliate of Harvard Medical School. Researchers at MGH were prompted by published reports of cold-induced panniculitis, or inflammation of subcutaneous adipose tissue, in a syndrome frequent in young children called popsicle panniculitus, whereby inflammation of the fatty tissue in the lower cheek occurred after children sucked for a prolonged time on frozen treats. Clinical reports of popsicle panniculitus suggested that human adipose tissue may be preferentially damaged by exposure to cold. Based on these reports, research scientists at MGH conducted further research and patented certain aspects of cyrolipolysis technology. In May 2005, we secured an exclusive, worldwide license to the cyrolipolysis technology developed at MGH.

Following our licensing of the cryolipolysis technology from MGH, we initiated animal and human clinical testing to support the development of the CoolSculpting procedure. These scientific studies used objective endpoints, including histologic and ultrasound assessments and outcome evaluation by blinded, independent panel review, and provided evidence of the safety and efficacy of the CoolSculpting procedure. As of September 30, 2011, there were seven peer-reviewed scientific journal articles discussing the effects of our CoolSculpting technology and 13 abstracts had been presented at medical conferences, both by physicians affiliated with our company as clinical and scientific advisors, as well as by unaffiliated physicians.

Preclinical Studies

We conducted animal testing primarily in pig models. In the original MGH studies, Manstein et al. investigated the feasibility of cryolipolysis, established correlations between cold treatment parameters (temperature, time) and fat reduction, and evaluated the impact on serum lipid levels in Yucatan pigs (see Manstein D, Laubach H, Watanabe K, et al: Selective cryolysis: A novel method of non-invasive fat removal. Lasers Surg Med 40:595-604, 2009). All sites treated with cold exposure less than -1°C developed panniculitis and fat layer reduction. No significant changes in the lipid profiles of the animals were noted immediately post-treatment or at any time point studied.

 

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A subsequent study was performed by Zelickson et al. (see Zelickson B, Egbert BM, Preciado J, et al: Cryolipolysis for non-invasive fat cell destruction: Initial results from a pig model. Dermatol Surg 35:1462-1470, 2009). In this study, three pigs underwent a single cryolipolysis treatment, while the fourth pig underwent seven treatments with the cryolipolysis device at different time points before euthanasia. Histopathology demonstrated an approximate reduction of 50% in the thickness of the superficial fat layer. No adverse impact on the skin was observed and lipid panels revealed no significant variations in lipid profiles at any time in the study. Figure 1 shows ultrasound and gross pathology images demonstrating a significant reduction in fat layer thickness at three months post-treatment.

 

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Figure 1. Zelickson et al. study results.    Gross pathology demonstrates ~50% reduction in fat layer thickness at three months post-treatment.

Clinical Studies

We have conducted multiple institutional review board-approved (IRB-approved), non-significant risk human clinical studies to assess the use of controlled cooling for selective fat reduction.

Pre-abdominoplasty study.    An initial exploratory human clinical study of cryolipolysis was performed at a single site in the United States on 180 patients. In this study, patients who were scheduled to undergo abdominoplasty were treated with our technology in the lower abdomen at different intervals up to 180 days prior to their scheduled surgery date. At the time of abdominoplasty, the treated tissue was excised and processed for histologic evaluation. Images of human histologic specimens are shown in Figure 2. These images show no significant changes in the fat tissue at seven days post-treatment, relative to the untreated control. This supports that controlled cooling triggers an apoptotic mechanism of fat cell elimination, as this process occurs gradually and is not evident immediately after cold exposure. At 14 days post-treatment, infiltration of immune cells (macrophages) are observed in the fat layer, as indicated by intense nuclei staining (purple stain). These cells are responsible for the removal of the apoptotic fat cells via phagocytosis. At 90 days post-treatment, the fibrous septae (connective tissue fibers) in the fat layer are condensed due to elimination of fat cells. There is no evidence of dermal, epidermal, nerve, or blood vessel inflammation, and there is no evidence of fibrosis (scar tissue formation).

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Figure 2. Human histology specimens after CoolSculpting in the abdomen.

Pivotal study.    To support our 510(k) application, we completed a prospective, multi-center U.S. human clinical trial in 2007. A total of 60 patients were treated at 12 dermatology or plastic surgery centers in the United States Follow-up periods for both safety and efficacy were at two and six months. An additional one-week assessment was performed via telephone interview to document potential side effects. The primary endpoint was assessed on the basis of blinded, independent panel review of photographs. Patients were treated with our technology for 30 to 60 minutes. Patients were treated on one flank only to aid in the assessment of the primary endpoint. Outcomes were assessed via photographs, ultrasound measurements, and patient satisfaction questionnaires.

Primary endpoint.    The primary effectiveness endpoint was the correct identification of the series of pre-treatment images versus six-month post-treatment images by the three independent physician reviewers who specialize in dermatology or plastic surgery. High resolution digital photographs were made of the patients’ abdomens at specific degrees of rotation. An example of baseline and post-treatment images (front view) obtained outside the trial are presented in Figure 3 below. The physicians were blinded to the identification of which photograph corresponded to the baseline image. Each reviewer was then asked to determine which photograph corresponded to the baseline photograph series and record their selections onto individual data collection forms. Intra-rater consistency among reviewers was determined by the inclusion of repeat sets. The order in which the patients were presented to the reviewer was randomized; within each patient, the set presentation was also randomized (e.g., left or right side of the presentation slide). It was expected that the percentage of correct identification of the pre-treatment images would be at least 80% based on past identification rates.

For all patients, regardless of weight change during the study period, reviewers were able to correctly identify baseline photos in 88% of the cases. Because fluctuations in weight can confound photo identifications, the primary endpoint outcome was also calculated for the patients who maintained their weight within five pounds of their baseline weight, and found that the correct identification percentage rose to 92%. These results suggest that clinically-meaningful changes were produced in the vast majority of patients regardless of subsequent weight change.

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Baseline

  Post Treatment

Figure 3. Patient photographs at baseline and post treatment reflect treatment on the left flank only.

Secondary endpoints.    The study also evaluated the following secondary outcome measures: reduction in the fat layer thickness as demonstrated by comparison of pre-treatment and post-treatment ultrasound measurements and patient satisfaction as determined by the results of a patient satisfaction questionnaire at the six-month follow-up visit. Standardized techniques for obtaining ultrasound images were developed and validated to ensure

 

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consistency throughout the study. A percent change in fat layer thickness was determined for an untreated area of the abdomen to account for patient weight variation during the study. A percent change in fat layer thickness was determined for the treated area to account for fat layer thickness reduction due to fat cell elimination through cryolipolysis and patient weight variation during the study. Fat layer thickness changes were normalized for each patient by subtracting the percent change in fat layer thickness in the untreated area from the percent change in fat layer thickness in the treated area to remove the influence of weight variations. 

Ultrasound results demonstrated a mean reduction in the fat layer of 19% for the entire study population. These fat layer reductions were statistically significant as compared to the control region. Since the pivotal study, we have continued to enhance and optimize the CoolSculpting procedure. The CoolSculpting algorithms used during the pivotal study used a lower CIF (Cooling Intensity Factor) and/or shorter treatment times than our CoolSculpting algorithm currently in commercial use with our CoolSculpting System. As a result, we believe the average percentage fat layer reduction produced by our current commercial version of the CoolSculpting System exceeds the percentage fat layer reduction measured by ultrasound in our pivotal study. Patient surveys showed that 82% of the participants were satisfied with the CoolSculpting procedure, and 79% agreed that there was a noticeable improvement in the appearance of their treated fat bulge.

Safety results.    Treatment sites were evaluated immediately after treatment and at subsequent follow-up visits. Evidence of local inflammation was anticipated after a CoolSculpting treatment based on the body’s reaction to a cold stimulus, and resolved spontaneously in all cases. Erythema, in most cases minor or moderate, was seen immediately post-treatment in virtually all patients. However, this condition had resolved itself by one week in the large majority of cases (93%). Purpura/bruising occurred in 27% of patients after the procedure was performed, and by the one week assessment had resolved in all but 5% of the patients. Minor or moderate edema was reported in only 13% of patients immediately after the procedure, and had universally resolved within a week. Numbness was common immediately after the CoolSculpting procedure, occurring in 87%. A week later only approximately half of the patients still experienced some degree of numbness (in no case marked), and by two months only 7% still had numbness; in all cases it was mild. At the six-month follow-up visit, no patient complained of numbness or tingling.

Blood was drawn from a subset of patients (n=10) for evaluation of serum lipids and liver tests. The mean values in all patient groups show no trends over time and there were no clinically meaningful differences between baseline and post-treatment values.

A total of four adverse events (AEs) were reported in our pivotal study. Two involved pain during the initial cooling exposure; in both cases treatment was discontinued. These events resolved without intervention approximately one week after treatment. One patient reported bruising in the treated area one-day post treatment. Resolution was documented at an optional follow-up conducted four weeks post treatment. The fourth AE involved a report of pain and muscle spasm in the treatment area rated as a one (minor in severity) occurring once a month for three months. In a follow-up visit three weeks after the complaint, the patient stated the muscle spasm had resolved and the patient did not feel that the spasms were related to the treatment. None of the AEs reported during this study were considered serious.

Conclusions.    The clinical findings of our pivotal study confirmed the safety and effectiveness of our CoolSculpting technology and procedure. Photographic review and ultrasound measurements demonstrated clinically significant and measurable reductions in the fat layer thickness in the treated area. Independent photo review of baseline and post-treatment images (the primary endpoint) yielded a correct identification percentage exceeding the 80% criteria, and a statistically significant achievement of the success criteria. No serious AEs were reported. Side effects and AEs were typically mild and transient and all resolved spontaneously without medical intervention. Post-treatment lipid profile and liver function test results exhibited only normal variations with no discernible difference from baseline. Patient survey results supported overall patient satisfaction with the treatment.

 

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Research and Development

Our ongoing research and development activities are primarily focused on improving and enhancing our CoolSculpting System and the CoolSculpting procedure. Our research and development efforts related to CoolSculpting currently include:

 

 

Additional treatment indications.    We intend to seek additional regulatory clearances from the FDA to expand our marketed indications for CoolSculpting in the United States to other areas of the body.

 

 

Additional applicators.    We are developing additional applicators for the CoolSculpting System to expand our range of available applicator sizes, which will provide physicians with additional flexibility in selecting the applicator that best fits the body contour to be treated.

 

 

Enhanced algorithms.    CoolSculpting utilizes our proprietary treatment algorithms to ensure the fat cells in the treated area are sufficiently cooled to obtain the desired aesthetic results while preserving the overlying skin and surrounding tissues. We are continuing to examine the interaction between controlled cooling and tissue response in order to enhance our proprietary treatment algorithms.

 

 

The CoolConnect feature.    Our CoolSculpting System currently records information regarding each treatment procedure, including information regarding procedure and patient statistics. Our direct sales force and our distributors currently collect this information for our analysis. We are in the process of adding wireless communication and networking functionality to each CoolSculpting System so that information regarding each treatment procedure is automatically transferred to our corporate headquarters.

 

 

Procedure tracking.    To help ensure we capture each procedure performed with our CoolSculpting System, we are continuing to optimize the security encryption in our CoolCards to protect against third- party manipulation or the use of counterfeit cartridges with our CoolSculpting System.

 

 

Design improvements.    We are continuing to optimize the design of our CoolSculpting System to improve reliability and to reduce our manufacturing and repair costs.

 

 

Enhanced physician alert feature.    We are redesigning and globalizing the remote alert feature of the CoolSculpting System to page physicians at the end of a treatment cycle through the use of a smart phone or tablet.

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. 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 on commercial 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 propriety we license from MGH. Any royalty we are required to pay will reduce our proceeds 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.

As of September 30, 2011, we had 34 employees focused on research and development. In addition to our internal team, we retain third-party-contractors from time to time to provide us with assistance on specialized projects. We also work closely with experts in the medical community to supplement our internal research and development resources. Research and development expenses for the years ended December 31, 2008, 2009, and 2010 and for the six months ended June 30, 2011 were $13.7 million, $8.0 million, $8.2 million, and $4.6 million, respectively.

 

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Sales and Marketing

We selectively market and sell our CoolSculpting System to dermatologists, plastic surgeons, and aesthetic specialists. A market research study we commissioned from Easton Associates estimates that there are currently over 70,000 physicians who perform aesthetic procedures at approximately 30,000 practice sites worldwide, including over 16,000 physicians and approximately 8,000 practice sites within the United States and Canada. We intend to place our CoolSculpting System with 4,000 to 5,000 physician practice sites on a global basis. Some of our target practice sites have purchased or may elect to purchase more than one CoolSculpting System. As of June 30, 2011, we had an installed base of 629 CoolSculpting Systems worldwide.

Sales

In North America, we utilize our direct sales force to sell CoolSculpting to our target physicians. As of June 30, 2011, we had a 31-person North American direct sales force. To support the continued roll-out of CoolSculpting, we anticipate that our North America direct sales force will increase to between 50 and 70 sales professionals in the next 12 months.

In international markets, we sell CoolSculpting through a network of distributors. As of September 30, 2011, we had an international sales team of four employees supporting 23 independent distributors. The percentage of our revenues from customers located outside North America was approximately 34% in 2010, and approximately 26% for the six months ended June 30, 2011. We intend to increase penetration of our installed base in international markets in which CoolSculpting is currently sold and expand into attractive new international markets by identifying and training qualified distributors. In addition, we may opportunistically hire a direct sales force and expand our marketing campaigns in select foreign markets. We require our distributors to provide customer training, to invest in equipment and marketing, and to attend certain exhibitions and industry meetings.

We enter into distribution agreements with our distributors outside of North America. Each of our distribution agreements provide the distributor with a right to distribute our product for a term of three years and are renewable by written agreement and terminable upon a material breach by either party, insolvency of the distributor, or a change of control of the distributor. Following the expiration or termination of the agreement, the distributor has an obligation to continue servicing existing customers for a period ranging from two to three months, upon our written request. Our distribution agreements generally provide the exclusive right to distribute our products within a designated territory, with certain distributors only receiving non-exclusive rights within a designated territory. Distributors are required to purchase an initial stocking order of CoolSculpting Systems upon execution of the agreement. We require distributors that have an exclusive territory right to purchase a fixed number of CoolSculpting Systems each year over the term of the agreement to maintain their exclusivity. In such a case, the agreement sets forth the minimum quarterly purchase obligations for the first calendar year of the term, and the parties will agree each year on the minimum quarterly purchase obligations for the remaining quarters during the term of the agreement. If the distributor fails to meet one of its minimum quarterly purchase obligations, we can convert the distributor to a non-exclusive distributor during the remaining term or terminate the agreement. These agreements also provide customary indemnities to the distributor including claims of patent infringement in the designated territory, material product defects, and our negligence or willful misconduct.

Physician Marketing and Support Programs

We intend to drive CoolSculpting procedures through our targeted marketing and physician support programs. Our Sales Training and Enhanced Practices (S.T.E.P.) Program provides physicians and their staff with product training and sales, practice marketing, and support services to help them make CoolSculpting a key component of their practices. We have hired and trained a group of S.T.E.P. support specialists who are focused on implementing our S.T.E.P. program. As the first step of the S.T.E.P. Program, our S.T.E.P. support specialists train our physician customers on the use of the CoolSculpting System when the CoolSculpting System is first delivered to the physician’s practice site. Following this initial training, our S.T.E.P. support specialists, at no

 

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additional cost to the physician, educate our physician customers on current CoolSculpting best practices and provide physicians and their staff with sales and marketing training and support to help them increase patient demand for CoolSculpting procedures. We require our S.T.E.P. support specialists to spend at least one day with each physician practice per quarter. In June 2011, we launched a comprehensive S.T.E.P. certification program. A physician’s participation in this certification program and our other S.T.E.P. programs, other than the initial training program, is voluntary. To become certified, physicians must commit to engage in quarterly business strategy meetings with one of our S.T.E.P. support specialists, educate members of their office in our CoolSculpting best practices, and adopt our guidelines for before and after patient photographs. Once certified, physicians receive distinction on our website and preference in our online geographic physician locator service.

We implemented our S.T.E.P. Select Partner Blueprint program in July 2011. This program will provide physicians with quarterly sales and utilization reports, an automated tool for improving patient conversion rates, ready-to-go marketing materials and advertisements, ideas for building awareness of their practice as a CoolSculpting provider, and assistance with setting sales goals. We also plan to implement a co-op advertising program designed to stimulate physicians to promote CoolSculpting to new aesthetic patients through advertising and cross-promotions with salons, fitness centers, and health food stores. We also will continue to participate in industry tradeshows, clinical workshops, and company-sponsored conferences with expert panelists.

Direct-to-Consumer Marketing

As we grow our installed base of CoolSculpting Systems, we intend to utilize a targeted and strategic direct-to-consumer marketing program to create awareness of CoolSculpting among consumers, notably those consumers who have not previously elected to undergo an aesthetic procedure and who may not presently visit our physician customers. We have an active public relations campaign and have been highlighted on national broadcasts as well as numerous local news programs. We also intend to continue our active media presence and our social media programming, such as Facebook, Twitter, YouTube, and targeted blogs through pay-per-click advertising, testimonials, and video presentations.

Customer Support

We strive to provide our physician customers and authorized distributors with superior customer support. We maintain a staff of 11 Customer Care personnel at our facility in Pleasanton, California who are available by telephone and email to field inquiries, troubleshoot product issues, facilitate sales activities and support the commercial activities of our international distributors. In addition, we provide worldwide 24/7 technical support to our physician customers and distributors year round. Our goal is to minimize the disruption caused by a service event, and we strive to repair the physician’s CoolSculpting System or provide the physician with a replacement CoolSculpting System within one day after notifying us of a problem. In the event of a technical issue with a CoolSculpting System in North America, one of our Customer Care personnel will call the physician and determine whether the technical issue may be resolved over the telephone or whether the issue requires intervention. If the issue cannot be resolved by telephone, our Customer Care personnel will request our third-party logistics provider to ship and setup a replacement CoolSculpting System, or the applicable module of the CoolSculpting System, at the physician’s office. To reduce shipping times and costs, we ensure that a number of CoolSculpting Systems and replacement modules are available in specific regions throughout North America. Upon arrival at the physician site, our logistics provider will move the replacement CoolSculpting System or module into the physician’s office, unpack it, set it up and power on the CoolSculpting System to ensure it is working properly. Because of the modular design of our CoolSculpting System, our logistics provider is not required to have any specialized training or expertise, and a number of logistics providers are available to provide these services. Upon completion, our logistics provider calls our Customer Care personnel and confirms the successful delivery and setup, and then ships the defective CoolSculpting System or module to our headquarters for repair. We allow our physician customer to keep the newly delivered CoolSculpting System or the applicable module, and we repair and reuse the defective CoolSculpting System or module received from our physician customer for future service calls. In markets outside of North America, our CoolSculpting System is serviced and

 

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supported through our independent distributors and certified third-party service providers. We proactively deploy replacement CoolSculpting Systems, modules, and components to strategic hubs worldwide to facilitate quick response time to service events and to maximize customer “up time.”

We provide a three-year standard warranty on our CoolSculpting control units and a one-year warranty on our CoolSculpting applicators. In addition to these product warranties, we offer two years of extended warranty service on our control units and applicators. We also offer extended warranties as well as out-of-warranty servicing.

Manufacturing

We occupy an approximately 43,000 square foot facility in Pleasanton, California, of which 6,800 square feet are dedicated to our manufacturing, product development, and clinical activities. We manufacture our CoolSculpting System through a combination of direct manufacturing at this facility and through third-party manufacturers. We plan to outsource all manufacturing and distribution of our CoolSculpting System to third-party manufacturers by 2013, and will use our available manufacturing space at our Pleasanton facility to support our product development and clinical activities.

We perform final testing and distribution of our CoolSculpting System, including procedure packs, at our Pleasanton facility. We also manufacture our CoolCurve and CoolCore applicators at our Pleasanton facility. Our CoolSculpting control units, CoolMax applicators, and CoolCards are manufactured by a single source manufacturer, OnCore Manufacturing LLC, or OnCore, at its manufacturing facility in San Jose, California. OnCore also has manufacturing facilities in San Marcos, California and Tijuana, Mexico that can be used to manufacture our CoolSculpting control units and applicators in the event of a disaster at its facility in San Jose, California. Our consumable gelpads are manufactured by Katcheco, Inc. in Des Moines, Iowa and Unicep Packaging, Inc., in Sandpoint, Idaho. Our consumable liners are manufactured by a single source manufacturer, Coastline International, Inc., in Tijuana, Mexico. During 2012, we intend to secure a second manufacturer for our consumable liners.

In addition, our CoolSculpting System contains two critical components, the integrated circuit contained in the CoolSculpting control unit, which is manufactured by Renesas Electronics Corporation in Japan, and the connector that attaches our applicators to the control unit, which is manufactured by Hypertronics Corporation in Hudson, Massachusetts. We do not have supply agreements with the suppliers of these critical components beyond purchase orders. However, we 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 at OnCore, as well as at least a three month supply of connectors to support open purchase orders.

Manufacturing facilities that produce finished medical devices intended for distribution in the United States and internationally are subject to regulation and periodic unannounced inspection by the FDA and other domestic and international regulatory agencies. In the United States, we are required to manufacture our products in compliance with the FDA’s Quality System Regulation, or QSR, which cover the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage, and shipping of our products. The FDA inspected our facilities in April 2011, and had no findings or observations. In international markets, we are required to obtain and maintain various quality assurance and quality management certifications. We have obtained the following international certifications: ISO 13485:2003 Quality Management Systems Requirements for regulatory purposes, ISO 13485:2003 under CMDCAS (Canada), Ordinance 169 certification (Japan), 93/42/EEC MDD certification to Annex II Full Quality System (Europe).

Neither our third-party manufacturers nor our suppliers are currently required to comply with the FDA’s QSR, as these parties do not provide us with a finished medical device. However, we maintain a quality system designed to be compliant to QSR and have procedures in place designed to ensure that all products and materials purchased by us conform to specified requirements, including evaluation of suppliers, and where required, qualification of the components supplied.

 

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We have determined to outsource the manufacturing of our CoolSculpting control units and applicators at OnCore’s facility in Tijuana, Mexico by 2013. OnCore will also perform final testing and distribution of the CoolSculpting System and our procedure packs. We believe that OnCore’s existing facilities in San Jose and Tijuana will be adequate to meet our current and future manufacturing needs. Prior to transferring final product manufacturing and distribution to OnCore, OnCore will be required to comply with the QSR and obtain the quality assurance and quality management certifications required by the international regulatory agencies in countries in which we market CoolSculpting. The OnCore manufacturing site in San Jose, California is certified to ISO 13485:2003 for contract manufacturing service of printed circuit board assemblies and system box builds for the medical industry. The OnCore manufacturing site in Tijuana, Mexico is ISO 13485:2003 certified for manufacture and assembly of printed circuit boards for general industrial applications.

Competition

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 now or in the future by our competitors. We designed CoolSculpting to address the aesthetic concerns of individuals who have stubborn fat bulges that may not respond to diet or exercise. 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. Although effective at reducing fat, these invasive and minimally-invasive procedures may involve patient pain, expense, downtime, and the risks typically associated with surgical procedures. As a result, 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. This product does not eliminate fat cells, however. In addition, the patient is required to undergo multiple treatments and is required to adopt a special diet and exercise program as part of the treatment protocol.

In September 2011, the FDA cleared the marketing of an ultrasound energy-based product for body contouring, which Solta Medical, Inc., a publicly traded company, recently announced it was acquiring. This ultrasound energy-based product utilizes heat to non-invasively eliminate fat cells in a single procedure. Utilizing heat to eliminate fat cells, however, has a number of significant limitations compared to the elimination of fat cells through cooling as provided by CoolSculpting. The heat generated by ultrasound energy may cause patient pain during and after the procedure. In addition, heat cannot be used to specifically target fat cells, which makes the procedure more difficult to perform and can lead to collateral damage to the skin, nerves and surrounding tissues. Acutely injuring fat cells through heat also causes fat cell elimination through a biological process known as necrosis. Unlike the apoptosis process utilized by CoolSculpting, necrosis triggers the body’s wound-healing response and can result in scar tissue formation. This scar tissue can lead to stiffening of the treated area and limit the number of times a patient can undergo these types of procedures in one area or the efficacy of any repeat treatments. The ultrasound energy-based product has not been launched for sale in the United States as of the date of this prospectus.

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 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.

 

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We also generally compete against medical technology and aesthetic companies, including those offering products and technologies unrelated to fat reduction, for physician resources and mindshare. Some of our competitors have a broad range of product offerings, large direct sales forces, and long-term customer relationships with our target physicians, which could inhibit our market penetration efforts. Our potential physician 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 or not to purchase our CoolSculpting System.

We believe that CoolSculpting competes largely on the basis of the following competitive factors:

 

 

consistency, predictability, and durability of aesthetic results;

 

 

patient safety and experience;

 

 

physician practice economic benefit;

 

 

product placement and distribution strategy;

 

 

procedure cost to patients; and

 

 

effectiveness of sales and marketing programs and initiatives.

Patents and Proprietary Technology

To establish and protect our proprietary technologies and products, we rely on a combination of patent, copyright, trademark, and trade-secret laws, as well as confidentiality provisions in our contracts. We have implemented a patent strategy designed to protect our technology and facilitate commercialization of our current and future products. As of September 30, 2011, our patent portfolio is comprised of five issued U.S. patents, 44 issued foreign counterpart patents, 18 pending U.S. patent applications, 60 pending foreign counterpart patent applications, and four pending PCT patent applications-each of which we either own directly or we are the exclusive licensee. Our intellectual property portfolio for our core Cryolipolysis technology was built through the combination of licensing patents from third parties and the issuance of new patents to us as the result of our ongoing development activities. Many of our issued and pending patents were exclusively licensed from MGH and generally relate to our core technology relating to our CoolSculpting System. In general, patents have a term of 20 years from the application filing date or earliest claimed priority date. We expect our issued and exclusively licensed patents to expire in 2023 or later.

We also rely on trade secrets, technical know-how, contractual arrangements, and continuing innovation to protect our intellectual property and maintain our competitive position. We have a policy to enter into confidentiality agreements with third parties, employees, and consultants. We also have a policy that our employees and consultants sign agreements requiring that they assign to us their interests in intellectual property such as patents and copyrights arising from their work for us. It is our policy that all employees sign an agreement not to compete unfairly with us during their employment and upon termination of their employment through the misuse of confidential information, soliciting employees, and soliciting customers.

ZELTIQ®, CoolSculpting®, and our logo are registered trademarks in the United States and in certain foreign countries.

Material Agreements

MGH License Agreement

In May 2005, we entered into an exclusive license agreement with MGH, which was amended and restated in September 2011. Under this agreement, MGH granted to us an exclusive worldwide, royalty-bearing license to

 

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patent applications related to our controlled-cooling platform technology, including the removal of cutaneous, subcutaneous or subdermal fat, treatment or removal of cellulite, and any therapy or procedures to the tissues and structures of the skin, subcutaneous tissue, and tumors, lesions and adipose tissue of the skin and of subdermal tissue. As consideration for the license granted to us by MGH, we agreed to pay to MGH (i) an upfront, non-refundable license issue fee of $250,000, (ii) a non-refundable minimum annual license maintenance payment of $75,000, $100,000, $150,000, and $200,000 upon the first, second, third, and each subsequent anniversary of the effective date of the agreement following our first commercial sale, respectively, credited against royalty payments due to MGH on net income and distributor income in the same year, (iii) payments totaling approximately $8.1 million upon the successful achievement of regulatory and commercial milestones, including (a) payments previously paid by us totaling $1.1 million, (b) $1 million due upon achieving cumulative net sales of $70 million, and (c) $6 million due upon the earlier to occur of achieving cumulative net sales of $200 million or the completion of a change of control as defined in the agreement, including a qualifying initial public offering (which this offering will be) and (iv) a 7% royalty on net sales (as defined in the agreement) of CoolSculpting. MGH may elect to receive up to 50% of each of the remaining milestone payments in our common stock, subject to a cap of 3.5% of our common stock on a fully-diluted basis. We have the option to buy down up to 25% of the future royalty payments. We also agreed to pay to MGH a percentage of sublicense royalties in certain circumstances and to reimburse MGH for all costs associated with the preparation, filing, prosecution, and maintenance of the patent rights under the agreement.

The agreement will remain in full force and effect for the later of (i) the life of any patents that issue from the underlying patent applications, which are expected to expire in 2023 or (ii) one year after the last commercial sale for which a royalty is due to MGH, unless terminated in accordance with its terms and conditions. MGH may terminate the agreement upon our insolvency, failure to maintain insurance, breach of the agreement, failure to satisfy our development progress obligations, or failure to make required payments. We may terminate the agreement for any reason upon 90 days’ advance written notice to MGH.

OnCore Manufacturing Services Agreement

We have in place a manufacturing services agreement with OnCore pursuant to which OnCore exclusively manufactures and supplies to us our CoolSculpting control units, certain of our applicators and our CoolCards in quantities to be specified in individual purchase orders provided by us. Under the terms of this agreement, pricing for the these products is based on kit quantities quoted to us, which may be updated or amended from time to time upon written agreement of OnCore and us. OnCore provides us a limited manufacturing warranty, whereby OnCore warrants that those products assembled or customized by it will be free from defects caused solely by faulty assembly or customization and will conform to specifications for 360 days after delivery. Our remedies under the terms of the agreement include a refund of the purchase price, repair by OnCore of the defective product, or replacement of any such product. In addition, OnCore has agreed to indemnify us from all liabilities arising from, or related to, any third party claim arising from (i) the failure or alleged failure of its products to comply with mutually agreed specifications as a result of improper assembly or (ii) allegations that OnCore’s manufacturing processes infringe any third party intellectual property rights not specified by us. This agreement has an indefinite term, but may be terminated by either us or OnCore (i) for any reason upon six months advance written notice or (ii) for cause.

Government Regulation

The design, development, manufacture, testing and sale of our diagnostic products are subject to regulation by numerous governmental authorities, principally the FDA, and corresponding state and foreign regulatory agencies.

Regulation by the FDA

In the United States, the Federal Food, Drug, and Cosmetic Act, or FDCA, FDA regulations and other federal and state statutes and regulations govern, among other things, medical device design and development, preclinical and clinical testing, premarket clearance or approval, registration and listing, manufacturing, labeling,

 

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storage, advertising and promotion, sales and distribution, export and import, and post-market surveillance. The FDA regulates the design, manufacturing, servicing, sale, and distribution of medical devices, including aesthetic devices. Failure to comply with applicable U.S. requirements may subject a company to a variety of administrative or judicial sanctions, such as warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties, and criminal prosecution. The FDA can also refuse to approve pending applications.

Each medical device we wish to distribute commercially in the United States will require marketing authorization from the FDA prior to distribution. The two primary types of FDA marketing authorization applicable to a device are premarket notification, also called 510(k) clearance, and premarket approval, also called PMA approval. The type of marketing authorization is generally linked to the classification of the device. The FDA classifies medical devices into one of three classes (Class I, II, or III) based on the degree of risk the FDA determines to be associated with a device and the level of regulatory control deemed necessary to ensure the device’s safety and effectiveness. Devices requiring fewer controls because they are deemed to pose lower risk are placed in Class I or II. Class I devices are deemed to pose the least risk and are subject only to general controls applicable to all devices, such as requirements for device labeling, premarket notification, and adherence to the FDA’s current Good Manufacturing Practices, or cGMP, and Quality System Requirements, as reflected in its QSR. Class II devices are intermediate risk devices that are subject to general controls and may also be subject to special controls such as performance standards, product-specific guidance documents, special labeling requirements, patient registries, or postmarket surveillance. Class III devices are those for which insufficient information exists to assure safety and effectiveness solely through general or special controls and include life-sustaining, life-supporting or implantable devices, devices of substantial importance in preventing impairment of human health, or which present a potential, unreasonable risk of illness or injury.

Most Class I devices and some Class II devices are exempted by regulation from the 510(k) clearance requirement and can be marketed without prior authorization from the FDA. Some Class I devices that have not been so exempted and Class II devices are eligible for marketing through the 510(k) clearance pathway. By contrast, devices placed in Class III generally require PMA approval or 510(k) de novo clearance prior to commercial marketing. The PMA approval process is more stringent, time-consuming, and expensive than the 510(k) clearance process; however, the 510(k) clearance process has also become increasingly stringent and expensive.

A premarket notification for the CoolSculpting System was submitted to the FDA on February 25, 2008 for the additional indication of cold-assisted lipolysis and a reduction in the subcutaneous fat layer. The premarket notification was subsequently determined by the FDA to be not substantially equivalent to the predicates identified because the device had a new intended use, that is, it alters the therapeutic effect impacting safety and effectiveness and; therefore, automatically classified it as Class III. We petitioned the FDA that the classification for the CoolSculpting System with the additional indication of cold-assisted lipolysis and a reduction in the subcutaneous fat layer should be Class II because it does not support or sustain human life, is not of substantial importance in preventing impairment of human health, and does not present a potential, unreasonable risk of illness or injury. In September 2010, the FDA issued a clearance letter concluding that the device would be classified as a Class II device.

510(k) clearance.    To obtain 510(k) clearance for a medical device, an applicant must submit a premarket notification to the FDA demonstrating that the device is “substantially equivalent” to a device legally marketed in the United States that is not subject to PMA approval, commonly known as the “predicate device.” A device is substantially equivalent if, with respect to the predicate device, it has the same intended use and has either (i) the same technological characteristics or (ii) different technological characteristics and the information submitted demonstrates that the device is as safe and effective as a legally marketed device and does not raise different questions of safety or effectiveness. A showing of substantial equivalence sometimes, but not always, requires clinical data. Generally, the 510(k) clearance process can exceed 90 days and may extend to a year or more.

After a device has received 510(k) clearance for a specific intended use, any change or modification that significantly affects its safety or effectiveness, such as a significant change in the design, materials, method of

 

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manufacture or intended use, may require a new 510(k) clearance or PMA approval and payment of an FDA user fee. The determination as to whether or not a modification could significantly affect the device’s safety or effectiveness is initially left to the manufacturer using available FDA guidance; however, the FDA may review this determination to evaluate the regulatory status of the modified product at any time and may require the manufacturer to cease marketing and recall the modified device until 510(k) clearance or PMA approval is obtained. The manufacturer may also be subject to significant regulatory fines or penalties.

Before we can submit a medical device for 510(k) clearance, we may have to perform a series of generally short studies over a period of months, including method comparison, reproducibility, interference and stability studies to ensure that users can use the device successfully. Some of these studies may take place in clinical environments, but are not usually considered clinical trials. For PMA submissions, we would generally be required to conduct a longer clinical trial over a period of years that supports the clinical utility of the device and how the device will be used.

PMA approval.    A PMA application requires the payment of significant user fees. PMA applications must be supported by valid scientific evidence, which typically requires extensive data, including technical, preclinical, clinical, and manufacturing data, to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device. A PMA application must also include, among other things, a complete description of the device and its components, a detailed description of the methods, facilities and controls used to manufacture the device, and proposed labeling.

The FDA has 45 days from its receipt of a PMA to determine whether the application will be accepted for filing based on the agency’s threshold determination that it is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review. During this review period, the FDA may request additional information or clarification of information already provided. In addition, the FDA will conduct a pre-approval inspection of the manufacturing facility or facilities to ensure compliance with the QSR, which requires manufacturers to follow design, testing, control, documentation and other quality assurance procedures.

FDA review of an initial PMA application is required by statute to take between six to 10 months, although the process typically takes significantly longer, and may require several years to complete. The FDA can delay, limit, or deny approval of a PMA application for many reasons, including:

 

 

it is not demonstrated that there is reasonable assurance that the device is safe or effective under the conditions of use prescribed, recommended, or suggested in the proposed labeling;

 

 

the data from preclinical studies and clinical trials may be insufficient; and

 

 

the manufacturing process, methods, controls, or facilities used for the manufacture, processing, packing, or installation of the device do not meet applicable requirements.

If the FDA evaluations of both the PMA application and the manufacturing facilities are favorable, the FDA will either issue an approval letter or an approvable letter, which usually contains a number of conditions that must be met in order to secure final approval of the PMA. If the FDA’s evaluation of the PMA or manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a not approvable letter. A not approvable letter will outline the deficiencies in the application and, where practical, will identify what is necessary to make the PMA approvable. The FDA may also determine that additional clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted and then the data submitted in an amendment to the PMA. Once granted, PMA approval may be withdrawn by the FDA if compliance with post approval requirements, conditions of approval or other regulatory standards is not maintained or problems are identified following initial marketing.

Approval by the FDA of new PMA applications or PMA supplements may be required for modifications to the manufacturing process, labeling, device specifications, materials or design of a device that is approved through

 

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the PMA process. PMA supplements often require submission of the same type of information as an initial PMA application, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA application and may not require as extensive clinical data or the convening of an advisory panel.

Regulation After FDA Clearance or Approval

Any devices we manufacture or distribute pursuant to clearance or approval by the FDA are subject to pervasive and continuing regulation by the FDA and certain state agencies. We are required to adhere to applicable regulations setting forth detailed cGMP requirements, as set forth in the QSR, which include, among other things, testing, control and documentation requirements. Non-compliance with these standards can result in, among other things, fines, injunctions, civil penalties, recalls or seizures of products, total or partial suspension of production, refusal of the government to grant 510(k) clearance or PMA approval of devices, withdrawal of marketing approvals and criminal prosecutions. We have designed and implemented our manufacturing facilities under the FDA’s cGMP requirements.

Because we are a manufacturer of medical devices, we must also comply with medical device reporting requirements by reviewing and reporting to the FDA whenever there is evidence that reasonably suggests that one of our products may have caused or contributed to a death or serious injury. We must also report any incident in which our product has malfunctioned if that malfunction would likely cause or contribute to a death or serious injury if it were to recur. Labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. Medical devices approved or cleared by the FDA may not be promoted for unapproved or uncleared uses, otherwise known as “off-label” promotion. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability, including substantial monetary penalties and criminal prosecution.

Export of Our Products

Export of products subject to the 510(k) notification requirements, but not yet cleared to market, is permitted with FDA authorization provided certain requirements are met. Unapproved products subject to the PMA approval requirements may be exported if the exporting company and the device meet certain criteria, including, among other things, that the device complies with the laws of the receiving country and the company submits a “Simple Notification” to the FDA when the company begins to export. If the company or device does not comply with such criteria, FDA approval must be obtained for export. To obtain FDA export approval, if required, we must meet certain requirements, including, among other things and with some exceptions, documentation demonstrating that the product is approved for import into the country to which it is to be exported and, in some instances, safety data to demonstrate that export of the device will not be contrary to public health or safety.

Food and Drug Amendments Act of 2007

The Food and Drug Amendments Act, or FDAAA, expanded the federal government’s clinical trial registry and results databank maintained by the NIH to include all (with limited exceptions) medical device trials. In particular, it requires certain information about device trials, including a description of the trial, participation criteria, location of trial sites, and contact information, to be sent to NIH for inclusion in a publicly accessible database. In addition, the results of clinical trials that form the primary basis for efficacy claims or are conducted after a device is approved or cleared must be posted to the results databank. Under the FDAAA, companies that violate these and other provisions of the new law are subject to substantial civil monetary penalties. We are in compliance with FDAAA’s clinical registry requirements.

Foreign Government Regulation

The regulatory review process for medical devices varies from country to country, and many countries also impose product standards, packaging requirements, environmental requirements, labeling requirements and

 

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import restrictions on devices. Each country has its own tariff regulations, duties, and tax requirements. Failure to comply with applicable foreign regulatory requirements may subject a company to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions, criminal prosecution, or other consequences.

Fraud and Abuse Regulations

We may be subject to numerous federal and state health care anti-fraud laws, including the federal anti-kickback statute and False Claims Act, that are intended to reduce waste, fraud, and abuse in the health care industry. These laws are broad and subject to evolving interpretations. They prohibit many arrangements and practices that are lawful in industries other than health care, including certain payments for consulting and other personal services, some discounting arrangements, the provision of gifts and business courtesies, the furnishing of free supplies and services, and waivers of payments. In addition, many states have enacted or are considering laws that limit arrangements between medical device manufacturers and physicians and other health care providers and require significant public disclosure concerning permitted arrangements. These laws are vigorously enforced against medical device manufacturers and have resulted in manufacturers paying significant fines and penalties and being subject to stringent corrective action plans and reporting obligations. We must operate our business within the requirements of these laws and, if we were accused of violating them, could be forced to expend significant resources on investigation, remediation, and monetary penalties. 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, can be excluded from federal health care programs and become subject to substantial civil and criminal penalties, and have often become subject to consent decrees severely restricting the manner in which they conduct their business.

Because we have commercial operations overseas, we are subject to the Foreign Corrupt Practices Act (FCPA) and other countries’ anti-corruption/anti-bribery regimes, such as the U.K. Bribery Act. The FCPA prohibits improper payments or offers of payments to foreign governments and their officials for the purpose of obtaining or retaining business. Safeguards we implement to discourage improper payments or offers of payments by our employees, consultants, sales agents or distributors may be ineffective, and violations of the FCPA and similar laws may result in severe criminal or civil sanctions, or other liabilities or proceedings against us, any of which would likely harm our reputation, business, financial condition and result of operations.

Patient Protection and Affordable Care Act

Our operations will also be impacted by the federal Patient Protection and Affordable Care Act of 2010, as modified by the Health Care and Education Reconciliation Act of 2010, which we refer to as the Affordable Care Act (ACA). The ACA imposes a 2.3% excise tax on sales of medical devices by manufacturers. Taxable devices include any medical device defined in Section 201(h) of the FDCA and intended for use by humans, with limited exclusions for devices purchased by the general public at retail for individual use. There is no exemption for small companies, and we expect to begin paying the tax in 2013.

The ACA also requires manufacturers to report to the Department of Health and Human Services detailed information about financial arrangements with physicians and teaching hospitals. These reporting provisions preempt state laws that require reporting of the same information, but not those that require reports of different or additional information. Failure to comply subjects the manufacturer to significant civil monetary penalties. We expect compliance with the ACA to impose significant administrative and financial burdens on us.

Environmental Regulation

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, product stewardship and end-of-life handling or disposition of products, and environmental protection, including those governing the generation, storage, handling,

 

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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. Although the costs to comply with applicable laws and regulations, including requirements in the European Union relating to the restriction of use of hazardous substances in products, have not been material, 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.

Employees

As of September 30, 2011, we had 148 employees, with 74 employees in sales and marketing, 34 in research and development, including clinical, regulatory and certain quality functions, 17 employees in operations, and 23 employees in general and administrative. We have never had a work stoppage and none of our employees are covered by collective bargaining agreements or represented by a labor union. We believe our employee relations are good.

Facilities

We occupy an approximately 43,000 square foot facility in Pleasanton, California, under a lease that ends in December 2013. We have an option to extend the lease for an additional five-year term. We believe that our existing facilities are adequate to meet our needs for the foreseeable future as we continue to implement our out-sourcing manufacturing strategy.

Legal Proceedings

We are subject from time to time to various claims and legal actions during the ordinary course of our business. We believe that there are currently no claims or legal actions that would reasonably be expected to have a material adverse effect on our results of operations, financial condition, or cash flows.

General Information

We are a venture backed medical technology company focused on developing and commercializing products utilizing our proprietary controlled-cooling technology platform. Our founding investors, Advanced Technology Ventures and Frazier Healthcare Ventures, identified the potential for products utilizing the controlled-cooling technology established by researchers at the Wellman Center at Massachusetts General Hospital in Boston, a teaching affiliate for Harvard Medical School. In 2005, these investors negotiated our exclusive license agreement with MGH and recruited a management team to lead our company. These investors also provided our initial funding by participating in a private placement of our Series A convertible preferred stock.

After funding, we focused on clinical testing to support the development of CoolSculpting. During this time, we completed three additional rounds of financing, including the private placement of our Series B convertible preferred stock in 2006, the private placement of our Series C convertible preferred stock in 2008, and the private placement of our Series D convertible preferred stock in 2010. We first received clearance from the FDA in May 2009 to market CoolSculpting for dermal cooling. In September 2010, we received clearance from the FDA to market CoolSculpting for the selective reduction of fat around the flanks, an area commonly referred to as the “love handles.”

We were originally incorporated in Delaware in March 2005 as Juniper Medical, Inc. In July 2007, we changed our name to ZELTIQ Aesthetics, Inc. Our principal corporate offices are located at 4698 Willow Road, Suite 100, Pleasanton, CA 94588 and our telephone number is (925) 474-2500. Our website is located at www.coolsculpting.com. The information contained on, or that can be accessed through, our website is not a part of this prospectus.

 

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Management

Directors and Officers

The following table provides information regarding our directors and officers, including their ages and positions, as of October 17, 2011:

 

Name

   Age     

Position

Executive Officers

     

Gordon E. Nye

     56       Chief Executive Officer, President, and Director

John F. Howe

     58       Chief Financial Officer and Senior Vice President

Dennis J. Jarvis

     62       Chief Marketing Officer

Kristine N. Tatsutani, Ph.D.

     44       Chief Technology Officer and Vice President of Enhanced Clinical Outcomes

Richard W. Poinsett

     60       Senior Vice President of Operations

Stephen W. Atkinson

     44       Senior Vice President of International

Joshua T. Brumm

     33       Vice President of Corporate Development

David H. Heagy

     47    &nbs