Form 10-K/A: 0001193125-17-145060 compared to 0001628280-17-002057
UNITED STATES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM
Washington, D.C. 20549
FORM 10-K
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(Mark One)
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(Amendment No. 1)
(Mark One)
| ☒ANNUAL |
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ý | ANNUAL
| REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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the fiscal year ended
December 31, 2016 OR
December 31, 2016
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¨ | TRANSITION
| REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period to . For
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Commission file number: 001-35318
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ZELTIQ Aesthetics, Inc.
001-35318
ZELTIQ Aesthetics, Inc.
(Exact name of registrant as specified in its charter)
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Delaware | | 27-0119051
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(State or other jurisdiction of
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(I.R.S. employer (I.R.S. employer
identification no.) |
4410 Rosewood Drive
Pleasanton, CA 94588
4410 Rosewood Drive
Pleasanton, CA 94588
(Address of principal executive offices and Zip Code)
(925) 474-2500
(Registrant’
(925) 474-2500
(Registrant’s telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Common Stock
Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(g) of the Act:
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes x No ¨
Yes ☒ No ☐
Indicate by check mark if the registrant is not required
to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes
ý No ¨ Yes ☒ No ☐
Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-TS-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
ý No ¨ Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-KS-K is not contained
herein, and will not be contained, to the best of registrant'’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K10-K or any amendment to this
Form 10-K ¨
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Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of ““large accelerated filer,” “” “accelerated filer” and “,” “smaller
reporting company”,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one):
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No ý
Yes ☐ No ☒
Aggregate market value of registrant'’s common stock held by non-affiliates of the registrant, based upon the
closing price of a share of the registrant'’s common stock on
June June 30, 2016 (the last business day of the registrant'’s most recently completed second quarter) as reported by NASDAQ Global Select Market on that date: $961,026,791$961,026,791.
Shares of the registrant'’s common stock held by each executive officer, director and person who owns 15% or more of the outstanding common stock of the registrant have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination for other purposes. As of
As of February 24, 2017
, there were 40,356,718 40,356,718
shares of the registrant’’s common stock, par value $0.001 per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed with Commission pursuant to Regulation 14A in connection with the registrant's 2016 Annual Meeting of Stockholders, to be filed on or before April 30, 2017, are incorporated by reference into Part III of this Form 10-K.
ZELTIQ Aesthetics, Inc.
FORM 10-K
For the Year Ended December 31, 2016
TABLE OF CONTENTS
DOCUMENTS INCORPORATED BY REFERENCE
None
ZELTIQ Aesthetics, Inc.
FORM 10-K
For the Year Ended December 31, 2016
TABLE OF CONTENTS
2
CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K
Explanatory Note
ZELTIQ Aesthetics, Inc. (“ZELTIQ,” the “Company,” “we,” “us,” or “our”) filed its Annual
Report on Form 10-K for the fiscal year ended
December 31, 2016, or “December 31, 2016 (the “Form 10-K,” contains forward-looking statements concerning our business, operations, and financial performance and condition as well as our plans, objectives, and expectations for 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 “anticipate,” “believe,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “potential,” “continue,” “should,” “project,” “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 Form 10-K may turn out to be inaccurate. Factors that could materially affect our business operations and financial performance and condition include, but are not limited to, less than anticipated growth in the number of customers electing to purchase CoolSculpting systems, insufficient patient demand for CoolSculpting procedure, our failure to correctly estimate and control our future expenditures, the success of our sales and marketing, and our ability to protect and enforce our intellectual property relating to our technology, as well as those other risks and uncertainties described herein under “Risk Factors.” You 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. The forward-looking statements are based on information available to us as of the filing date of this Annual Report on Form 10-K. 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 Securities and Exchange Commission, or SEC, after the date of this Form 10-K.
PART I
Overview
ZELTIQ Aesthetics, Inc. is 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. 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%. We received clearance from the Food and Drug Administration, or FDA, in September 2010 to market CoolSculpting for the selective reduction of fat around the flanks, an area commonly referred to as the “love handles.” We received further FDA clearance in May 2012 to use CoolSculpting for the selective reduction of fat around the abdomen area. In April 2014, CoolSculpting was cleared by the FDA for treatment of the thigh area, and, in January 2015, CoolSculpting was cleared by the FDA for treatment at lower temperatures which enables shorter treatment times. In September 2015, the FDA cleared CoolSculpting for treatment of the submental area under the chin, an area that is consistently ranked as one of the top areas of concern both by consumers and physicians. In March 2016, CoolSculpting was cleared for the additional treatment areas of around the bra straps, on the back, and underneath the buttocks or “banana roll.” Most recently, in November 2016, the FDA cleared the CoolSculpting treatment of the upper arm. Additionally, in July 2016, the CoolSculpting system achieved China FDA approval for non-invasive fat reduction of the abdomen and flanks. We sell our CoolSculpting system primarily to dermatologists, plastic surgeons, aesthetic specialists and general practice physicians and generate revenue primarily from sales of our CoolSculpting system and from sales of consumables to our customers. Consumables are the CoolSculpting procedure packs we sell that are needed to perform procedures using our CoolSculpting system.
The global market for aesthetic procedures is significant. In the United States alone, the American Society of Aesthetic Plastic Surgery, or the ASAPS, estimates that consumers spent approximately $13.5 billion on aesthetic procedures in 2015. Invasive procedures (such as liposuction and tummy tucks, arm, buttock and thigh lifts) and minimally-invasive procedures (such as laser-assisted liposuction, laser lipolysis or injection lipolysis) 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 radio
frequency, laser, or high intensity focused ultrasound, avoid the patient downtime and high costs of invasive and minimally-invasive procedures, but often are painful, produce limited or inconsistent results, and may require multiple treatments, and ongoing maintenance treatments. 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, 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, and maintenance 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. We offer training to our 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. Due to these advantages, we believe CoolSculpting is appealing to both existing consumers who have previously had one or more aesthetic procedures, and to new consumers who have not previously elected to undergo an aesthetic procedure.
Our customers can market CoolSculpting as a highly differentiated, non-invasive fat reduction procedure. Based on our commercial data and customer experiences, we have seen attractive economic benefits for our customers. In addition, the CoolSculpting procedure does not require significant training or skill, as it is largely automated. Once the procedure is initiated, the CoolSculpting system is self-monitoring, allowing our customer 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 CoolSculpting procedure. Further, we believe CoolSculpting's appeal will allow our customers to target the aesthetic first-time user market and expand their aesthetic practices.
We market CoolSculpting to dermatologists, plastic surgeons, aesthetic specialists and general practice physicians. 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. Some of the practices to which we sell have purchased or may elect to purchase more than one CoolSculpting system. We utilize our direct sales organization to market and sell CoolSculpting in our North American market which includes the United States and related territories, as well as Canada. In our markets located outside of North America, we market and sell CoolSculpting through both a direct sales force and a network of distributors. Our sales force and distributors target dermatologists, plastic surgeons, aesthetic specialists and general practice physicians who have practices focused on aesthetic procedures and who express a willingness to position CoolSculpting as a differentiated treatment and participate in our practice marketing and support programs. Revenue from markets outside of North America accounted for 20%, 24% and 23% of our total revenue for the years ended December 31, 2016, 2015 and 2014, respectively. We are driving growth in CoolSculpting procedures through our targeted marketing programs that provide our customers with practice development programs which include organization assessments and recommendations, sales training, practice marketing strategies, and metric analysis. After we establish a significant installed base of CoolSculpting systems in specific markets, we partner with our customers' practices on marketing, advertising, and promotional activities in their local markets to drive demand for CoolSculpting. To further enhance and expand our brand awareness, in 2015 we launched a direct-to-consumer advertising campaign, which includes television, radio and print media, throughout the U.S. and in selected target cities in North America and Europe. Direct-to-consumer advertising builds awareness in the marketplace by having consumers (a) go to existing local practices and request treatment and drive consumable revenue, or (b) go to their local physician who does not yet have consumable services, create the desire and drive system revenue. System revenue consists of our CoolSculpting control unit and our CoolSculpting applicators.
We generate revenue from sales of our CoolSculpting system and from sales of cycles in the form of consumable procedure packs to our customers. As of December 31, 2016, we had an installed base of approximately 6,000 CoolSculpting systems installed across approximately 4,800 practices worldwide. As of December 31, 2016, 3.9 million CoolSculpting revenue cycles had been shipped to our customers and distributors. A cycle is an authorization to perform one procedure to one specific area on the body; customers can only perform a treatment if they have purchased a cycle. We generated revenue of $354.2 million, $255.4 million and $174.5 million for the years ended December 31, 2016, 2015 and 2014, respectively. System revenue represented 45%, 51% and 53% of our total revenue for the years ended December 31, 2016, 2015 and 2014, respectively. Consumable revenue accounted for 55%, 49% and 47% of our total revenue for the years ended December 31, 2016, 2015 and 2014, respectively.
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. Although, based upon our current plans and market conditions, we believe that our existing cash, cash equivalents and short-term investments will be sufficient to satisfy our anticipated cash requirements for the foreseeable future, we cannot assure you that we will be able to maintain profitability.
Merger with Allergan
On February 13, 2017, ZELTIQ, Allergan Holdco US, Inc. (which we refer to as Allergan US), a subsidiary of Allergan plc (which we refer to as Allergan), and a wholly owned subsidiary of Allergan US (which we refer to as merger sub), entered into an agreement and plan of merger, which we refer to as the merger agreement, pursuant to which ZELTIQ will merge with and into merger sub, with ZELTIQ surviving the merger as a wholly owned indirect subsidiary of Allergan.
Upon the consummation of the merger, each issued and outstanding share of ZELTIQ common stock (other than (1) treasury shares, (2) shares held by Allergan US, merger sub, or any wholly-owned subsidiary of Allergan US, and (3) dissenting shares) will be canceled and automatically converted into the right to receive $56.50 in cash, without interest. All outstanding vested options shall be canceled and converted into the right to receive the difference between $56.50 and the exercise price for each share subject to the vested option, subject to applicable withholding taxes; all outstanding vested restricted stock units (RSUs), and all performance restricted stock units (PRSUs), shall be canceled and converted into the right to receive the $56.50 for each share subject to the vested RSU or PRSU, subject to applicable withholding taxes; and all unvested stock options and RSUs will be assumed by Allergan in the merger. Each outstanding unvested option and RSU shall be exercisable or shall be settled upon the same terms and conditions as under the applicable ZELTIQ equity compensation plan, except that each option shall be exercisable for, and each RSU shall be converted into the right to receive, shares of Allergan ordinary shares using an exchange ratio based on the average closing sales price per share of Allergan ordinary shares for the ten trading days ending on the second trading day prior to the closing of the merger.
The merger agreement contains customary representations, warranties, and covenants of ZELTIQ and Allergan US, including, among others: (a) representations relating to the accuracy of ZELTIQ ' filings with the U.S. Securities and Exchange Commission; (b) ZELTIQ ' ownership of and other rights in its intellectual property; (c) Allergan US's authority to enter into the merger agreement; and (d) covenants by ZELTIQ to conduct its business in the ordinary course during the interim period between the execution of the merger agreement and the merger and not to engage in certain kinds of transactions during such period. ZELTIQ is also subject to customary “no-shop” restrictions on its ability to solicit alternative acquisition proposals from third parties and to provide information to and participate in discussions and engage in negotiations with third parties regarding alternative acquisition proposals.
The consummation of the merger is subject to customary closing conditions, including requisite ZELTIQ stockholder approval. The merger agreement also includes termination provisions for both ZELTIQ and Allergan US. In connection with a termination of the merger agreement under specified circumstances involving competing transactions, a change in ZELTIQ’s board of directors’ recommendation of the merger to ZELTIQ’s stockholders or other triggering events, ZELTIQ may be required to pay Allergan US a termination fee of $74 million. In connection with a termination of the merger agreement under specified circumstances involving failure to obtain clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR”), to consummate the merger within nine months from the date of the merger agreement, subject to two extensions of up to 90 days each (provided other closing conditions are satisfied) or legal restraint of the merger arising under HSR, Allergan US may be required to pay ZELTIQ a reverse termination fee of $75 million.
The merger agreement is filed as Exhibit 210-K”) with the U.S. Securities and Exchange Commission (the “SEC”)
on March 1, 2017. The Company is filing this Amendment No.1 to our Current Report 1 on Form 8-K filed with the SEC on February 15,10-K/A (the “Form 10-K/A”), solely for the purpose of including in 2017.
Market Overview
The global market for aesthetic procedures is significant. The ASAPS estimates that U.S. consumers spent approximately $13.5 billion on approximately ten million aesthetic procedures in 2015. According to the ASAPS, cosmetic procedures have increased by 39% over the past five years with nonsurgical procedures up 44%. The top five aesthetic surgical procedures were liposuction, breast augmentation, tummy tuck, eyelid surgery and breast lift, while the top five non-surgical procedures were botulinum toxin injections, hyaluronic acid, hair removal, chemical peel and microdermabrasion. 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 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:
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• | 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. We believe the size and wealth of the aging “baby boomer” demographic segment and its desire to retain a youthful appearance for professional and personal reasons have driven the growth in aesthetic procedures. |
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• | Broader availability of safe non-invasive aesthetic procedures. Technological developments have resulted in the introduction of a broader range of safe, non-invasive aesthetic procedures. According to the ASAPS, non-invasive aesthetic treatments are growing faster than invasive surgical procedures. |
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• | Increased physician focus on aesthetic procedures. We believe increased restrictions imposed by managed care and government agencies on reimbursement for medical treatments are motivating our customers 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 our customers look for ways to expand their practices and improve profitability. |
Limitations of Existing Fat Reduction and Body Contouring Procedures
The following outlines the benefits and limitations of existing 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 customers and their patients.
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), thighplasty (thigh lift), lower rhytidectomy (neck lift) and mentoplasty (chin). Laser-assisted liposuction, laser lipolysis, ultrasound lipolysis and injection 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:
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• | Surgical risks. All invasive and minimally-invasive procedures disrupt the skin's barrier function and therefore may increase risks of infection, local or widespread scarring, perforation, and hemorrhage. These procedures generally require a general or local anesthesia, which carries additional risks. |
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• | 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 or multiple injections, and may cause patient pain. Patients generally require at least two days or more of recovery time after a minimally-invasive procedure, which may require the patient to miss work and necessitate prescribed pain medications post-surgery. |
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• | 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. |
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• | 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. |
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• | High cost. Invasive and minimally-invasive procedures can be 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 may 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 when compared to CoolSculpting:
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• | 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 capable of selectively targeting fat cells, which can lead to unpredictable results, including damage to surrounding tissue. |
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• | 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. |
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• | Maintenance requirements. Some existing non-invasive procedures have only a temporary treatment effect, and thus require periodic maintenance treatments to sustain the desired aesthetic results. |
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• | 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. |
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• | Pain. Energy based products that utilize heat to destroy fat cells are associated with significant procedural pain and discomfort. Patients may require pain medications to tolerate the procedure. Pain management considerations may complicate the procedure and impose additional risks associated with pain medications. |
Our Solution
CoolSculpting is a non-invasive fat reduction procedure that is clinically proven to be safe and effective and provides most patients with noticeable and measurable aesthetic results. CoolSculpting utilizes our proprietary controlled cooling technology to selectively reduce stubborn fat bulges. 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.
We believe that CoolSculpting provides the following benefits to our customers and their patients:
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• | 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. 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. |
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• | Safety profile. CoolSculpting selectively targets fat cells. Our proprietary treatment algorithms are designed to sufficiently cool the fat cells in the treated area 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. As of December 31, 2016, we have shipped 3.9 million cycles. To date, approximately 4,943 clinical complaints have been reported to us, representing 0.10% of all cycles. The most common clinical complaints relate to pain associated with the procedure, as well as common side effects, such as redness and edema. Medical Device Reports were filed when we believed reporting requirements were met. |
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• | 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 procedure in the morning before work, duringPart III the
information that was to be incorporated by reference from its definitive proxy statement for the 2017 annual meeting of stockholders. This Form 10-K/A hereby amends and restates in their entirety and Items 10
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 customers reported that 45% of their patients returned for an additional CoolSculpting treatment, according to the market research study we commissioned through Easton Associates. |
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• | 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.
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• | Reproducible results. The CoolSculpting procedure requires limited training and skill to obtain successful aesthetic results. We designed the CoolSculpting system to be easy to operate and largely automated which results in a more consistent application and reproducible results. 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 procedure. |
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• | Differentiated, high-value product for physician practices. Our selective distribution strategy is designed to enable our customers to market CoolSculpting as a highly differentiated, non-invasive fat reduction procedure. Based on our commercial data and customer experiences, we have seen attractive economic benefits for our customers. In addition, the clinician is not required to administer the procedure and can see and treat other patients or perform concurrent procedures, such as injections or other dermal treatments, on the same patient during the CoolSculpting procedure. |
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• | Ability to expand the aesthetic market. Through market research we have confirmed there is strong consumer demand for a non-invasive procedure that can address the aesthetic concerns of individuals who have stubborn fat bulges. During the third quarter of 2013, we conducted quantitative survey of 3,515 adults in the United States through Berglas Research, an independent marketing research company, and were able to project that more than 85 million consumers were considered aesthetically-oriented and qualify for CoolSculpting. Among this group and based on this study, we projected that 22.4 million consumers would be interested in learning more about the CoolSculpting procedure after reading the product description. During the fourth quarter of 2015, we conducted another quantitative survey of 3,261 adults in the United States through Quintessent Marketing, an independent marketing research company, and were able to project that more than 106 million consumers are considered aesthetically-oriented and qualify for CoolSculpting. Among this group and based on this study, we projected that 28.6 million consumers would be interested in learning more about the CoolSculpting procedure after reading the product description. The ASAPS reported 161,000 non-invasive fat reduction procedures in 2015. When we compare our potential audience to the number of procedures conducted we find that our market penetration is lower than 1%. Additionally, according to a separate market research study we commissioned through Easton Associates in 2011, our customers participating in the study reported that 30% of their CoolSculpting patients were aesthetic first-time users. Based on these results, we believe our customers will be able to target the aesthetic first-time user 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:
| |
• | Selectively market and sell our CoolSculpting system. With CoolSculpting established as a highly differentiated treatment we plan to continue to market and sell our CoolSculpting system to dermatologists, plastic surgeons, aesthetic specialists and general practice physicians. 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, aesthetic specialists and general practice physicians who have practices focused on aesthetic procedures and who express a willingness to position CoolSculpting as a differentiated treatment and participate in our practice marketing and support programs. |
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• | Deliver a focused and efficient marketing strategy. Our marketing strategy is designed to accelerate revenue while reducing overall sales and marketing spend through establishing co-operative customer partnerships and a direct-to-consumer program. This model has enabled our customers to leverage their local-market knowledge to create tailored, local patient marketing programs, with strong digital emphasis, to achieve greater awareness and demand. We intend to expand our co-operative customer partnership program in 2017. We also have a 5-step practice marketing program designed to help practices leverage established best practices relating to patient and staff treatments, front desk operations and internal and external marketing. At the core of this 5-step program is Treatment-to-Transformation, or T2T, a customized assessment and treatment protocol, which has revolutionized the way our customers use CoolSculpting to deliver improved outcomes and high patient satisfaction. We believe this clinical protocol has been instrumental in improving our system utilization and driving incremental system sales in existing practices. Its adoption was and continues to be a significant contributor to our current and long-term growth objectives. |
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• | Leverage data and customer insights. During 2013 and 2014, we launched our connectivity and data management tool, CoolConnect, across our installed base to collect real-time sales, demographic and marketing data that we believe can further optimize marketing strategies for both us and our customers. CoolConnect is compliant with the Health Insurance Portability and Accountability Act of 1996, of HIPPA, and the information derived from CoolConnect provides valuable trends and insights to our Practice Development Managers, or PDMs, showing both account-level treatment information and comparisons against peer-group counterparts within the same geographic area. We also leveraged our 2013 customer segmentation research to hone our messaging targeted towards consumers, and we have implemented a consistent creative strategy based on these insights. |
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• | Highly optimized, experienced and fully trained sales force. Our North American sales force is a bifurcated organization that has produced stronger focus and results on system sales and high-margin consumable sales. This organization is split between Area Sales Managers (ASMs), who focus on system sales, and Practice Development Managers (PDMs), who focus on assisting practices to market CoolSculpting to patients, product training and driving system utilization. We have continued to hire high quality, experienced sales representatives and sales management personnel in both categories and train the sales organization to optimize performance in their respective roles. This initiative has resulted in improved system placements to both existing and new practices, as well as increased system utilization, contributing to our recent revenue growth. We believe our sales force will continue to generate increased customer adoption and patient awareness momentum in the marketplace. We also believe that our focus on driving system utilization will offer the opportunity to drive increased sales of our high gross margin procedure packs. |
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• | Increase utilization of CoolSculpting through our marketing and customer support programs. We are driving demand for CoolSculpting procedures through our marketing and customer support programs. Through our PDMs we provide our customers with training on patient assessments, how to apply the CoolSculpting technology, practice development and marketing support to help our customers make CoolSculpting a key offering within their practices. We also intend to continue our co-operative marketing strategy with individual practices which is designed to encourage our customers to promote CoolSculpting to their aesthetic patients and those outside of their practices. To further support our customized marketing approach, we created the ZELTIQ Training Centers where we hold our training program, CoolSculpting University, or CSU. CSU is focused on customer training and education programs to optimize patient outcomes. In 2016, we hosted over 2,300 medical professionals from 1,035 offices worldwide at our CSU programs. This program invites practices to attend hands-on training where they learn the proper techniques for T2T, including a complete treatment assessment, applicator placement and patient consultation. Customers are also trained on a specific practice enhancement execution protocols designed to accelerate utilization and maximize the use of their CoolSculpting offering that includes branding, grassroots initiatives and digital marketing tactics. To address the demand for this training from our customers we currently have one training center in Pleasanton, California which we opened in 2013, and a second center in Reston, Virginia, which we opened in the second quarter of 2015. Our PDMs then visit customers in the field to further customize and optimize the program at a local level to ensure it is delivering improved patient flow. We believe this program is particularly well suited to the aesthetics industry. We also intend to continue to participate in industry trade shows, clinical workshops, and company-sponsored conferences with expert panelists. |
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• | Increase our international presence. There is strong global demand for aesthetic procedures outside of North America. 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 numerous international markets, where use of the product is generally not limited to specific treatment areas. Our customers in these markets commonly perform CoolSculpting procedures on the back and chest, in addition to the flanks, abdomen, thigh, upper arm, submental area, around the bra straps and underneath the buttocks. We intend to seek regulatory approval to market CoolSculpting in additional international markets, as well as grow our international sales and marketing organization to focus on increasing sales and strengthening our customer relationships. As part of that strategy, we are and intend to continue to opportunistically deploy a direct sales force in select international markets. |
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• | Expand our FDA-cleared indications for CoolSculpting. We currently have FDA clearance to market CoolSculpting in the United States for the visible reduction of fat in the flanks, an area commonly known as the “love handles”, abdomen, thigh, upper arm, and back, as well as around the bra straps, under the buttocks and the in submental area under the chin. We intend to continue to seek additional regulatory clearances from the FDA to expand our United States marketable indications for CoolSculpting to other areas on the body. |
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• | Leverage our technology platform. We are exploring additional uses of our proprietary controlled cooling technology platform for the dermatology, plastic surgery, aesthetic and general practice markets. We are also exploring potential therapeutic uses for our platform technology, either directly or through collaborative arrangements with strategic partners. |
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• | Streamline our R&D focus and capital deployment. Our R&D effortsthrough 14 of Part III. In addition, the reference on the cover of the Report to the incorporation by reference of the Company’s Definitive Proxy Statement into Part III of the Form 10-K is hereby amended
to delete that reference. We are also including Exhibits 31.1 and 31.2 required by the filing of this Amendment No. 1. Except as
expressly noted in this Form 10-K/A, this Form 10-K/A does not reflect events occurring after the original filing of the Form
10-K or modify or update in any way any of the other disclosures contained in the Form 10-K including, without limitation, the financial statements. Accordingly, this
Form 10-K/A should be read in conjunction with the Form 10-K and the Company’s other filings with the SEC.
PART III
| Item 10. |
Directors, Executive Officers and Corporate Governance | DIRECTORS
The following includes a brief biography of each member of our Board of Directors, or the Board, including their respective ages as of
April 30, 2017. The brief biographies below also include information regarding the specific experience, qualifications, attributes or skills that led our Board to determine that the applicable director should serve as a member of our Board as
of the date of this report.
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|
|
|
|
|
|
| Name |
|
Age |
|
|
POSITION HELD WITH ZELTIQ |
|
|
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| Mark J. Foley |
|
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51 |
|
|
Chairman, Chief Executive Officer, President, and Director |
|
|
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| D. Keith Grossman |
|
|
57 |
|
|
Lead Independent Director, Director |
|
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| David J. Endicott |
|
|
52 |
|
|
Director |
|
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| Mary M. Fisher |
|
|
55 |
|
|
Director |
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| Kevin C. O’Boyle |
|
|
61 |
|
|
Director |
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| Andrew N. Schiff, M.D. |
|
|
51 |
|
|
Director |
Mark J. Foley has served on our Board of Directors since 2009 and became our Interim President and
Chief Executive Officer in April 2012, and our President and Chief Executive Officer in August 2012. He previously served as our Executive Chairman of the Board of Directors from July 2009 to May 2010, and again since February 2015. Mr. Foley
currently serves as a Managing Director at RWI Ventures, and until March 2014, was Executive Chairman at Onpharma until its acquisition by Valeant Pharmaceuticals. Prior to this, Mr. Foley held a variety of operating roles in large public
companies and venture-backed startups including U.S. Surgical Corporation, Guidant Corporation, Devices for Vascular Intervention (acquired by Eli Lilly), Perclose (acquired by Abbott) and Ventrica (acquired by Medtronic) where he was the founder
and associated capitalCEO. Mr. deployment haveFoley has been streamlined toover 25 years focus on making the CoolSculpting procedure safer, more comfortable, fasterof medical device operating, investment and more efficacious. Our research is focused on optimizing the patient outcome and increasing practice efficiency by reducing treatment duration. In the long-term, weCEO experience. Additionally, he remain focused on leveraging our proprietary cooling technology into new applications and indications for CoolSculpting to treat acne and into areas with a smaller volume of fat on the body. |
has partnered with a number of entrepreneurs to assist with the formation and capitalization of new companies. Mr. Foley
serves or has served as Senior Advisor, Executive Chairman, Interim CEO and Board Member to a number of medical device companies. Mr. Foley is currently a director of Glaukos Corporation, a publicly traded company. Mr. Foley received his
B.A. from the University of Notre Dame. We believe Mr. Foley is qualified to serve on our Board of Directors because as our President and Chief Executive Officer, he has deep knowledge and understanding of our company and the business. He is
also qualified because of his previous medical device experience as a senior executive and his service on the boards of several medical device companies.
3
The CoolSculpting Experience
Patient Consultation
The first step
D. Keith Grossman has served on our Board of Directors since October 2013. In
February 2016, the Board appointed Mr. Grossman as its Lead Independent Director to preside over periodic meetings of our independent directors, to serve as a liaison between our Chairman and the independent directors, and to perform such
additional duties as our Board may otherwise determine and delegate. Mr. Grossman brings over 30 years of experience in the medical device industry. He most recently served for the second time as Chief Executive Officer, President and
Director of Thoratec Corporation (THOR) from September 2014 until October 2015, when the company was acquired by St. Jude Medical. Previous to Thoratec Corporation he served as Chief Executive Officer, President and a Director of Conceptus,
Inc. (CPTS), from December 2011 until September 2013, when the company was acquired by Bayer Healthcare. Prior to Conceptus, Mr. Grossman served as a Managing Director of TPG (Texas Pacific Group) Biotech from 2007 to 2011, where he co-led the medical device practice, and also served as a Senior Advisor to the healthcare efforts of the CoolSculpting process is a patient consultation. We designed our CoolSculpting system to address the aesthetic concernsbuyout fund, TPG Capital. Before joining TPG Biotech, Mr. Grossman was Chief Executive Officer, President
and a Director of Thoratec Corporation from 1996 to 2006. Before joining Thoratec, Mr. Grossman’s experience included Sulzermedica and American Hospital Supply Corporation, in a variety of sales, marketing and general management
positions. He is a past member of the boards of individuals who are not considered obese but have stubborn fat bulges. Utilizing our PDMspublic companies Kyphon, Inc. (KYPH) and CSU programIntuitive Surgical, we train our customers to properly identify those patients who would be good candidates for CoolSculpting and educate their patients on the aesthetic results they should expect from a CoolSculpting procedure. We also instruct our customers to explain to their patients 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 customers to personally conduct the patient consultation.
The CoolSculpting Procedure
CoolSculpting is a non-invasive procedure that is clinically proven to be safe and effective and provides most patients with noticeable and measurable aesthetic results. Once the desired treatment area has been identified, the clinician applies our consumable CoolGel to the skin surface of the treatment area to ensureInc. (ISRG). He has served on the boards of numerous private medical device companies, as well as the Board of the Medical Device
Manufacturers Association. consistentMr. thermal contact andGrossman received a to protect the skinB.S. in life sciences from freezing. The CoolSculpting applicator is then positioned on the treatment area over the CoolGel, and the fat bulge is drawn into the applicator and positioned between its cooling panels. In the case of our CoolSmooth applicator, a non-suction based applicator is secured by disposable securement accessories. Once the 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 applicatorOhio State University, and an M.B.A. from Pepperdine University. Mr. Grossman brings to our Board of Directors substantial experience in the life
that monitor the cooling of the fat bulge. Just prior to the end of the procedure, the CoolSculpting system signals the clinician that the treatment is ending. When the procedure is completed, the CoolSculpting system automatically terminates the cooling, and the clinician then removes the CoolSculpting 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 applicator (other than our CoolSmooth 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 procedure.
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.
Our CoolSculpting System
We generate revenue primarily from sales of our CoolSculpting system and from sales of consumables to our customers. Sales of systems can include sales of systems to new customers that include our entire suite of applicators, as well as multi-system sales to new customers or sales to existing customers which may not include the entire suite of applicators. Additionally, some practices may purchase additional applicators, or add-on applicators, for existing systems. We generate consumable revenue through sales of cycles in the form of consumable procedure packs, each of which includes our consumable CoolGels, CoolLiners, Geltraps and in the case of our CoolSmooth procedure packs, disposable securement accessories, all of which are used by our customer during treatments. In addition, each consumable procedure pack includes a disposable computer cartridge that we market as the CoolCard. The CoolCard contains enabling software that permits our customers to perform a fixed number of CoolSculpting procedures, or cycles.
We also announced the launch of a new CoolMini-only system, providing physicians with the option to purchase a system that only comes with the CoolMini applicator which was specifically designed to treat smaller pockets of fat, including the submental fat area, or "double chin." We began offering this new configuration in the first quarter of 2016, enabling us to target physicians that primarily or exclusively focus on facial aesthetic treatments. The system can be upgraded with the purchase of additional software and applicators. With these individually purchased upgrades, the system has the ability to treat other body areas.
CoolSculpting Control Unit
The CoolSculpting control unit is the basesciences industry, as well as the experience he obtained as a chief executive officer and president of other companies, which make him qualified to serve on our Board of Directors.
David J. Endicott has served on our Board of Directors since April 2016. Mr. Endicott was President, Medical Devices of Hospira,
Inc., the world’s leading provider of injectable drugs and infusion technologies and a global leader in biosimilars, from March 2014 until September 2015 when Hospira was acquired by Pfizer Inc. From July 2010 to March 2014, Mr. Endicott
served as President, Allergan Medical, Asia Pacific and Latin America and as an executive committee member of Allergan, Inc., a multi-specialty healthcare company. Earlier in 2010 he served as President, Europe, Africa & Middle East.
Mr. Endicott currently serves on the board of directors of Orexigen Therapeutics, Inc., a biopharmaceutical company focused on the treatment of obesity and as a member 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 a HIPAA compliant connectivity and data management tool that locally tracks and collects data about each procedure performed as well as any error messages that may be generated during the procedure. We can collect and analyze this information to help our customers better understand their usage patterns and improve their marketing plans, utilization, and profitability, as well as troubleshoot and resolve issues remotely.
Additionally, the CoolSculpting control unitboard of directors for AdvaMed, the principal industry association
features: (1) a color touchscreen which 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 which provide airflow and reduce heat build-up allowing our CoolSculpting system to be used in a standard physician treatment room without any special ventilation requirements or room modifications; (3) a drawer which provides storage space for our CoolSculpting CoolGels, CoolLiners, Geltraps and user documentation; and (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.
CoolSculpting Applicators
The CoolSculpting applicator: (1) delivers vacuum suction and cooling to the fat bulge being treated; (2) can be used to start and stop a CoolSculpting procedure and to turn the vacuum suction on and off; and, (3) has a thermoelectric cooling panel with temperature and pressure sensors which provide precise thermal control and monitoring of the fat bulge beingfor medical devices. Mr. Endicott earned his bachelor’s degree in chemistry from Whitman College, his master’s in business administration from the University of Southern California and is a graduate of the Harvard Business School
treated and will automatically stop the procedure if a problem is detected. In the case of our CoolSmooth applicator, which is a non-suction based applicator, the applicator is secured by disposable securement accessories.
With the launch of our CoolAdvantage and CoolAdvantage Plus applicators in June and December 2016, respectively, we currently offer eight CoolSculpting applicators for use with our CoolSculpting system. Each CoolSculpting applicator is designed to allow the physician to treat a different size and shape fat bulge.
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1. | CoolCore - designed for use on small and medium fat bulges. |
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2. | CoolMax - designed for use on larger fat bulges. |
| |
3. | CoolCurve+ - designed to fit tightly curved contours. |
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4. | CoolFit - designed for use on long, narrow fat bulges. |
| |
5. | CoolSmooth Pro - designed for use on non-pinchable fat bulges. |
| |
6. | CoolMini - designed to address smaller fat bulges, including the submental area under the chin. |
| |
7. | CoolAdvantage and CoolAdvantage Plus - designed to reduce treatment time by nearly half compared to our existing applicators mentioned above; CoolAdvantage features an adaptable 3-in-1 configuration and enhanced cup design to address medium fat bulges, and CoolAdvantage Plus is designed to address larger fat bulges. |
CoolSculpting Procedure Packs
A CoolCard is required to operate the CoolSculpting control unit and is programmed with enabling software that permits the CoolSculpting control unit to perform a fixed number of procedures, or cycles. 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 applicator. The security certificate is designed to ensure that customers pay for each CoolSculpting procedure and prevent the use of counterfeit CoolCards. Our consumable CoolGels are cotton sheets saturated in a solution that protects the skin and ensures proper thermal coupling during a CoolSculpting procedure. One CoolGel is required for each treated area and is not reusable. Our consumable plastic CoolLiners and Geltraps protect the applicator from gel contact. One CoolLiner is recommended per patient for hygienic reasons. In the case of our CoolSmooth procedure packs, the applicator is secured by disposable securement accessories.
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 uncontrolled cell death. 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 theAdvanced Management Program. We believe Mr. abilityEndicott is qualified 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 sensitivityserve on our Board of Directors based on his strong operational and management experience across multiple business and geographic regions which will provide significant value
as we continue to push for a greater international presence. His past leadership positions at Allergan and his role in Allergan’s international corporate expansion exemplifies his operational, strategic and corporate leadership experience.
Mary M. Fisher has served on our Board of Directors since September 2012. Ms. Fisher currently serves as Chief
Executive Officer and Director at Colorescience. Prior to Colorescience, Ms. Fisher was Chief Executive Officer and a Director at SkinMedica from April 2008 to December 2012. Ms. Fisher brings more than 25 years of experience in the
pharmaceutical and biotechnology industries including service as Chief Operating Officer of Acorda Therapeutics, a CNS company, with responsibility for corporate strategy and business development, financial planning, sales and marketing, and
manufacturing. Previously, Ms. Fisher was Vice President, Strategic Healthcare and Commercial Operations for Cephalon, with responsibility for product planning and marketing, managed care sales, and manufacturing. Her earlier experience
includes positions at Immunex and Boehringer Ingelheim. She is also a member of the board of directors of Ovascience, Inc., a publicly traded company, and Neuroscience Nursing Foundation. We believe Ms. Fisher is qualified to serve on our Board
of Directors based on her executive experience in the aesthetics medical device industry and her collective experience and expertise, as described above.
Kevin C. O’Boyle has served on our Board of Directors since July 2011. Mr. O’Boyle served as Senior Vice President and
Chief Financial Officer at Advanced BioHealing, Inc. from December 2010 until June 2011 when it was acquired. Previously, Mr. O’Boyle served as the Chief Financial Officer of NuVasive, Inc., a medical device company focused on the design,
4
development, and marketing of products for the surgical treatment of spine disorders, from January 2003 to December 2009 and the Executive Vice President of NuVasive from December 2004 to
December 2009. Prior to that time, Mr. O’Boyle served as Chief Financial Officer and Chief Operating Officer during his six years with ChromaVision Medical Systems, Inc., a publicly traded medical device firm specializing in the oncology
market. Also, Mr. O’Boyle held various positions during his six years with Albert Fisher North America, Inc., a publicly traded international food company, before it was sold in 1996, including Chief Financial Officer and Senior Vice
President of Operations. Mr. O’Boyle is currently a member of the board of directors of Wright Medical Group N.V., a global orthopedics company, Genmark Diagnostics, Inc., a molecular diagnostics company, and Sientra, Inc., a medical
device company, all publicly traded, and was a member of the board of directors of Durata Therapeutics, a publicly traded pharmaceutical company until it was acquired by Actavis in 2014. Mr. O’Boyle received a B.S. in Accounting from the
Rochester Institute of Technology and successfully completed the Executive Management Program at the University of California at Los Angeles, John E. Anderson Graduate Business School. We believe Mr. O’Boyle is qualified to serve on our
Board of Directors and to serve as a Chairman of our Audit Committee based on his executive experience in the medical device industry and his financial and accounting expertise.
Andrew N. Schiff, M.D. has served on our Board of Directors since July 2010. Dr. Schiff joined Aisling Capital in September
of 1999 and has served as a Managing Partner since 2002. Prior to joining Aisling Capital, Dr. Schiff practiced internal medicine at The New York Presbyterian Hospital where he maintains his position as a Clinical Assistant Professor of
Medicine. In addition to ZELTIQ, Dr. Schiff served as a director of Agile Therapeutics, Inc., a publicly-traded company, until February 2016, and currently serves as a director of a number of private companies. Dr. Schiff received his
M.D. from Cornell University Medical College, his M.B.A. from Columbia University, and his B.S. with honors in Neuroscience from Brown University. Dr. Schiff’s medical background, venture experience, and service on the board of fat cells to cold injurydirectors
of several healthcare companies make him qualified to serve on our Board of Directors and 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 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 CoolSculptingserve as Chairman of our Compensation Committee.
EXECUTIVE OFFICERS
Our
executive officers are appointed by and serve at the discretion of the board of directors. There are no family relationships among our directors and officers, other than Brent Hauser, our President, North America, and Brad Hauser, our Senior Vice
President of Research and Development, are brothers. The following table provides information regarding our executive officers, including their ages and positions, as of April 30, 2017:
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| Name |
|
Age |
|
|
Position |
| Mark J. Foley |
|
|
51 |
|
|
Chairman, Chief Executive Officer, President, and Director |
| Todd E. Zavodnick |
|
|
45 |
|
|
President, International |
| Brent Hauser |
|
|
40 |
|
|
President, North America |
| Taylor C. Harris |
|
|
41 |
|
|
Chief Financial Officer and Senior Vice President |
| Sergio Garcia |
|
|
55 |
|
|
Senior Vice President, General Counsel and Corporate Secretary |
| Carl H. Lamm |
|
|
55 |
|
|
Senior Vice President of Operations |
| Brad Hauser |
|
|
40 |
|
|
Senior Vice President of Research and Development |
| Danika Harrison |
|
|
41 |
|
|
Senior Vice President of Global Marketing |
| Mike Fitzgerald |
|
|
57 |
|
|
Senior Vice President of Global Human Resources |
Mark J. Foley – Biographical information with respect to Mark J. Foley is provided above under
“Directors.”
Todd E. Zavodnick has served as President, International, since February 2016. Prior to joining ZELTIQ,
Mr. Zavodnick was the President technology is designed to trigger apoptosis, eliminating fat& General Manager of Galderma North America, where he cells without generating awas responsible for all 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 theNorth America operations within the Pharmaceutical, Consumer (self-medication), and Aesthetic underlying tissue& Corrective
businesses. 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:
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1. | Cooling applicator is applied and the fat bulge being treated is suctioned into the applicator head (unless our CoolSmooth applicator is being used, in which case it is secured by disposable securement accessories). |
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2. | 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. |
| |
3. | Maintained cooling causes lipid crystallization in the fat cells and triggers apoptosis of the fat cells. |
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4. | Patient'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 the Massachusetts General Hospital, or MGH, a teaching affiliate of Harvard Medical School. CoolSculpting’s core technology was developed by Harvard scientists Dr. R. Rox Anderson and Dr. Deiter Manstein, two pioneers in the aesthetic industry. 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 panniculitis, whereby inflammation of the fatty tissue in the lower cheek occurred after children sucked for a prolonged time on frozen treats. Clinical reportsHe also previously served as Galderma’s Vice President, General Manager Aesthetic & Corrective USA, from May 2014 to January 2016, during which time
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of popsicle panniculitis 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 Cryolipolysis technology. In May 2005, we secured an exclusive, worldwide license to the Cryolipolysis 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 December 31, 2016, there were over 75 peer-reviewed scientific journal articles and published conference abstracts discussing the effects of our CoolSculpting technology, both by physicians affiliated with our company as clinical and scientific advisers, as well as by independent investigators.
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.
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.
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. There were 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) were observed in the fat layer, as indicated by intense nuclei staining. These cells are responsible for the removal
he was responsible for Galderma’s Aesthetic of the apoptotic fat cells via phagocytosis. At 90 days post-treatment, the fibrous septae (connective tissue fibers) in the fat layer were condensed due to elimination of fat cells. There was no evidence of dermal, epidermal, nerve, or blood vessel inflammation, and there was no evidence of fibrosis (scar tissue formation).
Pivotal study. To support our 510(k) notification for the use of CoolSculpting for non-invasive fat reduction of the flanks, commonly referred to as the love handles, 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& Corrective operations in the United States. Todd also served as Senior Regional Director for Galderma’s European 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. 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 formsLatin
America Operations, from May 2012 to January 2015, during which time he was responsible for all operations within Europe, Middle East, Africa, and Latin America for Galderma regarding all business units of Pharmaceutical, Consumer (self-medication),
and Aesthetic and Corrective Lines. Prior to joining Galderma, Mr. Zavodnick served as President, China and Mongolia for Alcon, a Novartis company, from April 2009 to July 2012, at which he oversaw operations for Alcon China and Mongolia
focusing on the areas of medical devices, pharmaceuticals and consumer eye care. In his career, Mr. Zavodnick has spent time leading organizations in Asia (residing in Beijing, China, for four years), Europe (residing in Lausanne,
Switzerland, for two and a half years), the Middle East, Africa, and Latin America for Alcon Laboratories and Galderma Laboratories. 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.
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 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 the 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 may exceed 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 within 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 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 adverse event 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 adverse events 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 adverse events were reported. Side effects and adverse events 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.
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:
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• | 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. |
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• | Additional applicators. We are developing additional applicators for the CoolSculpting system to expand our range of available applicator sizes and configurations, which will provide our customers with additional flexibility in selecting the applicator that best fits the body contour to be treated. In 2015, with our recent FDA clearance for lower temperatures, we launched our CoolSmooth PRO applicator in the second quarter of 2015. In the fourth quarter of 2015, we introduced our CoolMini applicator for treatment of smaller areas, including under the chin. We introduced our CoolAdvantage and CoolAdvantage Plus applicator in June and December 2016, respectively. |
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• | 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 to enhance our proprietary treatment algorithms. |
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• | Point of Sale information feature. Our CoolSculpting system currently records information locally at the unit level about each treatment procedure, including information regarding procedure and patient statistics. Our direct sales force and our distributors can collect this information for analysis. With CoolConnect, which is a HIPAA compliant connectivity and data management tool, we are able to accumulate and analyze treatment procedure information at the point of sale. These data points assist our sales force in discussions with customers regarding their marketing efforts and program effectiveness. CoolConnect continues to be used across our installed base to collect real-time sales, demographic and marketing data that we believe can further optimize marketing strategies for both us and our customers. This information provides valuable trends and insights to our PDMs showing both account-level treatment information and comparisons against peer-group counterparts within the same geographic area. |
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• | 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 CoolCards with our CoolSculpting system. |
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• | Design improvements. We are continuing to optimize the design of our CoolSculpting system to improve reliability and to reduce our manufacturing and repair costs. |
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, aesthetic and general practice 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 property we license from MGH. Any royalty we are required to pay will reduce our profits 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 December 31, 2016, we had 82 employees focused on research and development. In addition to our internal team, we retain third-party contractors from time to timeHe began his career as a Registered Pharmacist. In addition Mr. Zavodnick serves on the Board of
Directors for the Children’s Skin Disease Foundation whose mission is to care for children with severe life threatening skin diseases. Mr. Zavodnick earned a Bachelor of Science degree in Pharmacy from Rutgers University and to provide us with assistance on specialized projects. Wean M.B.A.
from also work closely with experts in the medical communitythe University of Texas at Dallas.
Brent Hauser has served as President, North America since January 2017, and previously
served as Vice President of North America Sales from January 2013 through December 2016. He first joined ZELTIQ as Regional Sales Director, West Region in November 2012. Mr. Hauser has more than 15 years of sales experience in the
medical device industry. Prior to supplement our internal research and development resources. Researchjoining ZELTIQ, he served as Director of Sales, APAC for Solta Medical, from March 2010 to October 2012, where he was responsible for developing and implementing the sales, clinical and development expenses for the years ended
December 31, 2016, 2015 and 2014, were $25.5 million, $22.9 million and $18.2 million, respectively. Sales and Marketing
Sales
In North America, we utilize a direct sales forcetraining strategy
throughout the Asia Pacific region. He also served as Area Sales Manager from March 2008 through February 2010. Prior to the Solta Medical acquisition, Mr. Hauser served as Director of Sales, EMEA from January 2006 through February 2008,
for Reliant Technologies. Mr. Hauser received his Bachelor of Arts in Human Biology from Stanford University.
Taylor C.
Harris has served as Chief Financial Officer and Senior Vice President since April 2016; however, he joined the company in March 2016 on a part-time basis as to sell CoolSculpting. As of
December 31, 2016, we had aVice President of Finance. Mr. Harris previously served as Vice President and
Chief Financial Officer at Thoratec Corporation from October 2012 until October 2015 when Thoratec was acquired by St. Jude Medical, Inc., during which tenure North American sales force of 171 employees. To support the continued roll-out of CoolSculpting, we intend to continue to invest in our North American sales force.
In international markets, we sell CoolSculpting primarily through a network of distributors. As of December 31, 2016, we had an international sales team of 43 employees supporting approximately 47 independent distributors. Additionally, we utilize a separate direct sales force of 27 employees to sell into certain key markets in Europe. Our product currently has regulatory approval in 74 countries. We are increasing and intend to continue 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. We require our distributors to provide customer training, to invest in equipment and marketing, and to attend certain exhibitions and industry meetings. In addition, we are opportunistically pursuing direct sales and expanding our marketing campaigns in select international markets.
We enter into distribution agreements with our distributors outside of North America. Our distribution agreements generally provide the distributor with a right to distribute our product for a limited period of time 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. We require distributors to purchase a minimum number of CoolSculpting systems each calendar quarter over the term of the agreement. The agreement sets forth the minimum quarterly purchase obligations for the first calendar year of the term of the agreement, 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.
Customers
No individual customer accounted for more than 10% of annual revenue in 2016 and 2014. One aesthetic chain, along with its affiliated franchises, accounted for 10% of revenue in 2015 and 10% of accounts receivable as of December 31, 2015. No individual customer accounted for more than 10% of accounts receivable as of December 31, 2016.
Customer Marketing and Support Programs
We intend to drive CoolSculpting procedures through our targeted marketing and customer support programs. Since 2013, we have hired and trained a group of PDMs. Our PDMs train our customers on the use of the CoolSculpting system when the CoolSculpting system is first delivered to the customer's practice site. Following this initial training, our PDMs educate our customers on current CoolSculpting best practices and provide customers and their staff with sales and marketing training and support to help them increase patient demand for CoolSculpting procedures.
We also continue to offer a comprehensive practice certification program, originally launched in 2011. A customer's participation in this certification program and our other practice support programs, other than the initial training program, is voluntary. We have found that the most successful practices have the customer involved in every part of the training and marketing process. To become certified, customers must commit to engage in quarterly business strategy meetings with one of our PDMs, educate members of their office in our CoolSculpting best practices, and adopt our guidelines for before and after patient photographs. Once certified, customers receive distinction on our website. Furthermore, in late 2013 we launched the first of our customer training programs, CoolSculpting University. This program enables new and existing customers to successfully launch their CoolSculpting programs through a curriculum that includes hands-on education, live treatments and lecture-style presentations. In 2016, we hosted over 2,300 medical professionals from 1,035 offices worldwide at our CSU programs. To address the demand for this training from our customers we currently have one training center in Pleasanton, California which we opened in 2013, and a second center in Reston, Virginia, which we opened in the second quarter of 2015. Also, we hosted 19 satellite CSU programs internationally for the year ended December 31, 2016.
In addition, with the launch of our HIPAA compliant connectivity and data management tool, CoolConnect, across our installed base, we are able to collect real-time sales, demographic and marketing data that we believe can further optimize marketing strategies for both us and our customers. This information provides valuable trends and insights to our PDMs, showing both account-level treatment information and comparisons against peer-group counterparts within the same geographic area. We also leveraged our 2013 customer segmentation research to hone our messaging targeted towards consumers, and we have implemented a consistent creative strategy based on these insights.
Direct-to-Consumer
In 2016, we launched a national direct-to-consumer advertising program to build awareness and interest in the marketplace. The national campaign leveraged learnings from the successful direct-to-consumer pilots held in 11 U.S. cities: Atlanta, Dallas, Denver, Houston, San Diego, Miami / Ft. Lauderdale, Minneapolis, Philadelphia, Phoenix, Seattle, Washington, DC.
CoolSculpting website traffic significantly increased in those markets, and local CoolSculpting providers experienced a significant increase in patient interest and treatments. The multiple channels we utilized included television commercials, radio spots, digital advertising, print advertising, out-of-home advertising, social media, and public relations. As of December 31, 2016, our program is active nationally in the U.S.
Customer Support
We strive to provide our customers and authorized distributors with superior customer support. We maintain a staff of Customer Care personnel in our facilities in Pleasanton, California and Reston, Virginia, as well as in the United Kingdom, to support our customers worldwide. This staff is available by telephone and email to field inquiries, troubleshoot product issues, facilitate sales activities and support the commercial activitieshe was responsible for all finance, accounting, treasury and investor relations functions.
Mr. Harris joined Thoratec as its Senior Director of Investor Relations and Business Development in February 2010, in which capacity he was responsible for developing and executing the company’s investor relations strategy, as well as
supporting the company’s strategic and business development activities. Prior to joining Thoratec, Mr. Harris worked at JPMorgan Chase & Co. for over a decade in several capacities, including as a Vice President in the firm’s
Healthcare Investment Banking and Equity Research departments. Mr. Harris holds a Bachelor of Arts in Physics and Economics from the University of North Carolina at Chapel Hill.
Sergio Garcia has served as Senior Vice President, General Counsel and Corporate Secretary since March 2012. With more than two decades
of legal and compliance experience, Mr. Garcia brings a wealth of expertise and knowledge to ZELTIQ. Before joining ZELTIQ, Mr. Garcia was a partner at the law firm Reed Smith LLP from July 2008 to February 2012 and at Fenwick &
West LLP from October 2005 to July 2008 where he advised public and private emerging growth biotechnology and medical device companies on corporate governance, securities matters, and strategic transactions, including mergers and acquisitions. Prior
to that, Mr. Garcia served as Vice President, Legal and General Counsel at PDL BioPharma Inc. where he was responsible for overseeing the company’s legal affairs worldwide, including corporate governance, securities compliance, strategic
partnerships, litigation, licensing and mergers and acquisitions activity. Mr. Garcia received his Bachelor of Arts degree in International Relations from Stanford University and his J.D. degree from the University of California, Berkeley,
School of Law.
Carl H. Lamm has served as Senior Vice President of Operations since January 2017 and previously as Vice President
of Operations from November 2012 to January 2017. He previously served as Vice President of Manufacturing & Supply Chain from July 2011 to November 2012 and as Senior Director of Supply Chain from April 2008 to July 2011. Prior to joining
ZELTIQ, Mr. Lamm served as Manufacturing Manager at Thoratec Corporation, as Operations Manager at Varian Inc. and Director of Logistics and Materials at Orthopedic Technology Inc. With over 25 years of Operations experience in Class II
and III Medical Device and High Technology companies managing operations, supply chain and manufacturing functions,
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Mr. Lamm is now responsible for establishing a flexible, scalable, cost effective and quality driven operations organization. Mr. Lamm holds a Bachelor of Arts in Economics from the
University of Washington and an M.B.A from Saint Mary’s College.
Brad Hauser has served as Senior Vice President of Research
and Development since January 2017 and previously as Vice President of Research and Development from July 2015 to January 2017. He joined ZELTIQ in December 2013 as Vice President of Product and Clinical Strategy. Prior to joining ZELTIQ,
Mr. Hauser served as Executive Vice President, Commercial Operations for Cutera, from June 2011 to December 2013, where he was responsible for marketing, clinical and business development activities for its global laser and energy-based
devices. From April 2010 to June 2011, Mr. Hauser served as Director of Research and Development at Medicis where he was responsible for clinical and product development for the LipoSonix program. Prior to joining Medicis, Mr. Hauser
served as Managing Director of Product and Clinical Marketing at Solta Medical. Mr. Hauser received his Bachelor of Arts in Human Biology from Stanford University.
Danika Harrison has served as Senior Vice President of Global Marketing since January 2017 and previously as Vice President of Global
Marketing from February 2015 to January 2017. She joined ZELTIQ in November 2014 as Vice President of Consumer and Brand Marketing. Prior to joining ZELTIQ, Ms. Harrison worked at Tria Beauty from March 2011 to June 2014 in several capacities,
including as Senior Vice President of Global Marketing and General Manager of North America, where she was responsible for marketing and eCommerce programs to drive consumer demand. Prior to joining Tria Beauty, Ms. Harrison worked at
digital marketing agency Rosetta from June 2006 to March 2011 where she partnered with companies such as Johnson & Johnson to build consumer-facing marketing programs. She spent the first six years of her career working in marketing
for financial services at MBNA (now Bank of America) and Merrill Lynch Investment Managers (now Blackrock). Ms. Harrison graduated cum laude with a Bachelor of Science from Georgetown University, and she received a Master of Business
Administration from Northwestern University’s Kellogg School of Management.
Mike Fitzgerald has served as Senior Vice
President, Global Human Resources since January 2017. Prior to joining ZELTIQ, Mr. Fitzgerald was the Executive Vice President, Global Human Resources for Cepheid, a leading company in molecular diagnostics, from January 2012 to January 2017,
where he was responsible for devising and implementing the company’s human capital strategy and associated programs. Before joining Cepheid, he served as the Senior Vice President of Global Human Resources at Verigy, Ltd (now a part of
Advantest Corp.) from October 2010 to January 2012. Prior to Verigy, Mr. Fitzgerald was Vice President of Human Resources at Varian, Inc. (acquired by Agilent Technologies) from 2007 to 2010, and prior to that, he held various HR roles
culminating in becoming the Global Director of HR Strategy and Planning for Vodafone Group, plc from 1995 to 2006. He earned a bachelor’s degree in Political Science from the University of California, Berkeley, a master’s degree in
Industrial Relations and Personnel Management from the University of London’s London School of Economics and Political Science, a master’s in Management at McGill University in Montreal, Canada as part of the International Masters in
Practicing Management Program (IMPM), and a postgraduate diploma in applied social studies at Trinity College, Dublin. He is a current participant in the master’s degree in Social Innovation program at the University of Cambridge Judge Business
School.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than ten percent of a registered
class of our international distributors. In additionequity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of ZELTIQ. Officers, we provide worldwide technical support to our customers and distributors year round. Ourdirectors and greater than ten percent stockholders are required
by SEC regulation to furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the
copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended December 31, 2016, all Section 16(a) filing requirements applicable to its officers, directors and greater than
ten percent beneficial owners were complied with, except that each of Messrs. Endicott, Grossman and O’Boyle, Dr. Schiff and Ms. Fisher filed one Form 4 reporting one transaction late, the automatic grant of restricted stock units to
them as non-employee directors.
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CODE OF BUSINESS CONDUCT
We have adopted a code of business conduct that applies to all of our officers, directors, and employees. We have posted a copy of our code of
business conduct, and intend to post amendments to this code, or any waivers of its requirements, on our website at www.zeltiq.com, as permitted under SEC rules and regulations. The reference to our web address does not constitute
incorporation by reference of the information contained at or available through this site.
AUDIT COMMITTEE
The Board of Directors established an Audit Committee in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934 to oversee
our corporate accounting and financial reporting processes and audits of its financial statements. The goal is to minimize the disruption caused by a service event, and weAudit Committee comprises Mr. O’Boyle (Chair), Ms. Fisher and Mr. Grossman.
The Board of Directors reviews the NASDAQ listing standards definition of independence for Audit Committee members on an annual basis and has
strive todetermined that repair our customer's CoolSculpting system or provide the customer 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, one of our Customer Care personnel will call the customer 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,all members of our Audit Committee meet the independence requirements for serving on the Audit Committee (as currently defined in Rule 5605(c)(2)(A)(i) and (ii) of the NASDAQ listing standards).
The Board of Directors has also determined that Mr. O’Boyle qualifies as an “audit committee financial expert,” at the customer's office. To reduce shipping timesas defined
in applicable SEC rules. The Board made a qualitative assessment of Mr. O’Boyle’s level of knowledge and costs, we ensure that a number of CoolSculpting systems and replacement modules are available in specific regions throughout North America and other international locations. Upon arrival at the customer site, our logistics provider will move the replacement CoolSculpting system or module into the customer's office, unpack it, set it up and then 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 customers to keep the newly delivered CoolSculpting system or the applicable module, and in many cases we repair and reuse the defective CoolSculpting system or module received from our customer for future service calls. In the direct markets outside of North America and our Europe direct markets, our CoolSculpting system is serviced and supported through our independent distributors. We pro-actively deploy replacement CoolSculpting systems, modules, and components to strategic hubs worldwide to facilitate quick response time to service events and to maximize customer “uptime.”
We provide a standard limited warranty on our products of one year for both control units and applicators for our direct customers. For indirect customers in international markets, we provide a standard limited warranty on our products of approximately three years for control units and one year for applicators. We also offer an extended warranty on both our CoolSculpting control units and CoolSculpting applicators.
Manufacturing
We occupy 34,176 square feet in our manufacturing facility in Dublin, California and 15,755 square feet of warehouse space in Livermore, California. We manufacture our CoolSculpting system and store raw materials at our Dublin facility. The Livermore facility is used for assembling our procedure packs and distribution of our CoolSculpting systems and procedure packs. In addition, in the third quarter of 2016 we began manufacturing CoolGels and CoolCards in our Galway, Ireland facility, which has a total of 47,880 square feet.
We depend upon suppliers for some critical components of our manufacturing processes and for materials used in our manufacturing processes. Some of these components and materials are supplied by a single vendor, and some are subject to certain minimum order quantities. Generally, we rely on purchase orders rather than long-term contracts with our suppliers, which subjects us to risks, including price increases and component shortages. We continue to evaluate alternative sources of supply for these components and materials.
CoolLiners, pretreatment wipes and other consumables continue to be manufactured by third-party manufacturers. In addition, our CoolSculpting system contains two critical components, the integrated circuit contained in the CoolSculpting control unit and the CoolCard, which is supplied by a company in Japan, and the connector that attaches our applicators to the control unit, which is supplied by a separate company in the United States. 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, as well as at least a three month supply of connectors to support open sales 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 Pleasanton facility in April 2011, April 2013 and March 2016, 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: EN ISO 13485:2012 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). We have recently been audited by our Notified Body, TUV Rheinland, and all certifications have been extended to cover all of our facilities.
Neither our third-party contract 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.
Our current facilities are adequate to support our near-term operations; however, they may not be sufficient in the long term. Leases for our manufacturing and warehouse locations expire in May 2017. In January 2017, we signed a six-year lease for a new manufacturing facility in Dublin, California in close proximity to our corporate headquarters, as well as a new warehouse facility lease (through January 2022) in Livermore, California. These new facilities are intended to replace our existing Dublin and Livermore facilities, which have leases that are set to expire in 2017.
Our business typically has a short sales cycle, and to date we have not had a significant backlog of orders at the end of any given quarter. We define backlog as unshipped orders resulting from lack of available product to fulfill non-cancelable sales orders.
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. Although effective at reducing fat, 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 addition to the above invasive and minimally-invasive procedures, the FDA has also cleared the marketing of several noninvasive technologies for fat reduction, circumferential reduction, fat cell destruction or body contouring. These noninvasive procedures involve various energy forms, including radio frequency, laser, or high intensity focused ultrasound, applied through the skin to eliminate fat cells. These technologies vary in the number of treatments required to produce a noticeable effect. Additionally, the high temperatures involved in certain of these procedures may lead to the patient experiencing various degrees of pain.
We believe that the marketing of these products has extended the sales cycle for CoolSculpting and may continue to have an impact on our sales in the future.
Due to less stringent regulatory requirements, there are many more aesthetic products and procedures available for use in international markets than are cleared for use in 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 mind share. Some of our competitors have a broad range of product offerings, large direct sales forces, and long-term customer relationships, which could inhibit our market penetration efforts. Our potential customers also may need to recoup the cost of expensive products that they have already purchased from our competitors, and thus they may decide to delay or not to purchase our CoolSculpting system.
We believe that CoolSculpting competes favorably, largely on the basis of the following competitive factors:
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• | CoolSculpting only affects fat cells without endangering any other structures in the skin resulting in more consistent, more predictable and durable outcomes; |
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• | CoolSculpting is able to achieve measurable results with minimal patient discomfort and high patient satisfaction; |
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• | CoolSculpting does not require a person to administer the procedure after the procedure is started which creates favorable customer practice economics by freeing uptime for the practice to generate additional revenue with new patients or with the patient undergoing CoolSculpting; and |
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• | Effectiveness of sales and marketing programs and initiatives along with product placement and distribution strategy. |
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 December 31, 2016, our patent portfolio comprised 146 issued patents and 82 pending patent applications, each of which we either own directly or for which 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®, Cryolipolysis® and our logo are among our registered trademarks in the United States and in certain foreign countries.
Seasonal Fluctuations
Seasonal fluctuations in the number of patients seeking treatment and the availability of our customers are likely to continue to affect our business. Seasonal fluctuations occur in both system revenue and consumable revenue as well as by geographic region. Specifically, our customers often take vacation or are on holiday during the summer months and therefore tend to perform fewer procedures, particularly in certain international countries. These seasonal trends have caused and will likely continue to cause, fluctuations in our quarterly results, including fluctuations in sequential revenue growth rates.
Massachusetts General Hospital License Agreement
In May 2005, we entered into an exclusive license agreement with the General Hospital Corporation, which owns and operates the Massachusetts General Hospital, or MGH, which was amended and restated in September 2011. Under this agreement, MGH granted to us an exclusive worldwide, royalty-bearing license to 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 $0.3 million, (ii) a non-refundable minimum annual license maintenance payment of $75,000, $0.1 million, $0.2 million and $0.2 million 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) $1.1 million due upon receipt of FDA clearance to market our CoolSculpting system for the selective reduction of fat, (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 and (iv) a 7% royalty on net sales (as defined in the agreement) of CoolSculpting. We have the option to buy down up to 25% of the future royalty payments, and the agreement has a provision that requires an equitable adjustment to a specified royalty rate triggered by certain market conditions. 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.
In September 2015, we entered into a new agreement with MGH to obtain an exclusive license to develop and commercialize certain patents and technology for the treatment of acne and certain related skin conditions. We are obligated to pay a 3% royalty on net sales, as defined in such agreement, of products incorporating such technology.
As of December 31, 2016, we have completed all milestones associated with the license agreement with MGH and have made all required license fee and milestone payments to MGH, described above. We continue to pay the royalty on net sales as required by the agreement and currently have no additional obligations to MGH resulting from any sublicensing agreement.
Government Regulation
The design, development, manufacture, testing and sale of our 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, pre-clinical and clinical testing, premarket clearance or approval, registration and listing, manufacturing, labeling, 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 Regulation, or 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 post-market 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.
The CoolSculpting system originally received 510(k) clearance in 2008 as a skin cooling device to minimize pain and thermal injury during laser and dermatological treatments. An additional 510(k) notification was submitted to the FDA in 2008 for the indication of cold-assisted lipolysis and a reduction in the subcutaneous fat layer. That 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 alters the therapeutic effect impacting safety and effectiveness; therefore, our device for cold-assisted lipolysis and a reduction in the subcutaneous fat layer was automatically classified as Class III. We petitioned the FDA that this classification 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 presentexperience based on a number of factors, including his experience as a chief financial officer for public reporting
companies.
PROCEDURES BY WHICH SECURITY HOLDERS MAY RECOMMEND NOMINEES TO THE BOARD
Our Nominating and Corporate Governance Committee will consider candidates proposed for nomination by our stockholders, and does not intend ato
potential, unreasonable risk of illness or injury. In September 2010, the FDA approved our de novo petition for Class II reclassification and issued a clearance letter for non-invasive fat reduction of the flanks (love handles). Subsequently on May 2, 2012, we received FDA clearance for expansion of the CoolSculpting indication to include the abdomen area. In April 2014, CoolSculpting was cleared by the FDA for treatment of the thigh area, and in January 2015, CoolSculpting was cleared by the FDA for treatment at lower temperatures which enables shorter treatment times. In September 2015, the FDA cleared CoolSculpting for treatment of the submental area under the chin, an area that is consistently ranked as one of the top areas of concern both by consumers and physicians. In March 2016, CoolSculpting was also cleared for the treatment of fat around the bra straps, on the back, and underneath the buttocks or “banana roll.” Most recently, in November 2016, the FDA cleared the CoolSculpting treatment of the upper arm.
We are also seeking additional regulatory clearances from the FDA to expand our United States marketed indications for CoolSculpting to areas on the body other than the flanks, abdomen, thighs and the submental area. We have received regulatory approval or are otherwise free to market CoolSculpting in numerous international markets where use of the product is generally not limited to specific treatment areas.
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 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 to the FDA. PMA applications must be supported by valid scientific evidence, which typically requires extensive data, including technical, pre-clinical, 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:
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• | 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; |
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• | the data from pre-clinical studies and clinical trials may be insufficient; and |
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• | 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 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 is 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 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, including establishment registration and device listing with the FDA. 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 operate our manufacturing facilities under the FDA's cGMP requirements and are subject to periodic inspection by the FDA for compliance with regulatory 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.
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 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, or FCPA, and other countries' anti-corruption/anti-bribery regimes, such as the U.K. Bribery Act and Chinese anti-corruption laws. 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 are impacted by the federal Patient Protection and Affordable Care Act of 2010, which, as amended is known as the ACA. Effective January 1, 2013, we began to incur a 2.3% excise tax on sales of medical devices in the United States. Medical device excise tax payments totaled $3.1 million, $2.2 million and $1.4 million during the years ended December 31, 2015, 2014 and 2013, respectively. Such excise tax has been temporarily suspended effective January 1, 2016 through December 31, 2017.
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, 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 December 31, 2016, we had 686 employees, with 343 employees in sales and marketing, 82 in research and development, including clinical, regulatory and certain quality functions, 166 employees in operations, and 95 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 in good standing and we strive to foster a positive work environment.
Financial Information About Geographic Areas
Financial information regarding revenue and long-lived assets by geographic area, as well as revenue by system revenue and consumable revenue, is included in Note 12 “Segment Information” in “Notes to Consolidated Financial Statements” included in this Annual Report on Form 10-K. Financial information regarding revenue, profit and loss and total assets is included in the financial statements in this Annual Report on Form 10-K.
See “There are additional hurdles we must overcome in order to effectively market and sell CoolSculpting in markets outside of North America” in Item 1A. Risk Factors, for certain risks attendant with foreign operations.
General 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 4410 Rosewood Drive, 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 part of this Annual Report on Form 10-K.
We make available free of charge on our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the United State Securities and Exchange Commission, or SEC. You may obtain a free copy of these reportstreat candidates recommended by stockholders differently from other candidates. Stockholders may propose candidates by submitting the names and supporting information to: Corporate Secretary, 4410 Rosewood Drive, Pleasanton, CA 94588. Supporting
information should include (a) the name and address of the candidate and the proposing stockholder, (b) a comprehensive biography of the candidate and an explanation of why the candidate is qualified to serve as a director taking into
account the criteria identified in our corporate governance guidelines, (c) proof of ownership, the class and number of shares, and the length of time that the shares of our voting securities have been beneficially owned by each of the
candidate and the proposing stockholder, and (d) a letter signed by the candidate stating his or her willingness to serve, if elected.
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| Item 11. |
Executive Compensation |
EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
Overview
This Compensation Discussion and Analysis is designed to provide our stockholders with an understanding of our compensation
philosophy and objectives as well as the analysis that we performed in setting executive compensation. It discusses the Compensation Committee’s and Board’s determination of how and why, in addition to what, compensation actions were taken
for each person serving as our chief executive officer, our chief financial officer, our former chief financial officer, and our three other most highly compensated executive officers at the end of 2016. These individuals are collectively referred
to in this discussion as the “named executive officers” because they are named in the compensation tables included in this proxy statement.
Our named executive officers for 2016 were:
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| Name |
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Position |
| Mark J. Foley |
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Chairman, Chief Executive Officer, President, and Director |
| Todd E. Zavodnick |
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President, International |
| Taylor C. Harris |
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Chief Financial Officer and Senior Vice President |
| Patrick Williams |
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Former Chief Financial Officer and Senior Vice President |
| Sergio Garcia |
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Senior Vice President, General Counsel and Corporate Secretary |
| Keith J. Sullivan |
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Former Chief Commercial Officer and President, North America |
Investors are encouraged to read this discussion in conjunction with the compensation tables and related
notes, which include more detailed information about the compensation of the named executive officers for 2016 as well as prior years.
Compensation
Philosophy and Objectives
The Compensation Committee of the Board of Directors designs our compensation and benefits programs to
attract, retain, and incentivize talented and qualified executives who share our commitment to our vision, customers, and constituents. We recruit and hire employees who strive to meet and surpass our annual and long-term corporate goals and build
long-term value for our stockholders. The Compensation Committee and Board believe compensation incentives should promote the success of our company and motivate our executive officers to pursue and exceed our corporate objectives.
The Compensation Committee’s philosophy is that an appropriate portion of an executive’s compensation should be performance-based to
encourage and foster a culture in which individual performance is aligned with corporate objectives. The Compensation Committee believes that by promoting a
pay-for-performance philosophy it will enable us to align our executive officers’ interests with those of our stockholders. Our performance-based compensation
programs combine short- and long-term components, consisting of cash bonuses based on performance, and equity grants that vest over time (and increase in value with the increase in our stock price) or upon achievement of performance objectives, in
amounts and proportions aimed to create incentives and reward our executive officers for achieving and surpassing our corporate objectives. Our executive compensation program also is intended to make us competitive in our industry, where there is
considerable competition for talented executives.
9
Role of “Say-on-Pay”
Vote
At the 2012 annual meeting, our stockholders voted to review our executive compensation, commonly referred to as a “say-on-pay” vote, once every three years. At the 2012 annual meeting, we presented stockholders with a non-binding say-on-pay vote on our executive compensation for 2011 described in the 2012 proxy statement. Of the total votes cast, approximately 99% were in favor of our 2011 executive
compensation. The Compensation Committee reviewed the results of the vote and concluded that the stockholders had endorsed the Compensation Committee’s compensation philosophy.
At the 2015 annual meeting we presented stockholders with a non-binding
say-on-pay vote on our executive compensation for 2014 described in the 2015 proxy statement. Of the total votes cast, 79% were in favor of our executive compensation.
The Compensation Committee reviewed the results of the vote and concluded it was not necessary to make any changes to its compensation philosophy. Taking into consideration the 2015
say-on-pay vote, the Compensation Committee continued its compensation philosophy and practices and, in February 2016, applied the same compensation principles in
establishing 2016 compensation.
Summary of Compensation Program
The overall objective of our compensation program is to motivate our executives to meet and exceed our corporate goals and build stockholder
value. Therefore, the elements of our compensation program are focused on providing our executives with both annual and long-term performance incentives. The elements include:
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Annual performance-based cash incentive awards; |
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In cases of exceptional performance, additional cash bonuses; and |
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Stock-based incentive awards. |
We also provide our executives with the same benefits we
provide generally to our employees, including health insurance, short-term and long-term disability insurance, life and accidental death and dismemberment insurance, and other insurance benefits.
In determining the amounts of each of these compensation elements, the Compensation Committee considers the following objectives:
An appropriate portion of executive compensation should be performance-based. We believe that a
meaningful portion of executive compensation should be directly tied to the performance of our company as a whole. Consistent with this objective, we adopted a 2016 Corporate Bonus Plan to reward achievement of our corporate goals.
Stock-based incentive awards should be a significant portion of executive compensation. We believe
a meaningful portion of executive compensation should be tied to the long-term performance of the organization with a focus on building long-term stockholder value. By granting executives stock option, performance stock unit and restricted stock
unit awards, we directly incentivize our executives to build stockholder value. To assure the long-term focus on stockholder value as well as to retain our executives responsible for achieving this objective, our stock option and restricted stock
unit awards typically have a four-year vesting schedule.
Our executive compensation should be competitive
and fair. Executive talent is important to our organization, and there is significant competition for top talent in the medical technology industry. To attract and retain talented executives, our compensation programs should be
competitive when compared to our peers and fair with respect to internal and external considerations.
10
Compensation Process
Our Compensation Committee is responsible for establishing our compensation philosophy and ultimately determining the compensation levels for
our named executive officers, including base salaries, cash incentive compensation and stock-based incentive awards. The Compensation Committee is also responsible for approving the corporate goals for purposes of determining annual cash incentive
awards. To assist the Compensation Committee, our Chief Executive Officer collaborates with our Chief Financial Officer and Human Resources to develop recommendations to make to the Compensation Committee for base salaries, cash incentive bonus
plans, stock-based incentive awards, corporate goals for the fiscal year, and individual performance goals for each named executive officer (other than with respect to the Chief Executive Officer’s own compensation). The Compensation Committee
in its sole discretion determines whether to adopt the Chief Executive Officer’s recommendations. No named executive officer may be present at the time his or her compensation is being discussed or determined by the Compensation Committee. With
respect to the compensation of the Chief Executive Officer, the Compensation Committee makes recommendations to the Board, and the Board ultimately approves the compensation of the Chief Executive Officer.
The Compensation Committee engaged Compensia, a national compensation consulting firm, to provide executive compensation advisory services,
which services with respect to 2016 compensation for the named executive officers included the following:
| |
• |
|
an assessment of executives’ base salaries, cash incentives and equity compensation levels, and plan structures; |
| |
• |
|
a review of market practice with respect to executive severance and change in control arrangements; |
| |
• |
|
a review of recommendations for our peer group; |
| |
• |
|
a review of market data and compensation trends specific to our peer group to design compensation plans; and |
| |
• |
|
a review of our compensation discussion and analysis included in our proxy statement. |
Determination of
Executive Compensation
In setting the compensation for our named executive officers, our Compensation Committee places significant
emphasis on the recommendations of our Chief Executive Officer for all named executive officers, except with respect to the compensation of the Chief Executive Officer. Our Compensation Committee also considers market data, our overall performance
during the prior fiscal year relative to our financial goals and the executive’s individual contributions during the prior fiscal years toward the achievement of our corporate goals. Our Compensation Committee determines compensation for newly
hired executive officers based on the following (not mentioned in any specific order): (1) significance of the position relative to our business needs and objectives; (2) competitive market data of our peer companies and other available
market data; (3) industry experience; (4) experience and expertise; and (5) arm’s-length negotiations between the company and the executive officer in connection with the executive officer
becoming employed by us.
Establishment of Peer Group
In the second half of 2011 in connection with our initial public offering, the Compensation Committee engaged Compensia to conduct a
compensation analysis of our peer group, and has continued to use Compensia ever since. In December 2015, Compensia reviewed our peer group originally established in 2013, and revised in 2014, and delivered its findings and recommendations to the
Compensation Committee, which our Compensation Committee adopted, leading to the removal of one company from the peer group, due to reduced market capitalization (Fluidigm) and the inclusion of one new company (Natus Medical) as a replacement.
Compensia’s and the Compensation Committee’s goal in creating the new peer group was to establish representative industry group most similar to the company based on revenues, industry segment, business model and U.S. location. The 2016
peer group was as follows:
|
|
|
|
|
| Abaxis, Inc. ABIOMED, Inc.
AtriCure Inc. Atrion Corporation
Cardiovascular Systems, Inc. |
|
Cynosure, Inc. DexCom, Inc.
Endologix, Inc. HeartWare International, Inc. |
|
Insulet Corporation LDR Holding
Natus Medical Vascular Solutions, Inc. |
11
Components of Executive Compensation
As indicated above, our executives are compensated through a combination of annual and long-term incentives designed to motivate them to help
us achieve our key corporate goals and build value for our stockholders.
The Compensation Committee considers many factors in the process
of determining compensation levels for each named executive officer, including:
| |
• |
|
the Compensation Committee’s belief that our compensation amounts should be internally fair and equitable relative to roles, responsibilities, and relationships among our named executive officers;
|
| |
• |
|
prior compensation or amounts realized or realizable from equity compensation by named executive officers; and |
| |
• |
|
the evaluations and recommendations of our Chief Executive Officer based on his evaluation of each executive’s performance and contributions (other than with respect to his own compensation). |
We do not have a predefined framework that determines which factors may be more or less important, and the emphasis placed on specific factors
may vary among the named executive officers. Ultimately, it is our Compensation Committee’s judgment of these factors, along with competitive data, that form the basis for determining named executives’ compensation.
Base Salary
Our Compensation
Committee is responsible for setting our executive base salaries based on input from the Chief Executive Officer (except with respect to the compensation of the Chief Executive Officer, whose base salary the Compensation Committee recommends to the
Board, with Board making the final determination). The Compensation Committee annually sets the base salary for our executives and adjustments are made to reflect performance-based factors and competitive conditions.
Based upon Compensia’s market findings and to remain competitive with salaries offered by peer companies, at the beginning of 2016, based
on a recommendation by the Compensation Committee, the Board of Directors increased the base salary of Mr. Foley by 14.3% from $525,000 per year to $600,000. In addition, based upon the recommendation of the Chief Executive Officer and
Compensia’s market findings, at the beginning of 2016 the Compensation Committee increased the base salary of Mr. Garcia by 4.8% from $310,000 to $325,000.
In addition, in January 2016 Mr. Sullivan was promoted from Senior Vice President and Chief Commercial Officer to Chief Commercial
Officer and President, North America. With this promotion, the Compensation Committee increased Mr. Sullivan’s base salary 10.8%, from $325,000 to $360,000. Mr. Sullivan’s compensation adjustment was a result of the Chief
Executive Officer’s recommendation and market findings by Compensia.
On February 1, 2016, Mr. Zavodnick joined us on a
full-time basis as President, International, earning a base salary of $350,000 per year. The base salary for Mr. Zavodnick was the result of arms-length negotiations in connection with the negotiation of his employment agreement in December
2015, and the Compensation Committee approved Mr. Zavodnick’s salary level prior to his hire based in part upon the recommendation from the Chief Executive Officer and market findings by Compensia.
On March 1, 2016, Mr. Harris joined us on a part-time basis as Vice President of Finance, earning a base salary of $175,000 per
year. Mr. Harris became Senior Vice President and Chief Financial Officer on April 18, 2016, and began working full-time with a base salary of $350,000. The base salary for Mr. Harris was the result of arms-length negotiations in
connection with the negotiation of his employment agreement in February 2016, and the Compensation Committee approved Mr. Harris’s salary level prior to his hire based in part upon the recommendation from the Chief Executive Officer and
market findings by Compensia.
Mr. Williams’ base salary was not adjusted in 2016, and remained at $325,000.
12
Performance-Based Cash Incentive Awards
Our Compensation Committee is responsible for administration of our bonus plans, and in February 2016 adopted the 2016 Corporate Bonus Plan, or
the Bonus Plan, which provided for cash incentive awards for performance in 2016. All named executive officers were eligible to participate in the Bonus Plan other than Mr. Williams, who would be terminating employment with our company. The
Bonus Plan was designed to align our named executive officers’ efforts with our corporate goals and our Compensation Committee’s pay-for-performance
philosophy. Each named executive officer had a target bonus ranging from 50% to 100% of his base salary.
In determining the percentage of
base salary used to establish the target bonus for each of the named executive officers, the Compensation Committee (and the Board with respect to our Chief Executive Officer), considered the factors described above in the Components of Executive
Compensation. The Compensation Committee has no formula for making these determinations, but uses its judgment and industry knowledge, as well as the advice of Compensia, in determining the target bonus as a percentage of base salary. For 2016, the
Compensation Committee (and the Board with respect to our Chief Executive Officer), set target bonuses as a percentage of base salary for our named executive officers as follows:
|
|
|
|
|
| Name |
|
Target Bonus as a Percentage of Base Salary |
|
| Mark J. Foley |
|
|
100 |
% |
| Todd E. Zavodnick |
|
|
75 |
%(1) |
| Taylor C. Harris |
|
|
60 |
%(1) |
| Patrick F. Williams |
|
|
60 |
% |
| Sergio Garcia |
|
|
50 |
% |
| Keith J. Sullivan |
|
|
75 |
% |
| (1) |
Mr. Zavodnick’s and Mr. Harris’ target bonuses were established in connection with the negotiation of their employment agreements in December 2015 and February 2016, respectively. |
For our Chief Executive Officer, the Compensation Committee and the Board determined that 100% of his actual bonus would be determined based
solely on company performance as against the established metrics. For our other named executive officers for whom a target bonus was established, 70% of actual bonus would be based on company performance as against the established metrics, and the
remaining 30% would be based on individual goals. There are no guaranteed bonuses under the Bonus Plan. The company must achieve corporate goals and objectives, at specified levels, for any bonus payouts to occur that are tied to company
performance. Individual goals are set at the beginning of the year specific to each named executive officer’s functional area.
The
Compensation Committee and the Board determined that the metrics for company performance under the Bonus Plan would be 2016 revenue and 2016 Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, excluding stock-based
compensation), which are collectively referred to as the “Corporate Objective.” Further, the Compensation Committee and the Board determined to weight these metrics for the Bonus Plan with 70% for revenue performance and 30% for Adjusted
EBITDA performance, for purposes of determining actual payouts. The Compensation Committee and the Board determined to use these metrics and weightings for the Bonus Plan based upon their determination that these metrics and weightings were the
appropriate mix to best motivate the named executive officers to maximize the company’s financial performance.
The Compensation
Committee and the Board determined that no bonus would be achieved unless at least $315.0 million of 2016 revenue was recognized, and no less than $31.5 million of Adjusted EBITDA was achieved. At these minimum levels, 50% of the Corporate
Objective component of target bonuses would be earned. For amounts above these minimums, actual bonuses related to the Corporate Objective component of target bonuses would increase to 100% of the target bonus tied to Corporate Objective being paid
if (1) the company’s actual 2016 revenue equaled the revenue set forth in the company’s budget ($327.5 million), and (2) the company’s actual 2016 Adjusted EBITDA was achieved as set forth in the company’s budget
13
($35.7 million). The maximum bonus payable with respect to the Corporate Objective was 200% of target bonus for Mr. Foley, Mr. Zavodnick, Mr. Harris and Mr. Sullivan, and 175%
of target bonus for Mr. Garcia, which would be reached if at least $350.0 million of 2016 revenue was recognized, and no less than $40.6 million of Adjusted EBITDA was achieved. Mr. Williams was eligible for a pro-rated target bonus as per his separation agreement.
The 2016 individual goals for each named
executive officer included International Sales and expansion activities (for Mr. Zavodnick), non-financial goals for Finance and Information Technologies (for Mr. Harris), execution of legal strategy
and favorable legal outcomes (for Mr. Garcia), and North American Sales, Commercial Operations, Training and Marketing related goals (for Mr. Sullivan).
Actual company performance with respect to the Corporate Objective component was: 2016 world-wide revenue of $354.2 million, exceeding
target by 8.2%; and 2016 Adjusted EBITDA of $35.3 million, missing target by 7.4%. Therefore although our world-wide revenue achieved the maximum level, our Adjusted EBITDA achievement did not achieve the target level. As such, the company paid
bonuses below the target levels at 98.6% but earned overachievement of bonus due to the exceeded revenue target.
As a result of this
performance, in February 2017, our Compensation Committee made the subjective determination to pay bonuses to each of our named executive officers as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Name |
|
Target Bonus |
|
|
Portion of Target
Bonus Earned (1) |
|
|
Portion of Over-achievement
Bonus Earned(2) |
|
|
Total Bonus
Earned |
|
|
Percentage of
Target Bonus |
|
| Mark J. Foley |
|
$ |
600,000 |
|
|
$ |
591,463 |
|
|
|
420,000 |
|
|
$ |
1,011,463 |
|
|
|
168 |
% |
| Todd E. Zavodnick(3) |
|
$ |
262,500 |
|
|
$ |
255,948 |
|
|
|
183,750 |
|
|
$ |
439,698 |
|
|
|
168 |
% |
| Taylor C. Harris(4) |
|
$ |
161,875 |
|
|
$ |
131,936 |
|
|
|
113,313 |
|
|
$ |
245,249 |
|
|
|
152 |
% |
| Patrick F. Williams(5) |
|
$ |
57,688 |
|
|
$ |
57,113 |
|
|
|
— |
|
|
$ |
57,113 |
|
|
|
99 |
% |
| Sergio Garcia(6) |
|
$ |
162,500 |
|
|
$ |
160,881 |
|
|
|
85,313 |
|
|
$ |
246,194 |
|
|
|
152 |
% |
| Keith J. Sullivan(6) |
|
$ |
270,000 |
|
|
$ |
267,311 |
|
|
|
189,000 |
|
|
$ |
456,311 |
|
|
|
169 |
% |
| (1) |
The company achieved 98.6% of its Target Bonus. Excludes amounts paid for overachievement. |
| (2) |
Overachievement was calculated as follows: the company exceeded its maximum world-wide revenue target of $350.0 million by achieving $354.2 million, but did not achieve the target Adjusted EBITDA of
$35.7 million. The actual achievement was $35.3 million in Adjusted EBITDA and was, therefore, under the 100% target for Adjusted EBITDA. Based on the weighting of these metrics at 70% (for world-wide revenue) and 30% (for Adjusted
EBITDA), it was determined that the company achieved 98.6% of its target and 70% of its overachievement metric, as the revenue target exceeded the maximum target. This 168% overachievement metric was multiplied by the overachievement opportunity for
each objective (an additional 100% for Messrs. Foley, Harris, Zavodnick and Sullivan and 75% for Mr. Garcia) to determine their earned bonus. |
| (3) |
Mr. Zavodnick did not achieve all of his individual goals. As such, his earned bonus is calculated below the full achievement for which he is eligible and his overachievement is based on a multiple of the lower
earned bonus. Though Mr. Zavodnick was hired in February 2016, his bonus was not pro-rated for his length of service in 2016 per his employment arrangements with the company. |
| (4) |
Mr. Harris did not achieve all of his individual goals. As such, his earned bonus is calculated below the full achievement for which he is eligible and his overachievement is based on a multiple of the lower earned
bonus. Mr. Harris began his employment on March 1, 2016, and as such, his bonus is pro-rated for his length of service in 2016. Per his employment agreement with the company,
Mr. Harris’ earnings while a part-time employee from March 1, 2016, through April 17, 2016, were included with his 2016 bonus opportunity. |
| (5) |
Based on Mr. Williams’ separation agreement, he was eligible to receive the target bonus level, pro-rated for his length of service in 2016. Mr. Williams’
employment terminated on April 18, 2016. |
| (6) |
Achieved 100% of his individual goals. |
14
Cash Bonuses
In 2016 we paid a cash bonus to Mr. Zavodnick pursuant to the terms of his employment agreement in the amount of $153,361, which comprised
$50,000 as a sign on bonus and the remainder as a bonus as a result of the bonus he was required to forego from his prior employer to join our company.
Mr. Harris received a one-time discretionary bonus in the amount of $28,327 on March 15,
2017, for his work performed in 2016 based on a recommendation from the Chief Executive Officer and approved by the Compensation Committee.
Stock-Based Incentive Awards
In
addition to our performance-based cash incentive awards, we provide long-term stock-based incentive awards to our executive officers. These stock-based incentive awards are a blend of options to purchase shares of our common stock, performance stock
units (“PSUs”) and restricted stock units (“RSUs”), which provide incentives which enable the company to continue to attract, retain experienced and skilled industry leaders, and maintain a competitive position.
Our Chief Executive Officer recommends to our Compensation Committee a specific value of shares to be subject to each award granted to each
named executive officer (with the exception of his own stock-based grants). The actual value of shares granted to the named executive officers is determined by the Compensation Committee and the Board based on the Compensation Committee’s and
the Board’s subjective assessment of the company’s performance, the named executive officers’ total compensation, the individual officer’s level of duties and responsibilities, performance, demand in the labor market, and market
data (including competitive analysis provided by Compensia), as well as the dilutive effects of equity grants. Each named executive officer generally receives award grants with a value determined by reference to the named executive officer’s
responsibilities and duties. The number of RSUs awarded is calculated by taking the average fair market value of our common stock for the preceding 30 calendar days and dividing it into the aggregate award value. Generally, our executive officers
receive these grants at the time of their initial hire, following promotion and, if approved by the Compensation Committee, on an annual basis. The determination of the specific value of shares to be subject to each grant to our Chief Executive
Officer is made by the Board of Directors following discussion with the chairman of the Compensation Committee.
All equity based
incentive awards to our continuing executive officers are granted at regular meetings of the Compensation Committee. Awards to new employees and to current employees who are promoted are granted on or soon after the date of hire or promotion. Our
Compensation Committee does not time the granting of equity awards based on whether the company is in possession of material non-public information. The number of options awarded is calculated by taking the
Black-Scholes value of the average fair market value of our common stock for the preceding 30 calendar days and dividing it into the aggregate award value. The exercise price of any option grant is determined by reference to the fair market value
listed of such shares, which our Equity Incentive Plan defines as the closing price of our common stock on the date of grant. On the vesting date, the value for each RSU and PSU is determined by calculating the closing price listed on NASDAQ
multiplied by the number of shares vesting.
In 2016, our Board and Compensation Committee made equity award grants only of stock options
and RSUs to our named executive officers other than to Keith J. Sullivan, our Chief Commercial Officer and President, North America. The Compensation Committee made equity award grants solely of PSUs to Mr. Sullivan. Mr. Sullivan’s
PSUs are subject to vesting quarterly over one year based upon the achievement of quarterly revenue levels. Our Board and Compensation Committee determined the value of shares to be subject to the stock options and RSUs granted to our named
executive officers other than to Mr. Sullivan using the subjective criteria discussed above. The Compensation Committee made the grant of PSUs to Mr. Sullivan pursuant to Mr. Sullivan’s employment agreement with the company,
which was negotiated with Mr. Sullivan at the time that he entered into his employment with the company, which PSUs are intended to provide him with substantial incentives to achieve superior sales performance by tying the vesting of the PSUs
to sales performance.
Equity grants to Mr. Zavodnick and Mr. Harris were negotiated in connection with the negotiation of their
employment agreements in December 2015 and February 2016, and the grants were effective upon their beginning employment with the company.
15
Equity incentives are generally granted on a time-based vesting schedule, with the exception of
certain prior grants to Mr. Foley and Mr. Sullivan, each of which vest upon the achievement of performance targets, and a grant to Mr. Garcia in 2015, which vests upon the achievement of an operational milestone. Most new hire option
grants, including those for our named executive officers, generally vest over a four-year period with 25% vesting on the first anniversary of the grant date or vesting commencement date and the remainder vesting in equal monthly installments over
the subsequent three years of employment. Annual option grants generally vest over a four-year period. RSU grants vest over four years. Mr. Sullivan’s PSUs vest quarterly in amounts depending on achievement of quarterly revenues. The named
executive officers also have accelerated vesting on certain types of terminations of employment, as described below in the section “Employment Agreements.”
The equity grants made in 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| Name |
|
Number of Shares Subject
to Stock Options |
|
|
Number of Shares Subject
to RSUs |
|
|
Number of Shares Subject to PSUs |
|
| Mark J. Foley |
|
|
124,610 |
|
|
|
65,421 |
|
|
|
— |
|
| Todd E. Zavodnick |
|
|
— |
|
|
|
99,049 |
|
|
|
— |
|
| Taylor C. Harris |
|
|
106,411 |
|
|
|
55,865 |
|
|
|
— |
|
| Patrick F. Williams |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Sergio Garcia |
|
|
26,702 |
|
|
|
14,019 |
|
|
|
— |
|
| Keith J. Sullivan |
|
|
— |
|
|
|
— |
|
|
|
40,000 |
|
Other Benefits
To attract, retain and offer market levels of compensation to our executives, we provide the following benefits:
Health insurance. We provide each of our executives and their spouses and children the same health, dental and vision
insurance coverage we make available to our other eligible employees.
Health Saving Account/Flexible Spending
Account. Pursuant to the plan restrictions all eligible executives have the same opportunity to participate in these plans consistent with all of our eligible employees.
Disability insurance. We provide each of our executives with the same short-term and long-term disability insurance we provide to all
eligible employees.
Life insurance. We provide each of our executives with the same life insurance we provide to all eligible
employees at 1x annual compensation.
401(k) retirement plan. All executives are eligible to participate in the same 401(k) Plan
that is available to all eligible employees. Pursuant to our 401(k) plan, we made matching contributions for each of our named executive officers in an amount equal to $1.00 for every $1.00 contributed by an employee up to 3% of earnings and $0.50
for every $1.00 contributed by an employee between 3% and 5% of earnings to a maximum matching contribution of 4% of earnings.
Employee
Stock Purchase Plan. All executives are eligible to participate in the same plan that is available to all eligible employees.
Personal Time-Off (“PTO”). We provide each of our executives with the same PTO accrual
that is available to all eligible employees.
Nonqualified deferred compensation. We do not currently provide any nonqualified
deferred contribution or other deferred compensation plans to any employees.
16
Perquisites. We have limited the perquisites made available to our executive officers. In
the event of relocation upon acceptance of a position with the company, we have provided relocation assistance to include actual moving expenses and limited assistance with the sale of a residence. Relocation assistance has been provided to other
employees in the organization. A formal relocation plan has not been developed. If necessary, we may develop a formal relocation plan to aid us in attracting and retaining key employees.
Post-Employment Compensation
Certain
employment arrangements with our named executive officers provide for protections in the event of their termination of employment under specified circumstances. We believe that these protections are necessary for both recruiting and retention
purposes. We also believe that entering into these arrangements will help our executives maintain continued focus and dedication to their responsibilities to help maximize stockholder value if there is a potential transaction that could involve a
change in control of our company. For a summary of the material terms and conditions of these severance and change in control arrangements, please review section “Employment Arrangements.”
On February 25, 2016, we entered into a severance and consulting agreement with Mr. Williams pursuant to which Mr. Williams
remained an employee of ZELTIQ until April 17, 2016, at which time he became a consultant to us. The severance and consulting agreement provides that Mr. Williams will: (a) receive severance of continued payment of his base cash
compensation for a period of nine (9) months following April 17, 2018; (b) receive nine (9) months of COBRA health insurance premiums (or a shorter period if Mr. Williams becomes eligible for health insurance benefits through
another employer); (c) be a participant in the ZELTIQ 2016 Corporate Bonus Plan for his service while he remains an employee of ZELTIQ, with a target bonus of 60% of his actual annual base cash compensation; and receive a consulting fee equal to
$1,000 per month, beginning April 18, 2016, until the earlier of (a) the expiration or termination of the period during which he provides consulting services to ZELTIQ, or (b) the date on which he begins full-time employment with
another company. These terms were arrived at based on Mr. Williams’ contractual obligations to severance in addition to the company’s periodic need for his consultative services over a transitional period of time.
Accounting and Tax Considerations
Internal Revenue Code, or the Code, Section 162(m) limits the amount that we may deduct for compensation paid to our Chief Executive
Officer and to certain other of our most highly compensated officers to $1,000,000 per person, unless certain exemption requirements are met. Exemptions to this deductibility limit may be made for various forms of “performance-based”
compensation. In 2016 our Compensation Committee and stockholders approved our 2016 Executive Performance Award Plan that was intended to be used in future years to establish “performance-based” compensation for 2017 and beyond. With the
impending acquisition of our company by Allergan in the second quarter of 2017, we do not expect that the Compensation Committee will be making any further compensation decisions.
17
SUMMARY COMPENSATION TABLE
The following table shows for the fiscal years ended December 31, 2016, 2015 and 2014, compensation earned by our Chief Executive Officer,
Chief Financial Officer and our three other most highly compensated executive officers at December 31, 2015 (the “named executive officers”).
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Name and Principal Position |
|
Year |
|
|
Salary |
|
|
Bonus
($) |
|
|
Stock Awards
($)(1)(2) |
|
|
Option
Awards
($)(1) |
|
|
Non-Equity
Incentive Plan
Compensation
($) |
|
|
All Other
Compensation
($)(3) |
|
|
Total ($) |
|
| Mark J. Foley
President and Chief Executive
Officer |
|
|
2016
2015
2014 |
|
|
|
600,000
525,000
500,000 |
|
|
|
—
—
— |
|
|
|
1,506,646
1,820,996
735,000 |
|
|
|
1,437,825
477,952
154,440 |
|
|
|
1,011,463
945,000
750,000 |
|
|
|
11,260
11,029
10,829 |
|
|
|
4,567,194
3,779,977
2,150,269 |
|
|
|
|
|
|
|
|
|
|
| Todd E. Zavodnick (4)
President, International |
|
|
2016 |
|
|
|
320,833 |
|
|
|
153,361 |
|
|
|
2,291,004 |
|
|
|
— |
|
|
|
439,698 |
|
|
|
19,274 |
|
|
|
3,224,170 |
|
|
|
|
|
|
|
|
|
|
| Taylor C. Harris (5)
Chief Financial Officer,
Senior Vice President |
|
|
2016 |
|
|
|
269,792 |
|
|
|
28,327 |
|
|
|
1,162,551 |
|
|
|
1,109,473 |
|
|
|
245,249 |
|
|
|
10,517 |
|
|
|
2,825,909 |
|
|
|
|
|
|
|
|
|
|
| Patrick F. Williams (6)
Former Chief Financial Officer,
Senior Vice President |
|
|
2016
2015
2014 |
|
|
|
96,146
325,000
318,750 |
|
|
|
—
—
— |
|
|
|
—
705,613
417,600 |
|
|
|
—
185,200
230,343 |
|
|
|
57,113
346,788
318,750 |
|
|
|
285,025
15,028
14,822 |
|
|
|
438,284
1,577,629
1,300,265 |
|
|
|
|
|
|
|
|
|
|
| Sergio Garcia
Senior Vice President, General
Counsel and Corporate Secretary |
|
|
2016
2015
2014 |
|
|
|
325,000
310,000
310,000 |
|
|
|
—
—
— |
|
|
|
322,858
691,899
250,560 |
|
|
|
308,104
55,549
57,586 |
|
|
|
246,194
223,200
244,125 |
|
|
|
11,235
10,265
9,833 |
|
|
|
1,213,391
1,290,913
872,104 |
|
|
|
|
|
|
|
|
|
|
| Keith J. Sullivan (7)
Former Chief Commercial Officer
and President, North America |
|
|
2016
2015
2014 |
|
|
|
360,000
325,000
325,000 |
|
|
|
—
—
— |
|
|
|
921,200
1,386,000
1,111,800 |
|
|
|
—
—
— |
|
|
|
456,311
410,000
455,000 |
|
|
|
23,260
191,686
23,829 |
|
|
|
1,760,771
2,312,686
1,915,629 |
|
| (1) |
As required by SEC rules, amounts shown present the aggregate grant date fair value calculated using the same valuation methodology we use for financial reporting purposes in accordance with ASC 718, excluding the
effects of forfeiture with respect to awards subject to performance conditions. As a result, these amounts do not reflect the amount of compensation actually received by the named executive officer during the fiscal year. For a description of the
assumptions used in calculating the fair value of equity awards under ASC 718, see Note 8, “Stock Based Compensation,” in the notes to consolidated financial statements included in our Annual Report on Form
10-K for the year ended December 31, 2016. |
| (2) |
Includes the fair value of the performance stock units (“PSUs”) granted, excluding estimates of forfeiture, that were granted to Mr. Sullivan in the "investor relations, corporate governance" sectionyear with vesting based upon the achievement of
our website, |
www.coolsculpting.com. The reports filed withrevenue-based targets for each year, and to Mr. Garcia in 2015 with vesting based upon the achievement of an operational milestone. The fair value is calculated based upon the SEC are also available at www.sec.gov.
ITEM 1A. RISK FACTORS
Our operations and financial results are subject to various risks and uncertainties, including those described belowprobable outcome of the vesting conditions. The probable outcome
values for PSUs granted to Mr. Sullivan for 2014, 2015 and 2016 were the same as the maximum values, which could adversely affect our business, financial condition, results of operations, cash flowswere $1,111,800, $1,386,000 and $921,000, respectively. The probable outcome value for the PSU granted to Mr. Garcia in 2015 was $0,
and the trading price of our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair maximum value was $691,899. No other named executive officers were granted PSUs in 2014, 2015 or 2016.
| (3) |
For 2016, includes (i) matching contributions to our 401(k) plan; (ii) life insurance premiums and (iii) the value of perquisites, including car allowance, medical expenses, severance/PTO/COBRA and
relocation fees. The individual components of the total amounts for 2016 are as follows: |
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Name |
|
401K
Contributions
($) |
|
|
Life
Insurance ($) |
|
|
HSA
Contribution
($) |
|
|
Car
Allowance ($) |
|
|
Severance/PT
O/COBRA
($) |
|
| Mr. Foley |
|
|
10,600 |
|
|
|
660 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Mr. Zavodnick |
|
|
10,600 |
|
|
|
424 |
|
|
|
— |
|
|
|
8,250 |
|
|
|
— |
|
| Mr. Harris |
|
|
10,208 |
|
|
|
309 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Mr. Williams |
|
|
10,600 |
|
|
|
220 |
|
|
|
1,500 |
|
|
|
— |
|
|
|
272,705 |
|
| Mr. Garcia |
|
|
10,600 |
|
|
|
635 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Mr. Sullivan |
|
|
10,600 |
|
|
|
660 |
|
|
|
3,000 |
|
|
|
9,000 |
|
|
|
— |
|
In association with Mr. Williams’ termination of employment, he received $230,208 in 2016 severance
payments, $31,249 in PTO (personal time off) payments and $11,248 in COBRA benefits.
| (4) |
Mr. Zavodnick became our President, International in February 2016. The amount in the bonus column represents the bonus he received pursuant to the terms of his employment agreement with us upon joining our
company. See “Compensation Discussion and Analysis – Components of Executive Compensation – Cash Bonuses” for more information. |
| (5) |
Mr. Harris became our employee March 1, 2016, and our Chief Financial Officer on April 18, 2016. The amount in the bonus column represents a one-time discretionary
bonus on March 15, 2017, for his work performed in 2016 based on a recommendation from the Chief Executive Officer and approved by the Compensation Committee. |
| (6) |
Mr. Williams ceased to be our business operations. |
Risks Related to our Potential Merger with Allergan plc
If the proposed merger is not completed, our business could be materially and adversely affected and our stock price could decline.
On February 13Chief Financial Officer on April 18, 2016.
| (7) |
Mr. Sullivan was promoted from Senior Vice President of Worldwide Sales and Marketing to Chief Commercial Officer and President, North America in January 2016. His employment terminated in January 2017.
|
19
GRANTS OF PLAN-BASED AWARDS
Grants of Plan-Based Awards in Fiscal 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Name |
|
|
|
|
|
Estimated Future Payouts Under Non-
Equity Incentive Plan Awards (1) |
|
Estimated Future Payouts Under Equity
Incentive Plan Awards(2) |
|
All Other
Stock
Awards:
Number of
Shares of
Stock or
Units(3)
(#) |
|
All Other
Option
Awards:
Number of
Securities
Underlying
Options(4)
(#) |
|
Exercise
or Base
Price per
share of
Option
Awards
($)(5) |
|
Grant Date
Fair Value
of Stock
and Option
Awards
($) (6) |
| |
Approval
Date |
|
Grant Date |
|
Threshold
($) |
|
Target
($) |
|
Maximum
($) |
|
Threshold
(#) |
|
Target
(#) |
|
Maximum
(#) |
|
|
|
|
| Mr. Foley |
|
2/25/2016
2/29/2016
2/29/2016 |
|
2/28/2016
2/29/2016
2/29/2016 |
|
300,000 |
|
600,000 |
|
1,200,000 |
|
|
|
|
|
|
|
65,421 |
|
124,610 |
|
23.03 |
|
1,506,646
1,437,825 |
| Mr. Zavodnick |
|
12/1/2015
12/10/2016 |
|
2/11/2016
2/1/2016 |
|
131,250 |
|
262,500 |
|
525,000 |
|
|
|
|
|
|
|
99,049 |
|
|
|
|
|
2,291,003 |
| Mr. Harris |
|
2/2/2016
2/2/2016
2/2/2016 |
|
2/26/2016
2/26/2016
2/26/2016 |
|
80,938 |
|
161,875 |
|
323,750 |
|
|
|
|
|
|
|
55,865 |
|
106,411 |
|
20.81 |
|
1,162,551
308,104 |
| Mr. Williams |
|
2/2/2016 |
|
2/26/2016 |
|
|
|
57,688 |
|
57,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mr. Garcia
|
|
2/25/2016
2/29/2016
2/29/2016 |
|
2/25/2016
2/29/2016
2/29/2016 |
|
81,250 |
|
162,500 |
|
284,375 |
|
|
|
|
|
|
|
14,019 |
|
26,702 |
|
23.03 |
|
322,858
308,104 |
| Mr. Sullivan |
|
2/25/2016
2/29/2016 |
|
2/25/2016
2/29/2016 |
|
135,000 |
|
270,000 |
|
540,000 |
|
0 |
|
10,000 |
|
10,000 |
|
|
|
|
|
|
|
921,200 |
| (1) |
Threshold, target and maximum are the amounts to be paid under the 2016 Corporate Bonus Plan if the minimum criteria are met for bonus awards to be paid, target goals are met, and over achievement goals are met,
respectively. Mr. Harris’ amounts are pro-rated based on his length of service in 2016. Mr. Williams was eligible for target bonus, based on his separation agreement. Mr. Zavodnick’s
amounts are not pro-rated based on his length of service in 2016 per his employment agreement. |
| (2) |
Reflects performance stock units to Mr. Sullivan, of which 10,000 vest each quarter upon achievement of certain revenue-based targets. |
| (3) |
Reflect restricted stock units that vest annually at a rate of 25% per year beginning from February 29, 2017, we entered into a definitive agreement with Allergan Holdco US, Inc. (which we refer to as Allergan US), a subsidiary of Allergan plc (which we refer to as Allergan), pursuant to which, upon the terms and subject to the conditions set forth therein, we would merge with and into a wholly-owned, indirect subsidiary of Allergan and continue on as a surviving entity and wholly-owned, indirect subsidiary of Allergan. The merger is subject to closing conditions, including the adoption of the merger agreement by the holders of a majority of the outstanding shares of our common stock. Therefore, the merger may not be completed or2016, subject to the named executive officer’s continued service to us. |
| (4) |
Generally, 25% of the shares subject to options vest annually over four years. Options expire ten years from the date of grant. |
| (5) |
The exercise price for may not be completed as quickly as expected. If the merger agreement is terminated, the market price of our common stock will likely decline, as we believe that our market price reflects an assumption that the merger will be completed. For example, on February 10, 2017, the closing price for our common stock was $49.40, and on the next trading day, following the announcement of our entering into the merger agreement, our stock price increased to a closing price of $55.93 per share. In addition, our stock price may be adversely affected as a result of the fact that we have incurred and will continue to incur significant expenses related to the merger that will not be recovered if the merger is not completed. If the merger agreement is terminated under certain circumstances, we may be obligated to pay Allergan a termination fee of $74.0 million. As a consequence of the failure of the merger to be completed, as well as of some or all of these potential effects of the termination of the merger agreement, our business could be materially and adversely affected. |
The fact that there is a merger pending could have an adverse effect on our business, revenue and results of operations.
While the merger is pending, it creates uncertainty about our future. As a result of this uncertainty, customers may decide to delay, defer, or cancel purchases of our CoolSculpting systems and consumables, and patients may delay undergoing procedures, pending completion of the merger or termination of the merger agreement. If these decisions represent a significant portion of our anticipated revenue, our results of operations and quarterly revenues could be substantially below the expectations of market analysts.
In addition, while the merger is pending, we are subject to a number of risks that may adversely affect our business, revenue and results of operations, including:
| |
• | the diversion of management and employee attention and the unavoidable disruption to our relationships with customers and vendors may detract from our ability to grow revenues and minimize costs; |
| |
• | we have incurred and will continue to incur significant expenses related to the merger; |
| |
• | the merger agreement restricts us from engaging in business activities outside of our ordinary course of business without Allergan’s permission and, if we determine that doing so would be advantageous and Allergan does not consent, we would not be able to pursue those advantageous activities; and |
| |
• | we may be unable to respond effectively to competitive pressures, industry developments and future opportunities. |
If the merger occurs, our stockholders will not be able to participate in any upside to our business.
Upon consummation of the merger, our stockholders will receive $56.50 in cash per share of our common stock owned by them, but will notall option awards is equal to the closing market price per share of our common stock on the date of grant.
| (6) |
Values expressed were determined in accordance with ASC 718, excluding estimates of forfeiture in the case of performance awards to Mr. Sullivan, utilizing the assumptions discussed in Note 8, “Stock Based
Compensation,” in the notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016. |
20
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The following table shows for the fiscal year ended December 31, 2016, certain information regarding outstanding equity awards at fiscal year-end for the named executive officers.
Outstanding Equity Awards at December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Option Awards |
|
|
Stock Awards |
|
| Name |
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable |
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable |
|
|
Option
Exercise
Price
($) |
|
|
Option
Expiration
Date |
|
|
Number
of Shares
or Units
of Stock
That
Have Not
Vested
(#) |
|
|
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($) (1) |
|
|
Equity
Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
(#)(2) |
|
|
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have
Not Vested
($) (1) |
|
| Mr. Foley |
|
|
121,236 |
|
|
|
— |
(3) |
|
$ |
6.38 |
|
|
|
4/26/2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,536 |
|
|
|
— |
(4) |
|
$ |
5.06 |
|
|
|
6/13/2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
758,667 |
|
|
|
— |
(4) |
|
$ |
5.04 |
|
|
|
8/22/2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
572,435 |
|
|
|
— |
(4) |
|
$ |
5.04 |
|
|
|
8/22/2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,167 |
|
|
|
5,833 |
(4) |
|
$ |
21.00 |
|
|
|
2/23/2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,043 |
|
|
|
14,234 |
(4) |
|
$ |
34.65 |
|
|
|
2/18/2025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
124,610 |
(4) |
|
$ |
23.03 |
|
|
|
2/27/2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,500 |
(5) |
|
$ |
761,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,415 |
(5) |
|
$ |
1,715,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,421 |
(5) |
|
$ |
2,847,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
1,488,084 |
|
|
|
144,677 |
|
|
|
|
|
|
|
|
|
|
|
122,336 |
|
|
$ |
5,324,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mr. Zavodnick |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,049 |
|
|
$ |
4,310,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,049 |
|
|
$ |
4,310,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mr. Harris |
|
|
— |
|
|
|
106,411 |
(5) |
|
$ |
20.81 |
|
|
|
2/28/2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,865 |
(5) |
|
$ |
2,431,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
— |
|
|
|
106,411 |
|
|
|
|
|
|
|
|
|
|
|
55,865 |
|
|
$ |
2,431,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mr. Williams |
|
|
63,125 |
|
|
|
— |
(4) |
|
$ |
4.62 |
|
|
|
11/18/2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,250 |
|
|
|
8,750 |
(4) |
|
$ |
20.88 |
|
|
|
2/20/2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,666 |
|
|
|
5,516 |
(4) |
|
$ |
34.65 |
|
|
|
2/18/2025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000 |
(5) |
|
$ |
435,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,273 |
(5) |
|
$ |
664,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
89,041 |
|
|
|
14,266 |
|
|
|
|
|
|
|
|
|
|
|
25,273 |
|
|
$ |
1,099,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mr. Garcia |
|
|
32,000 |
|
|
|
— |
(4) |
|
$ |
4.30 |
|
|
|
11/18/2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,313 |
|
|
|
2,187 |
(4) |
|
$ |
20.88 |
|
|
|
2/20/24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,399 |
|
|
|
1,655 |
(4) |
|
$ |
34.65 |
|
|
|
2/18/25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
26,702 |
(4) |
|
$ |
23.06 |
|
|
|
2/27/26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000 |
(5) |
|
$ |
261,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,581 |
(5) |
|
$ |
199,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,019 |
(5) |
|
$ |
610,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,938 |
|
|
$ |
650,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
38,712 |
|
|
|
30,544 |
|
|
|
|
|
|
|
|
|
|
|
24,600 |
|
|
$ |
1,070,592 |
|
|
|
14,938 |
|
|
$ |
650,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mr. Sullivan |
|
|
25,625 |
|
|
|
4,375 |
(4) |
|
$ |
5.95 |
|
|
|
7/17/2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000 |
(5) |
|
$ |
217,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000 |
|
|
$ |
435,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
25,625 |
|
|
|
4,375 |
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
$ |
217,600 |
|
|
|
10,000 |
|
|
$ |
435,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
| (1) |
The market value was calculated based on the closing market price per share of our common stock on the last trading day of 2016, which was $43.52 per share. |
| (2) |
The number of performance units disclosed is based on achievement of certain performance milestones. |
| (3) |
The options vest monthly over 48 months beginning on the grant date. |
| (4) |
The shares vest 25% after the first year from the date of grant, and the remaining shares vest monthly over the remaining 36 month period. |
| (5) |
The shares vest 25% per year beginning one year from the date of grant. |
OPTION EXERCISES AND STOCK VESTED
The following table shows for the fiscal year ended December 31, 2016, certain information regarding option exercises and stock
vested during the last fiscal year with respect to the named executive officers:
Option Exercises and Stock Vested in Fiscal 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Option Awards |
|
|
Stock Awards |
|
| Name |
|
Number of
Shares
Acquired
on Exercise
(#) |
|
|
Value
Realized
on Exercise
($)(1) |
|
|
Number of
Shares
Acquired
on Vesting
(#) |
|
|
Value
Realized
on Vesting
($)(2) |
|
| Mr. Foley |
|
|
100,000 |
|
|
|
3,157,925 |
|
|
|
111,333 |
|
|
|
3,152,423 |
|
| Mr. Zavodnick |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Mr. Harris |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Mr. Williams |
|
|
26,875 |
|
|
|
939,550 |
|
|
|
28,841 |
|
|
|
1,006,033 |
|
| Mr. Garcia
|
|
|
20,000 |
|
|
|
692,000 |
|
|
|
29,527 |
|
|
|
852,164 |
|
| Mr. Sullivan |
|
|
48,000 |
|
|
|
1,460,560 |
|
|
|
56,042 |
|
|
|
1,743,225 |
|
| (1) |
The value realized by the named executive officer was calculated based on the difference between the closing market price per share of our common stock on the date of exercise and the applicable exercise price.
|
| (2) |
The value realized by the named executive officer was calculated based on the closing market price per share of our common stock on the date of vesting. |
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
The table below describes the potential payments or benefits to our named executive officers upon “termination of employment by us without
cause” not in connection with a change in control, as if each executive’s employment terminated as of December 31, 2016. See “Employment Arrangements” for additional information. Mr. Williams’ employment with us
terminated in April 2016 and, accordingly, he was not eligible to receive any sharesfurther severance as of AllerganDecember ordinary shares31, 2016. As a result, if our business following For a description of Mr. Williams’ severance arrangements with us, see “Employment Arrangements –
Former Chief Financial Officer Severance and Consulting Arrangements” below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Name |
|
Base
Salary
($) |
|
|
Bonus
($) |
|
|
Health
($) |
|
|
Option/
Award
Vesting
($) |
|
|
Total ($) |
|
| Mr. Foley |
|
|
900,000 |
|
|
|
900,000 |
|
|
|
— |
(1) |
|
|
— |
|
|
|
1,800,000 |
|
| Mr. Zavodnick |
|
|
350,000 |
|
|
|
262,500 |
|
|
|
13,010 |
|
|
|
— |
|
|
|
625,510 |
|
| Mr. Harris |
|
|
350,000 |
|
|
|
210,000 |
|
|
|
28,023 |
|
|
|
— |
|
|
|
588,023 |
|
| Mr. Williams |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Mr. Garcia |
|
|
325,000 |
|
|
|
162,500 |
|
|
|
17,329 |
|
|
|
— |
|
|
|
504,829 |
|
| Mr. Sullivan |
|
|
360,000 |
|
|
|
270,000 |
|
|
|
12,600 |
|
|
|
— |
|
|
|
642,600 |
|
22
| (1) |
Mr. Foley waived his medical coverage for 2016. |
The table below describes the potential
payments or benefits to our named executive officers upon termination of employment by the company without cause or by the executive for good reason within one year following a “change in control,” as if the change in control and
termination occurred as of December 31, 2016. See “Employment Arrangements” for additional information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Name |
|
Base
Salary
($) |
|
|
Bonus ($) |
|
|
Health
($) |
|
|
Option/
Award
Vesting
($)(1) |
|
|
Total
($) |
|
| Mr. Foley |
|
|
1,200,000 |
|
|
|
1,200,000 |
|
|
|
— |
(2) |
|
|
8,134,936 |
|
|
|
10,534,936 |
|
| Mr. Zavodnick |
|
|
350,000 |
|
|
|
262,500 |
|
|
|
13,010 |
|
|
|
4,310,612 |
|
|
|
4,936,122 |
|
| Mr. Harris |
|
|
350,000 |
|
|
|
210,000 |
|
|
|
28,023 |
|
|
|
4,847,839 |
|
|
|
5,435,862 |
|
| Mr. Williams |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Mr. Garcia |
|
|
325,000 |
|
|
|
162,500 |
|
|
|
17,329 |
|
|
|
2,332,011 |
|
|
|
2,836,840 |
|
| Mr. Sullivan |
|
|
360,000 |
|
|
|
270,000 |
|
|
|
12,600 |
|
|
|
817,169 |
|
|
|
1,459,769 |
|
| (1) |
The value was calculated based on the closing market price per share of our common stock on the last trading day of 2016, which was $43.52 per share. |
| (2) |
Mr. Foley waived his medical coverage for 2016. |
INDEMNIFICATION AGREEMENTS
Under indemnification agreements with our named executive officers and directors and the company’s bylaws, we are obligated to indemnify
each of our directors and officers against expenses (including attorneys’ fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by such person in connection with any action, suit or proceeding, arising by
reason of services provided as a director, officer, employee or agent of the company. To cover these possible expenses, the company purchases and maintains D&O insurance on behalf of each executive officer and director.
EMPLOYMENT ARRANGEMENTS
All of our named
executive officers have entered into agreements with us which contain provisions relating to our confidential information and the assignment of inventions. None of our named executive officers is employed for a certain term, and employment with us
is “at-will” and subject to termination at any time by either party for any reason, with or without cause. We have also entered into employment offer letters with our named executive officers, each
of which has been amended from time to time. The following description of the merger performs well, our current stockholders will not receive any additional consideration, and will therefore not receive any benefit from the performance of our business.
Risks Related to Our Business
Patient demand for the procedures for which our products are used is particularly sensitive to economic trends. If there isemployment offer letters reflects the terms and conditions of the agreements as in effect on December 31, 2016, to provide context for the calculations in the section
captioned “Potential Payments Upon Termination or Change in Control.”
General Compensation Terms
As of December 31, 2016, the employment offer letters with our named executive officers other than Mr. Williams, who was not an
employee on December 31, 2016, provided for:
| |
• |
|
In the case of Mr. Foley, an annual base salary of $600,000 and a target bonus of 100% of base salary. |
| |
• |
|
In the case of Mr. Zavodnick, an annual base salary of $350,000, a target bonus of 75% of base salary, a car allowance of $750 per month, and a sign-on bonus of $50,000 plus
an advance equal to $247,500 less any bonus amount he received from his previous employer when he terminated his previous employment. These advances were considered earned after Mr. Zavodnick completed twelve months of service to the company.
|
| |
• |
|
In the case of Mr. Harris, an annual base salary of $350,000 and a target bonus of 60% of base salary. |
23
| |
• |
|
In the case of Mr. Garcia, an annual base salary of $325,000 and a target bonus of 50% of base salary. |
| |
• |
|
In the case of Mr. Sullivan, an annual base salary of $360,000, a target bonus of 75% of base salary, a car allowance of $750 per month, and annual grants of 40,000 performance stock units. |
Severance Provisions
As of
December 31, 2016, the employment offer letters with our named executive officers other than Mr. Williams, who was not an employee on December 31, 2016, provided for:
| |
• |
|
On a termination by the company without cause (as defined in the offer letters) other than within three months prior to, or 18 months following, a change in control (as defined in the offer letters), the executive
receives: (a) twelve months of salary continuation and COBRA (18 months in the case of Mr. Foley); and (b) if the company pays bonuses for the year of termination, a bonus of one times target bonus (1.5 times target bonus in the case
of Mr. Foley). |
| |
• |
|
On a termination by the company without cause or by the executive for good reason (as defined in the offer letters) within three months prior to, or 18 months following, a change in control the executive receives:
(a) twelve months of salary continuation and COBRA (24 months in the case of Mr. Foley); (b) payment of one times target bonus (two times target bonus in the case of Mr. Foley); and (c) full accelerated vesting of equity awards.
|
Former Chief Financial Officer Severance and Consulting Arrangements
On February 25, 2016, ZELTIQ and Mr. Williams entered into a severance and consulting agreement. Pursuant to the terms of
Mr. Williams’ severance and consulting agreement, Mr. Williams remained an employee of ZELTIQ until April 17, 2016, and will then serve as a consultant from April 18, 2016, until April 17, 2017, unless terminated
earlier. Further, the severance and consulting agreement provides that Mr. Williams will: (a) receive severance of continued payment of his base cash compensation for a period of nine (9) months following April 17, 2018; (b)
receive nine (9) months of COBRA health insurance premiums (or a shorter period if Mr. Williams becomes eligible for health insurance benefits through another employer); (c) be a participant in the ZELTIQ 2016 Corporate Bonus Plan for his
service while he remains an employee of ZELTIQ, with a target bonus of 60% of his actual annual base cash compensation; and receive a consulting fee equal to $1,000 per month, beginning April 18, 2016, until the earlier of (a) the
expiration or termination of the period during which he provides consulting services to ZELTIQ, or (b) the date on which he begins full-time employment with another company. These terms were arrived at based on Mr. Williams’
contractual obligations to severance in addition to the company’s periodic need for his consultative services over a transitional period of time.
DIRECTOR COMPENSATION
The following
table shows for the fiscal year ended December 31, 2016, certain information with respect to the compensation of all of our non-employee directors:
24
Director Compensation for Fiscal 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
| Name |
|
Fees
Earned or Paid
in Cash
($) |
|
|
Stock
Awards
($)(1)(2) |
|
|
Total
($)(2) |
|
| David J. Endicott |
|
|
43,000 |
|
|
|
474,974 |
|
|
|
517,974 |
|
| Mary M. Fisher (3) |
|
|
63,500 |
|
|
|
174,998 |
|
|
|
238,498 |
|
| D. Keith Grossman |
|
|
80,750 |
|
|
|
239,988 |
|
|
|
320,738 |
|
| Kevin C. O’Boyle |
|
|
74,000 |
|
|
|
174,998 |
|
|
|
248,998 |
|
| Bryan E. Roberts, Ph.D. (3) (4) |
|
|
29,500 |
|
|
|
— |
|
|
|
29,500 |
|
| Andrew N. Schiff, M.D.(4) |
|
|
65,000 |
|
|
|
174,998 |
|
|
|
239,998 |
|
| (1) |
Amounts reflect the aggregate grant date fair value determined of restricted stock units granted, as required, under Financial Accounting Standards Board Topic 718, “Stock Compensation.” For a more detailed
discussion on the valuation model and assumptions used to calculate the fair value of our equity instruments, refer to Note 8, “Stock Based Compensation,” in the notes to consolidated financial statements included in our Annual Report on
Form 10-K for the year ended December 31, 2016. These amounts do not reflect whether the recipient has actually realized or will realize a financial benefit from the instrument. Each non-employee director was granted only one restricted stock unit award in 2016, other than: Mr. Endicott, who received two restricted stock unit awards valued at $299,977 and $174,998; and Mr. Grossman,
who received two restricted stock unit awards valued at $64,990 and $174,998. |
| (2) |
Stock awards are restricted stock units. The aggregate number of shares subject to restricted stock units and stock options outstanding at December 31, 2016, and held by our
non-employee directors was: |
|
|
|
|
|
|
|
|
|
| Name |
|
RSU Shares |
|
|
Option Shares |
|
| David J. Endicott |
|
|
16,132 |
|
|
|
— |
|
| Mary M. Fisher |
|
|
6,199 |
|
|
|
— |
|
| D. Keith Grossman |
|
|
8,351 |
|
|
|
48,987 |
|
| Kevin C. O’Boyle |
|
|
6,199 |
|
|
|
82,907 |
|
| Bryan E. Roberts, Ph.D. |
|
|
— |
|
|
|
— |
|
| Andrew N. Schiff, M.D. |
|
|
6,199 |
|
|
|
1,589 |
|
| (3) |
Dr. Roberts ceased to be a director in June 2016. |
| (4) |
Dr. Roberts’ and Dr. Schiff’s board and committee fees are made payable to each of their respective firms. |
DIRECTOR COMPENSATION ARRANGEMENTS
Our
standard compensation arrangements with our non-employee directors in 2016 were as follows:
| |
• |
|
each non-employee director receives an annual cash fee of $50,000 payable for the director’s service during the year; |
| |
• |
|
our Lead Independent Director receives an additional annual cash fee of $20,000 payable for the director’s service as Lead Independent Director during the year; |
| |
• |
|
the Chairman of the Audit Committee receives an additional annual fee of $20,000 for the Chairman’s service during the year and each Audit Committee member receives $7,500 for their service during the year;
|
| |
• |
|
the Chairman of the Compensation Committee receives an additional annual fee of $16,000 for the Chairman’s service during the year and each Compensation Committee member receives $6,000 for their service during the
year; |
| |
• |
|
the Chairman of the Nominating and Corporate Governance Committee receives an additional annual fee of $9,000 for the Chairman’s service during the year and each Nominating and Corporate Governance Committee member
receives $4,000 for their service during the year; |
25
| |
• |
|
on the date of a non-employee director’s initial election to the Board, the non-employee director will automatically, and without
further action by the Board, be granted a restricted stock unit to acquire the number of shares of our common stock which equals $300,000 divided by the fair market value per share of our common stock as of the date of appointment, which will vest
monthly over three years, subject to the non-employee director’s continuous service with us, which vesting will accelerate in full upon a change in control of our company; and |
| |
• |
|
on the date of each company annual meeting of stockholders, each non-employee director will automatically, and without further action by the Board, be granted a restricted stock
unit to acquire the number of shares of our common stock which equals $175, 000 divided by the fair market value per share of our common stock as of the date of grant, which will vest monthly over one year and be fully vested at the next annual
meeting, subject to the non-employee director’s continuous service with us, which vesting will accelerate in full upon a change in control of our company. |
In February 2016, the Board appointed D. Keith Grossman as its Lead Independent Director. In April 2016, the Board approved the annual
compensation of $20,000 for the Lead Independent Director and, concurrently with this decision, granted Mr. Grossman a one time RSU grant to acquire 2,152 shares of the company’s common stock, vesting over three years.
Each director is also entitled to be reimbursed for reasonable travel and other expenses incurred in connection with attending meetings of the
perception that economic trends are negative, patient demand for the procedures for which our products are used may decrease, which could cause practitioner demand for these systems to drop and our operating results could be harmed.
The decision to undergo a procedure from our systems is driven by consumer demand. If patient demand for procedures using our systems decreases, practitioner demand for our systems could drop. Procedures performed using our systems are elective procedures, the cost of which must be borne by the patient, and are not reimbursable through government or private health insurance. As a result, our revenues, and therefore our operating results, are particularly vulnerable to economic trends. If the economic conditions our customers' patients face worsen, or for other reasons demand from patients for procedures using our systems decreases, our business would be negatively impacted and our financial performance would be materially harmed.
We may not be able to correctly estimate or control our future operating expenses, which could lead to cash shortfalls.
Our operating expenses may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control. These factors include:
| |
• | our commercialization strategy; |
| |
• | the time, resources, and expense required to develop and conduct clinical trials and seek additional regulatory clearances and approvals for additional treatment indications for CoolSculpting and for any additional products we may develop; |
| |
• | the costs of preparing, filing, prosecuting, defending, and enforcing patent claims and other patent related costs, including litigation costs and the results of such litigation; |
| |
• | any adverse events associated with CoolSculpting or product liability or other lawsuits related to our products and the costs associated with defending them or the results of such lawsuits; |
| |
• | costs associated with obtaining components for manufacturing, including increases due to changes in foreign exchange rates or increased shipping costs; |
| |
• | the costs to attract and retain personnel with the skills required for effective operations; and |
| |
• | the costs associated with being a public company. |
Further, our budgeted expense levels are based in part on our expectations concerning future revenue from CoolSculpting. We may be unable to reduce our expenditures in a timely manner to compensate for any unexpected shortfalls in revenue. Accordingly, a significant shortfall in market acceptance or demand for CoolSculpting could have an immediate and material adverse impact on our business and financial condition.
Economic uncertainty has reduced and may continue to reduce patient demand for our products; if there is not sufficient patient demand for the procedures for which our products are used, practitioner demand for these systems could drop, resulting in unfavorable operating results.
The aesthetic industry in which we operate is particularly vulnerable to economic trends. The decision to undergo a procedure from our systems is driven by consumer demand. Procedures performed using our systems are elective procedures, the cost of which must be borne by the patient, and are not reimbursable through government or private health insurance. In times of economic uncertainty, individuals often reduce the amount of money that they spend on discretionary items, including aesthetic procedures. The general economic difficulties being experienced and the lack of availability of consumer credit for some of our customers' patients are adversely affecting certain markets in which we operate.
If the economic hardships our customers' patients face continue or worsen, our business would be negatively impacted and our financial performance would be materially harmed in the event that any of the above factors discourage patients from seeking the procedures for which our products are used.
Due to a number of factors outside of our direct control, our financial results may fluctuate unpredictably, which could adversely affect our stock price.
The rapid evolution of the markets for medical technologies and aesthetic products make it difficult for us to predict our future performance. In addition, a number of factors, many of which are outside of our control, may contribute to fluctuations in our financial results, such as:
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• | quarter to quarter variation in customer demand for purchasing CoolSculpting systems; |
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• | the inability for our customers to obtain necessary financing; |
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• | changes in the length of the sales process; |
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• | performance of our international distributors; |
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• | media coverage of CoolSculpting and positive or negative patient experiences, the procedures or products of our competitors, or our industry; |
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• | our ability to maintain our current or obtain further regulatory clearances or approvals; |
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• | delays in, or failure of, product and component deliveries by our third-party contract manufacturers or suppliers, whether due to their inability to meet our demands or other forces, such as port strikes, labor shortages or other factors that could impact shipping costs or the ability of manufacturers to ship components to us; |
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• | seasonal or other variations in patient demand for aesthetic procedures; |
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• | introduction of new aesthetic procedures or products that compete with CoolSculpting; and |
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• | adverse changes in the economy that reduce patient demand for elective aesthetic procedures. |
Fluctuations in our financial results could negatively affect our stock price.
We are dependent upon the success of CoolSculpting. If the market acceptance for CoolSculpting fails to grow significantly, our business and future prospects will be harmed.
We commenced commercial sales of CoolSculpting for the selective reduction of fat in the United States in late 2010, and expect that the revenue we generate from sales of our CoolSculpting system and CoolSculpting consumables will account for substantially all of our revenue for at least the next several years. Accordingly, our success depends on the continued and growing acceptance among customers and patients of CoolSculpting as a preferred aesthetic treatment for the selective reduction of fat. Although we have received FDA clearance to market CoolSculpting for the selective reduction of fat for eight specified body areas in the United States and are approved or are otherwise free to market CoolSculpting in numerous international markets, increased acceptance among customers and patients of CoolSculpting may not occur. We cannot assure you that demand for CoolSculpting will continue or grow among customers and patients. Because we expect to derive substantially all of our revenue for the foreseeable future from sales of CoolSculpting systems and consumables associated with each CoolSculpting cycle, any failure of this product to satisfy customer or patient demand will harm our business and future prospects.
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 forceBoard and any committee on which he or she serves.
All of our directors are eligible to participate in our 2011 Equity Incentive Plan.
RISK ASSOCIATED WITH COMPENSATION PLANS
Our Compensation Committee reviews and evaluates potential risks related to our compensation policies and practices for employees and has
determined that we have no compensation risks that are reasonably likely to have a material adverse effect on our company. We structure our compensation to sell CoolSculpting in the United States, Canada and certain markets in Europe. To meet our anticipated sales objectives, we intend to opportunistically build a direct sales and marketing force in certain international markets. There are significant risks involved in building and managing our sales and marketing organization, including risks related to our ability to:
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• | hire qualified individuals as needed; |
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• | generate sufficient leads within our target customer group for our sales force; |
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• | provide adequate training for the effective sale and marketing of CoolSculpting; |
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• | retain and motivate our direct sales and marketing professionals; and |
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• | effectively oversee geographically dispersed sales and marketing teams. |
Our failure to adequately address theseaddress company-wide risk. This is accomplished in part by tying compensation to corporate
goals and individual performance goals. These goals can be adjusted to address risks identified in the risk assessment. We also use a mix of different compensation elements to balance short-term awards versus long-term awards to align compensation
with our business strategy and stockholders’ interests. We believe the combination of base salary, performance-based cash, and stock-based incentive awards with multi-year vesting periods is balanced and serves to motivate our employees to
accomplish our business plan without creating risks couldthat are reasonably likely to have a material adverse effect on our ability to increase sales and use of our CoolSculpting systems, which would causecompany.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of our Compensation Committee during 2016 were Dr. Schiff, Ms. Fisher and Mr. Grossman until April 25, 2016,
at which time Mr. our revenue to be lower than expectedEndicott joined the Board and harm our results of operationsreplaced Mr. In addition, as we transition to direct sales in certain international markets, consistent with our sales strategy, the transition may result in a slow-down of growth or even a reduction in sales in those markets during the transition process as our distributors anticipate losing the ability to sell our products. Furthermore, our transition to direct sales in certain international markets could impact the performance of distributors in otherwise unaffected international markets as distributors may anticipate that their territories may be transitioned in the future.
Our ability to market CoolSculpting in the United States is limited to the non-invasive reduction of fat for eight specified body areas, and if we want to expand our marketing claims, we will need to obtain additional FDA clearances or approvals, which may not be granted.
We currently have FDA clearance to market CoolSculpting in the United States for the non-invasive reduction of fat for eight specified body areas. This clearance restricts our ability to market or advertise CoolSculpting treatment for other specific body areas, which could limit customer and patient adoption of CoolSculpting. Developing and promoting new treatment indications
and protocols and new treatment applicators for our CoolSculpting system are elements of our growth strategy, but weGrossman on the Compensation Committee. No member of our Compensation Committee during 2016 cannot predict when or if we will receive the clearances required to so implement those elements. In addition, we will be required to conduct additional clinical trials or studies to support our applications, which may be time-consuming and expensive, and may produce results that do not result in FDA clearances. In the event that we do not obtain additional FDA clearances, our ability to promote CoolSculpting in the United States will be limited. Because we anticipate that sales in the United States will account for a substantial majority of our revenue for the foreseeable future, ongoing restrictions on our ability to market CoolSculpting in the United States could harm our business and limit our revenue growth.
Customers must make significant capital expenditures to purchase our CoolSculpting systems, which makes it difficult to increase our customer base, and if we are not able to convince customers to make this capital expenditure, our ability to grow our business will be harmed.
Customers must make significant capital expenditures to purchase our CoolSculpting systems, and our ability to increase the number of customers willing to make these significant capital expenditures and make CoolSculpting a significant part of their practices depends on the success of our sales and marketing programs. We must be able to demonstrate that the cost of our CoolSculpting system and the revenue that a customer can derive from performing CoolSculpting cycle are compelling when compared to the cost and revenue associated with alternative aesthetic treatments our customer may offer. In addition, alternative treatments may be invasive, minimally-invasive, or non-invasive and we must, in some cases, overcome a bias against non-invasive aesthetic procedures for fat reduction, principally from plastic surgeons. Further, we believe some of our marketing programs, including our co-operative marketing strategy with individual practices, will be critical in driving additional CoolSculpting procedures, but these programs require customers commitment and involvement to succeed. If we are unable to increase customer adoption and use of CoolSculpting, our financial performance will be adversely affected.
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:
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• | the success of our sales and marketing programs, including our direct-to-consumer marketing and co-operative marketing strategy with individual practices; |
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• | the cost, safety, and effectiveness of CoolSculpting versus other aesthetic treatments; |
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• | the price of CoolSculpting relative to other aesthetic products and alternative treatments; |
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• | the willingness of patients to wait up to four months post-treatment to notice the aesthetic results of a CoolSculpting procedure; |
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• | the ability to obtain regulatory clearance to market CoolSculpting for additional treatment indications in the United States; |
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• | the adverse event profile of CoolSculpting, including warnings, side effects, and contraindications, which are subject to change; |
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• | the extent to which our customers recommend CoolSculpting to their patients; |
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• | our success in attracting consumers who have not previously purchased an aesthetic procedure; |
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• | the extent to which our CoolSculpting procedure satisfies patient expectations; |
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• | our ability to properly train our customers in the use of CoolSculpting such that their patients do not experience excessive discomfort during treatment or adverse side effects; |
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• | consumer sentiment about the benefits and risks of aesthetic procedures generally and CoolSculpting in particular; and |
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• | general consumer confidence, which may be impacted by economic and political conditions. |
Our success depends in part upon patient satisfaction with the effectiveness of CoolSculpting.
To generate repeat and referral business, patients must be satisfied with the effectiveness of CoolSculpting. Our clinical studies demonstrate that a single CoolSculpting procedure noticeably and measurably reduces the fat layer within a treated fat bulge without requiring diet or exercise. However, we designed CoolSculpting to address the aesthetic concerns of individuals who have stubborn fat bulges. Although there are no technical or regulatory restrictions on the use of CoolSculpting based on patient weight, we believe patients who are significantly obese and who do not have specific fat bulges but require significant fat reduction to achieve aesthetic results are better candidates for invasive and minimally-invasive procedures not offered by us. In addition, results obtained from a CoolSculpting procedure occur gradually over a period of two to four months after treatment and patient perception of their results may vary. Although we train our customers to select the appropriate patient candidates for a CoolSculpting procedure, explain to their patients the time period over which the results from a CoolSculpting procedure will occur, and take before and after photographs of a patient, our customers may not select appropriate patient candidates or
CoolSculpting may produce results that may not meet patients' expectations. If patients are not satisfied with the long term aesthetic benefits or safety of CoolSculpting, or feel that it is too expensive for the results obtained, our reputation and future sales will suffer. As market experience of CoolSculpting increases and more procedures are performed, we may learn more about the risk profile of the CoolSculpting system and receive reports of new side effects. For example, we have received reports of rare side effects, including late-onset pain, subcutaneous induration, which is hardening of normally soft tissue under the skin, hernia, and paradoxical hyperplasia, which is unusually enlarged tissue volume in the treatment area.
To market and sell CoolSculpting in markets outside of North America, we mainly depend on third-party distributors.
We currently depend on third-party distributors to sell, market, and service our CoolSculpting systems in certain markets outside of North America and to train our customers in these markets. We may need to engage additional third-party distributors to expand in new markets outside of North America. We are subject to a number of risks associated with our dependence on these third parties, including:
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• | we lack day-to-day control over the activities of third-party distributors; |
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• | third-party distributors may not commit the necessary resources to market, sell, and service our systems to the level of our expectations; |
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• | third-party distributors may not be as selective as we would be in choosing customers to purchase CoolSculpting systems or as effective in training customers in marketing and patient selection; |
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• | 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; |
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• | 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; and |
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• | ability to collect amounts owed from third-party distributors, who may operate in currency controlled countries. |
If we fail to establish and maintain satisfactory relationships with our third-party distributors, our revenue and market share may not grow as anticipated, and we could be subject to unexpected costs, each of which would harm our results of operations and financial condition.
There are additional hurdles we must overcome in order to effectively market and sell CoolSculpting in markets outside of North America.
We believe that a significant percentage of our business will continue to come from sales in markets outside of North America through increased penetration in countries where we currently market and sell CoolSculpting directly and through our third-party distributor network, combined with expansion into new international markets. However, international sales are subject to a number of risks, including:
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• | 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; |
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• | longer accounts receivable payment cycles and difficulties in collecting accounts receivable; |
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• | reduced or varied protection for intellectual property rights in some countries; |
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• | export restrictions, trade regulations, and foreign tax laws; |
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• | fluctuations in currency exchange rates, which could increase the selling costs of, and therefore lower demand for, our products overseas; |
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• | foreign certification and regulatory clearance or approval requirements; |
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• | difficulties in developing effective marketing campaigns in unfamiliar foreign countries; |
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• | customs clearance and shipping delays; |
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• | political, social, and economic instability abroad, terrorist attacks, and security concerns in general; |
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• | preference for locally produced products; |
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• | 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; |
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• | the burdens of complying with a wide variety of foreign laws and different legal standards; and |
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• | increased financial accounting and reporting burdens and complexities. |
The extent to which we encounter these additional obstacles could require us to dedicate significant financial and management resources which could negatively affect our financial results.
Our inability to effectively compete with our competitors may prevent us from achieving further market penetration or improving our operating results.
The medical technology and aesthetic product markets are highly competitive and dynamic, and are characterized by rapid and substantial technological development and product innovations. Demand for CoolSculpting could be limited by the products and technologies offered by our competitors, including newly announced products and technologies, whether or not effective. We designed CoolSculpting to address the aesthetic concerns of individuals who have stubborn fat bulges. Patients who are obese and who do not have specific fat bulges but require significant fat reduction to achieve aesthetic results are candidates for invasive and minimally-invasive procedures, such as liposuction, laser-assisted liposuction and injection lipolysis, in which a compound is administered into the fat under the skin to eliminate the fat cells. 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 several noninvasive technologies for fat reduction, circumferential reduction, fat cell destruction or body contouring. These noninvasive procedures involve various energy forms, including radio frequency, laser, or high intensity focused ultrasound, applied through the skin to eliminate fat cells. We believe that the marketing of these products has extended the sales cycle for CoolSculpting beginning in 2013 and may continue to have an impact on our sales in the future. The timing of, and publicity around, the introduction of such products or other technologies is outside our control, and may have an adverse impact on our sales and the rate at which practices purchase CoolSculpting systems and/or cycles in the form of consumable procedure packs.
Due to less stringent regulatory requirements, there are many more aesthetic products and procedures available for use in international markets than are approved for use in the United States. For example, multiple ultrasound based products have been cleared for marketing outside the United States. There are also fewer limitations on the claims our competitors in international markets can make about the effectiveness of their products and the manner in which they can market them. As a result, we face more competition in these markets than in the United States.
We also compete generally against medical technology and aesthetic companies, including those offering products and technologies unrelated to fat reduction, for customer resources and mind share. Some of our competitors have a broad range of product offerings, large direct sales forces, and long-term customer relationships with our target customers, which could inhibit our market penetration efforts. Our potential customers also may need to recoup the cost of expensive products that they have already purchased from our competitors, and thus they may decide to delay purchasing, or not to purchase, our CoolSculpting system.
Many of our competitors are large, experienced companies that have substantially greater resources and brand recognition than we do. Competing in the medical technology and aesthetic markets could result in price-cutting, reduced profit margins, and limited market share, any of which would harm our business, financial condition, and results of operations.
Third parties may attempt to produce counterfeit versions of our products and which may harm our ability to sell our CoolSculpting systems or consumables, negatively affect our reputation, or harm patients and subject us to product liability.
Third parties may seek to develop, manufacture, distribute and sell systems that we believe infringe our proprietary rights, which would compete against our CoolSculpting systems and impair our ability to sell our CoolSculpting systems in jurisdictions in which our proprietary rights are not upheld. In addition, counterfeit products may be promoted in a way that misleads consumers into believing they are affiliated with us. If counterfeit products are used with or in place of our products, we could be subject to product liability lawsuits resulting from the use of damaged or defective goods and suffer damage to our reputation.
For example, in January 2013, the Mercantile Court in Spain rendered its ruling on the merits of Massachusetts General Hospital's, or MGH, and our request for a permanent injunction against Clinipro's LipoCryo device based on Clinipro's infringement of two European patents owned by MGH and globally licensed exclusively to us. While the Mercantile Court had earlier granted in 2012 MGH's and our request for a preliminary injunction, the Court, in the January 2013 ruling, denied the request for a permanent injunction, and the Mercantile Court’s ruling has been upheld on appeal. The Mercantile Court's ruling affects only Clinipro's activities in Spain. Further, although we and MGH did prevail against Clinipro in a patent infringement case in France, holding that an MGH patent exclusively licensed to us is valid and enforceable and enjoining Clinipro and its distributors from selling LipoCryo in France, Clinipro appealed that ruling. The French court of appeal overturned a portion of the ruling related to sufficiency of disclosure, which has the potential to affect certain claims in MGH's patents. We are entitled to and intend to pursue an appeal. However, there is no assurance that we will prevail.
In addition, in May 2014, the United States District Court Eastern District of Wisconsin granted a mandatory injunction in our favor against a clinic using and promoting “Freeze Sculpting” treatments with a counterfeit device. Other counterfeit users are present in the United States and although our enforcement strategy is aggressive, there is no assurance that we will be successful in our actions to enjoin them from using or promoting treatments with counterfeit devices.
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 and our reputation could be harmed.
Our CoolSculpting system consists of a CoolSculpting control unit and our CoolSculpting applicators. Our CoolSculpting procedure packs are composed of consumable CoolGels, CoolLiners, Geltraps, skin wipes and in the case of our CoolSmooth procedure packs, disposable securement accessories, all of which are used by our customer during treatments. In addition, each consumable procedure pack includes a disposable computer cartridge that we market as the CoolCard. The CoolCard contains enabling software that permits our customer to perform a fixed number of CoolSculpting cycles. We manufacture our CoolSculpting system at our own facilities. During the second quarter of 2013, we fully in-sourced the manufacturing of our CoolSculpting system. CoolGels, CoolLiners and disposable securement accessories continue to be manufactured through third-party contract manufacturers. To manufacture our CoolSculpting system in the quantities that we believe will be required to meet anticipated increased market demand, we will need to increase manufacturing capacity, which will involve significant challenges and may require additional regulatory approvals. In addition, the development of these manufacturing capabilities will require us to invest substantial additional funds and hire and retain the technical personnel who have the necessary manufacturing experience. We may not successfully complete any required increase to existing manufacturing processes in a timely manner, or at all.
If there is a disruption to our manufacturing operations, we will have no other means of producing our CoolSculpting systems until we restore the affected facilities or develop alternative manufacturing facilities or methods, including potentially re-outsourcing our manufacturing operations. Additionally, any damage to or destruction of our facilities or equipment may significantly impair our ability to manufacture CoolSculpting systems on a timely basis.
If we are unable to produce CoolSculpting systems in sufficient quantities to meet anticipated customer demand, our revenue, business, and financial prospects would be harmed. In addition, if we experience any quality issues in the manufacturing of CoolSculpting systems, this could result in product recalls. Manufacturing delays related to quality control could negatively impact our ability to bring our CoolSculpting system and procedure packs to market, harm our reputation, and decrease our revenue. Any recall could be expensive and generate negative publicity, which could impair our ability to market our CoolSculpting system and further affect our results of operations.
We outsource the manufacturing of key components of our consumable procedure packs to third-party contract manufacturers.
Key components of our consumable procedure packs, including CoolGels, CoolLiners, Geltraps, skin wipes and securement accessories used with our CoolSmooth applicator, are manufactured by third-party contract manufacturers. If the operations of third-party contract manufacturers are interrupted or if they are unable to meet our delivery requirements due to capacity limitations, regulatory problems or other constraints, we may be limited in our ability to fulfill new customer orders or to repair equipment at current customer sites. Any change to another contract manufacturer would likely entail significant delay, require us to devote substantial time and resources, and could involve a period in which our products could not be produced in a timely or consistently high-quality manner, any of which could harm our reputation and results of operations.
Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to supply shortages and price fluctuations, which could harm our business.
Our CoolSculpting system contains a few critical components, the integrated circuit contained in the CoolSculpting control unit, the CoolSculpting applicators and the CoolCard, which is supplied by a company in Japan, and the connector that attaches our applicators to the control unit, which is supplied by a separate company in the United States. The single source suppliers of these critical components may not be replaced without significant effort and delay in production. We do not have supply agreements with the suppliers of these critical components beyond purchase orders. However, we attempt to maintain a safety stock inventory for these critical components equal to one year of forecasted part requirements of the integrated circuit and one month of connectors in finished assemblies, as well as at least three months' supply of connectors to support open purchase orders. Such forecasted amounts may be inaccurate and we may experience shortages as a result of serious supply problems or longer lead times with these suppliers as well as an increased demand for our products. In addition, several other non-critical components and materials that compose our CoolSculpting system are currently supplied by a single supplier or a limited number of suppliers. In many of these cases, we have not yet qualified alternate suppliers and rely upon purchase orders, rather
than long-term supply agreements. A supply interruption or an increase in demand beyond our current suppliers' capabilities could harm our ability to manufacture our CoolSculpting system to meet demand until new sources of supply are identified and qualified, which could impact our sales and/or gross margins. Our reliance on these suppliers subjects us to a number of risks that could harm our business, including:
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• | interruption of supply resulting from modifications to or discontinuation of a supplier's operations; |
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• | interruption of supply, or increased shipping costs, resulting from port strikes, work stoppages or other unrest; |
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• | delays in product shipments resulting from uncorrected defects, reliability issues, or a supplier's variation in a component; |
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• | a lack of long-term supply arrangements for key components with our suppliers; |
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• | inability to obtain adequate supply in a timely manner, or to obtain adequate supply on commercially reasonable terms; |
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• | difficulty and cost associated with locating and qualifying alternative suppliers for our components in a timely manner; |
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• | production delays related to the evaluation and testing of products from alternative suppliers, and corresponding regulatory qualifications; |
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• | delay in delivery due to our suppliers prioritizing other customer orders over ours; |
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• | 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 |
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• | 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 contract manufacturers and suppliers, we forecast anticipated product orders and material requirements to predict our inventory needs and enter into purchase orders on the basis of these requirements. Several components of our CoolSculpting system require an order lead time of six months or more. If our business expands, and our demand for components and materials increases beyond our estimates, our contract manufacturers and suppliers may be unable to meet our demand. In addition, if we underestimate our component and material requirements, we may have inadequate inventory, which could interrupt, delay, or prevent delivery of our CoolSculpting system to our customers. In contrast, if we overestimate our component and material requirements, we may have excess inventory, which would increase our expenses. Further, outside forces, such as port strikes, could impact our ability to receive components necessary to meet demand. Any of these occurrences would negatively affect our financial performance and the level of satisfaction our customers have with our business.
There exists a potential for misuse of our CoolSculpting system, which could harm our reputation and our business.
Under state law in the United States, our customers can generally allow nurse practitioners, technicians, and other non-physicians to perform CoolSculpting procedures under their supervision. Similarly, in markets outside of the United States, our customers can allow non-physicians to perform CoolSculpting procedures under their supervision. Although we and our distributors provide training on the use of CoolSculpting systems, we do not supervise the procedures performed with our CoolSculpting system, nor can we be assured that direct physician supervision of procedures occurs according to our recommendations. The potential misuse of our CoolSculpting system by physicians and non-physicians may result in adverse treatment outcomes, which could harm our reputation and expose us to costly product liability litigation.
Product liability suits could be brought against us due to defective design, labeling, material, workmanship, or misuse of our CoolSculpting system, or unanticipated adverse events, and could result in expensive and time-consuming litigation, payment of substantial damages, an increase in our insurance rates and substantial harm to our reputation.
If our CoolSculpting system is defectively designed, manufactured, or labeled, contains defective components, or is misused, we may become subject to substantial and costly litigation by our customers or their patients. Misusing our CoolSculpting system or failing to adhere to operating guidelines can cause skin damage and underlying tissue damage and, if our operating guidelines are found to be inadequate, we may be subject to liability. Furthermore, if a patient is injured in an unexpected manner after undergoing a CoolSculpting procedure, even if the procedure was performed in accordance with our operating guidelines, we may be subject to product liability claims. We may also be subject to additional liability from claims related to known rare side effects such as late-onset pain, subcutaneous induration, hernia, and paradoxical hyperplasia. Product liability claims could divert management attention from our core business, be expensive to defend, and result in sizable damage awards against us. We have historically been and continue to be predominantly self-insured for any product liability losses related to our products. We currently have product liability insurance to limit our exposure to these claims, but this insurance is subject to a cap reimbursement and, may not be adequate to cover us against all potential liability and is subject to material deductibles. In addition, we may not be able to maintain insurance in amounts or scope sufficient to provide us with adequate coverage against all potential liabilities. Any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage, could harm our reputation in the industry, and could reduce product sales. Product liability claims in excess of our insurance coverage, as well as deductibles under insurance policies, would be paid out of cash reserves, harming our financial condition and reducing our operating results.
Although we are currently exploring the use of our proprietary controlled cooling technology for other indications, such as for the treatment of acne and certain related skin conditions, there can be no guarantee that our research and development efforts in these additional indications will be successful.
We are currently exploring the use of our proprietary controlled cooling technology for other indications, and in September 2015, we entered into a new collaboration and patent license agreement with MGH to develop and commercialize a controlled cooling product for the treatment of acne and certain related skin conditions. However, there can be no guarantee that our research and development efforts will produce results that will enable us to pursue a regulatory submission to commercialize our proprietary controlled cooling technology for use in acne or any other indication, or that any submission that we make will receive regulatory approval. If our research and development efforts are not successful, we will have expended research and development efforts and capital in pursuing these indications without realizing any benefits from these efforts and expenses.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
We rely on networks, information management software and other technology, or information systems, including the Internet and third-party hosted services, to support a variety of business processes and activities, including procurement and supply chain, manufacturing, distribution, invoicing, order processing and collection of payments. We use information systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. In addition, we depend on information systems for digital marketing activities and electronic communications among our locations around the world and between company personnel as well as customers and suppliers. Because information systems are critical to many of our operating activities, our business processes may be impacted by system shutdowns or service disruptions. These disruptions may be caused by failures during routine operations such as system upgrades or user errors, as well as network or hardware failures, malicious or disruptive software, computer hackers, geopolitical events, natural disasters, failures or impairments of telecommunications networks, or other catastrophic events. These events could result in unauthorized disclosure of material confidential information. If our information systems suffer severe damage, disruption or shutdown and our business continuity plans do not effectively resolve the issues in a timely manner, we could experience delays in reporting our financial results and we may lose revenue and profits as a result of our inability to timely manufacture, distribute, invoice and collect payments. Misuse, leakage or falsification of information could result in a violation of data privacy laws and regulations and damage our reputation and credibility, and could expose us to liability. We may also be required to spend significant financial and other resources to remedy the damage caused by a security breach or to repair or replace networks and information systems.
Like most major corporations, our information systems are a target of attacks. Although the disruptions to our information systems that we have experienced to date have not had a material effect on our business, financial condition or results of operations, there can be no assurance that such disruptions will not have a material adverse effect on us in the future.
We may encounter issues with privacy and security of personal information.
CoolConnect allows us to obtain information directly from CoolSculpting systems deployed by our customers and, as a result, we expect to become subject to certain data privacy and security regulation by both the federal government and the states in which we conduct our business. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, and its implementing regulations, established uniform federal standards for certain “covered entities,” which include certain health care providers, health care clearinghouses, and health plans. These standards govern the conduct of specified electronic health care transactions and govern the privacy and security of protected health information, or PHI. The Health Information Technology for Economic and Clinical Health Act, or HITECH Act, makes HIPAA’s security standards directly applicable to “business associates,” which are independent contractors or agents of covered entities that create, receive, maintain, or transmit PHI in connection with providing a service for or on behalf of a covered entity. The HITECH Act increased the civil and criminal penalties that may be imposed against covered entities, business associates and certain other persons, and gave state attorneys general authority to enforce HIPAA’s requirements.
A portion of the data that we expect to obtain and handle for or on behalf of our customers is considered PHI. Under HIPAA and our contractual agreements with our covered entity customers, we expect to be considered a “business associate” to those customers, and be required to maintain the privacy and security of PHI in accordance with HIPAA and the terms of our business associate agreements with customers, including by implementing HIPAA-required administrative, technical and physical safeguards. We have incurred, and will continue to incur, significant costs to establish and maintain these safeguards and, if additional safeguards are required to comply with HIPAA regulations or our customers’ requirements, our costs could increase further, which would negatively affect our operating results. Furthermore, we cannot guarantee that such safeguards will be adequate. If we fail to maintain adequate safeguards, or we or our agents and subcontractors use or disclose PHI in a manner prohibited or not permitted by HIPAA or our business associate agreements, we could be subject to significant liabilities and consequences, including but not limited to contractual damages, government investigation, fines, private litigation, and/or negative publicity.
We have increased the size of our company significantly and over a short period, and difficulties managing our growth could adversely affect our business, operating results, and financial condition.
We have increased our headcount from 208 at January 1, 2013, to 686 at December 31, 2016, and plan to continue to hire additional employees as we increase our commercialization and sales activities for CoolSculpting. This growth has placed and may continue to place a strain on our management and our administrative, operational, and financial infrastructure. Our ability to manage our operations and growth requires the continued improvement of our operational, financial and management controls, reporting systems, and procedures, particularly to meet the reporting requirements of the Securities Exchange Act of 1934. If we are unable to manage our growth effectively or if we are unable to attract additional highly qualified personnel, our business, operating results, and financial condition may be harmed.
We depend on skilled and experienced personnel to operate our business effectively. If we are unable to recruit, hire, and retain these employees, our ability to manage and expand our business will be harmed, which would impair our future revenue and profitability.
Our success largely depends on the skills, experience, and efforts of our executive officers and other key employees. We do not have employment contracts with any of ourwas at any time during 2016 one of our officers or employees, or was formerly an
officer or employee. None of our executive officers currently serve, or in the past year have served, as a member of the board of directors or compensation committee of any other entity that has executive officers orwho other key employees that require these officers to stay with us for any period of time. Any of our executive officers and other key employees may terminate their employment with us at any time. The loss of any of our executive officers and other key employees could weaken our management expertise and harm our business operations.
In addition, our ability to retain our skilled employees and our success in attracting and hiring new skilled employees will be a critical factor in determining whether we will be successful in the future. We may not be able to meet our future hiring needs or retain our existing employees. We will face significant challengeshave served on our Board or
Compensation Committee.
26
and risks in hiring, training, managing, and retaining sales and marketing, product development, financial reporting, and regulatory compliance employees, many of whom are geographically dispersed. Failure to attract and retain personnel, particularly our sales and marketing, product development, financial reporting, and regulatory compliance personnel, would materially harm our ability to compete effectively and grow our business.
We may need to raise additional funds in the future, and such funds may not be available on a timely basis, or at all.
2015 was the first year in which we have generated positive cash flow from operations. Until such time, if ever, as we can achieve significant and sustained positive cash flows from sales of our CoolSculpting system and from sales of cycles in the form of consumable procedure packs, we will be required to finance our operations with our cash resources. We may need to raise additional funds in the future to support our operations. We cannot be certain that additional capital will be available as
needed on acceptable terms, or
COMPENSATION COMMITTEE REPORT
Compensation Committee Report*
The
Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis (“CD&A”) contained in this Annual Report on Form 10-K/A. Based aton 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 paymentthis review and
discussion, the Compensation Committee has recommended to the Board of principal and interest on such indebtedness, andDirectors that the CD&A be included in ZELTIQ’s Annual Report on Form 10-K for the terms of the debtfiscal year ended December securities issued could impose significant restrictions on our operations. If we raise additional funds through collaborations and licensing arrangements31, 2016.
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| Andrew N. Schiff, we could be required to relinquish significant rights to our technologies and products, or grant licenses on terms that are not favorable to us. |
If we fail to manage our exposure to global financial and securities market risk successfully, our operating results and financial statements could be materially impacted.
The primary objective of most of our investment activities is to preserve principal. To achieve this objective, a majority of our marketable investments are investment grade, liquid, fixed-income securities and money market instruments denominated in U.S. dollars. If the carrying value of our investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, we will be required to write down the value of our investments, which could materially harm our results of operations and financial condition. Moreover, the performance of certain securities in our investment portfolio correlates with the credit condition of the U.S. financial sector. In our current unstable credit environment, we might incur significant realized, unrealized or impairment losses associated with these investments.
Our ability to use net operating losses and tax credit carryforwards to offset future tax liabilities may be limited.
We have substantial federal net operating loss carryforwards, or NOLs, and state and federal tax credit carryforwards. A lack of future taxable income would adversely affect our ability to utilize these NOLs and tax credit carryforwards. In addition, under Section 382 of the U.S. Internal Revenue Code, or the Code, a corporation that experiences a more-than 50% ownership change over a three-year testing period is subject to limitations on its ability to utilize its pre-change NOLs and tax credit carryforwards to offset future taxable income. Future changes in our stock ownership, many of the causes of which are outside of our control, could result in an ownership change under Section 382 of the Code. Our NOLs and tax credit carryforwards may also be impaired under state law. As a result of these limitations, we may not be able to utilize a material portion of the NOLs and tax credit carryforwards.
If taxing authorities challenge our recently implemented international tax structure, we may be required to pay more in taxes than we currently expect.
In 2016, we continued the implementation of our international tax structure which includes a research and development cost-sharing arrangement, certain licenses and other contractual arrangements between us and our wholly-owned foreign subsidiaries. As a result of the implementation, we anticipate in future years that our consolidated pre-tax income will be subject to foreign tax at relatively lower tax rates when compared to the United States federal statutory tax rate and, as a consequence, our effective income tax rate is expected to be lower than the United States federal statutory rate. Our future effective income tax rates could be adversely affected if tax authorities challenge our international tax structure or if the relative mix of United States and international income changes for any reason.
Regulations related to conflict minerals could adversely impact our business.
Regulations promulgated by the United States Security and Exchange Commission, orM.D.
David J. Endicott
Mary M. Fisher
| * |
The preceding “Compensation Committee Report” shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor SEC, prescribe annual disclosure and reporting requirements for public companies that use tin, tantalum, tungsten and gold, known as conflict minerals, mined from the Democratic Republic of Congo and adjoining countries, referred to as Covered Countries, in their products. These disclosure requirements require us to use diligent efforts to determine which conflict minerals we use and the source of those conflict minerals. We have determined that we use at least one of these conflict minerals in the manufacture of our CoolSculpting system, and so we are subject to these reporting requirements. We filed our most recent conflict minerals report on May 31, 2016, reporting that we could not yet determine whether the conflict minerals we source were, directly or indirectly, used to finance or benefit armed groups in the Covered Countries. There are and will continue to be costs associated with complying with these disclosure requirements. Further, these disclosure requirements could adversely affect the sourcing, supply and pricing of materials used in our CoolSculpting system and related consumables. In addition, our inability to conclude that we use conflict free minerals may damage our reputation. If we determine it is necessary to redesign our CoolSculpting system and/or related consumables to enable us to confirm that we do not use conflict minerals, we would incur costs associated with doing so.
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, such as for the treatment of cellulite, acne and certain related skin conditions.
We are investing in the research and development of new products and procedures based on our proprietary controlled cooling technology platform, such as for the treatment of cellulite, acne and certain related skin conditions. 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 notification for 510(k) clearance, premarketing approval or foreign regulatory approvals. For example, we will be required to submit new 510(k) notifications to expand our ability to market CoolSculpting for use on other areas of the body beyond the eight specified body areas for which we already have approval, and for the treatment of cellulite, acne and certain related skin conditions.
The 510(k) clearance process, as well as the process for obtaining foreign approvals, can be expensive, time-consuming, and uncertain. We anticipate that the direct clinical costs to support a 510(k) notification 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 a notification to obtain 510(k) clearance; however, it may take longer, and 510(k) clearance may never be obtained. Delays in receipt of, or failure to obtain, clearances or approvals for any product enhancements or new products we develop, and for the treatment of cellulite, acne and certain related skin conditions, would result in delayed, or no, realization of revenue from such product enhancements or new products and in substantial additional costs which could decrease our profitability.
In addition, we are required to continue to comply with applicable FDA and other regulatory requirements once we have obtained clearance or approval for a product. There can be no assurance that we will successfully maintain the clearances or approvals we have received or may receive in the future. Our clearances can be revoked if safety or effectiveness problems develop. Any failure to maintain compliance with FDA and applicable international regulatory requirements could harm our business, financial condition, and results of operations.
We will be subject to significant liability if we are found to have improperly promoted CoolSculpting for off-label uses.
The FDA strictly regulates the promotional claims that may be made about FDA-cleared products. In particular, a product may not generally be promoted for uses that are not cleared or approved by the FDA as reflected in the product's labeling. Our current FDA labeling only permits marketing CoolSculpting in the United States for use on eight specified body areas and restricts us from promoting it for use on other parts of the body. The FDA does not regulate the practice of medicine however, and, we are aware that CoolSculpting is used by our customers on other parts of the body. If we are found to have inappropriately promoted such off-label uses, we may become subject to significant liability. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and entered agreements with several companies that require cumbersome reporting and oversight of sales and marketing practices. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed.
CoolSculpting may cause or contribute to adverse medical events that we are required to report to the FDA and if we fail to do so, we could be subject to sanctions that would materially harm our business.
Rare side effects have been reported after receiving CoolSculpting treatments, such as late-onset pain, subcutaneous induration, hernia, and paradoxical hyperplasia. There may be other new side effects that are reported to us as use of CoolSculpting increases. We may need to update our labeling, or take other regulatory action, in response to adverse event reports. In addition, FDA regulations require that we report certain information about adverse medical events if our medical devices may have caused or contributed to those adverse events, or if our device has malfunctioned. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events we become aware of within the prescribed timeframe. We may also fail to appreciate that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of our products. If we fail to comply with our reporting obligations, the FDA could take action including criminal prosecution, the imposition of civil monetary penalties, revocation of our device clearance or approval, seizure of our products, or delay in approval or clearance of future products.
We are currently, and in the future our contract manufacturers may be, subject to various governmental regulations related to the manufacturing of CoolSculpting, and we may incur significant expenses to comply with, experience delays in our product commercialization as a result of, and be subject to material sanctions if we or our contract manufacturers violate these regulations.
Our manufacturing processes and facilities are required to comply with the FDA's Quality System Regulation, or QSR, which covers the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage, and shipping of our devices. Although we believe we are compliant with the QSRs, the FDA enforces the QSR through periodic announced or unannounced inspections of manufacturing facilities. We have been, and anticipate in the future being, subject to such inspections, as well as to inspections by other federal and state regulatory agencies.
Failure to comply with applicable FDA requirements, or later discovery of previously unknown problems with our products or manufacturing processes, including our failure or the failure of one of our third-party contract manufacturers to take satisfactory corrective action in response to an adverse QSR inspection, can result in, among other things:
| | • | administrative or judicially-imposed sanctions; |
| | • | injunctions or the imposition of civil penalties; |
| | • | recall or seizure of our products; |
| | • | total or partial suspension of production or distribution; |
| | • | the FDA's refusal to grant pending future clearance or pre-market approval for our products; |
| | • | withdrawal or suspension of marketing clearances or approvals; |
| | • | refusal to permit the import or export of our products; and |
| | • | criminal prosecution of us or our employees. |
Any of these actions, in combination or alone, could prevent us from marketing, distributing, or selling our products and would likely harm our business.
We could have to issue a correction or removal to reduce a risk to health posed by our device or to remedy a violation which may present a risk to health. In addition, a product defect or regulatory violation could lead to a government-mandated or voluntary recall by us. The FDA could request that we initiate a voluntary recall if a product was defective or presented a risk of injury or gross deception. The FDA could order a recall if there is a reasonable probability that our product would cause serious adverse health consequences or death. Regulatory agencies in other countries have similar authority to recall devices because of material deficiencies or defects in design or manufacture that could endanger health. Any recall would divert management attention and financial resources, could cause the price of our shares of common stock to decline and expose us to product liability or other claims, including contractual claims from parties to whom we sold products and harm our reputation with customers. A recall involving our CoolSculpting system would be particularly harmful to our business and financial results and, even if we remedied a particular problem, would have a lasting negative effect on our reputation and demand for our products.
Legislative or regulatory healthcare reforms may make it more difficult and costly for us to obtain regulatory clearance or approval of our products and to produce, market, and distribute our products after clearance or approval is obtained.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory clearance or approval, manufacture, and marketing of regulated products or the reimbursement thereof.
In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. For example, in the future, the FDA may require more burdensome premarket approval of our procedures rather than the 510(k) clearance process we have used to date and anticipate primarily using in the future. Our CoolSculpting Platform is also subject to state regulations which are, in many instances, in flux. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of our products. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require:
| | • | changes to manufacturing methods; |
| | • | recall, replacement, or discontinuance of certain products; |
| | • | additional record keeping; and |
Each of these would likely entail substantial time and cost and could materially harm our financial results. In addition, delays in receipt of or failure to receive regulatory clearances or approvals for our new products would harm our business, financial condition, and results of operations.
Federal and state governments in the United States are also undertaking efforts to control growing health care costs through legislation, regulation, and voluntary agreements with medical care providers, and third-party payers.
We may be subject to various federal and state laws pertaining to health care marketing and promotional practices and other business practices, and any violations by us of such laws could result in fines or other penalties.
State and federal authorities have targeted medical technology companies for alleged violations of laws and regulations, based on off-label marketing schemes and other improper promotional practices. Companies targeted in such prosecutions have paid substantial fines in the hundreds of millions of dollars or more, have been forced to implement extensive corrective action plans, and have often become subject to consent decrees severely restricting the manner in which they conduct their business. If we become the target of such an investigation or prosecution based on our marketing and promotional practices, we could face similar sanctions which would materially harm our business.
To our knowledge, the CoolSculpting Platform is not reimbursed by any third party payers, including federal health care programs such as Medicare and Medicaid. This helps to limit our possible exposure under certain U.S. health regulatory laws that have been at issue in some other medical technology enforcement. This also means we are not required to track and report marketing expenditures under the federal physician payment “sunshine” provisions enacted under the Patient Protection and Affordable Care Act, or ACA. However, in the event third party reimbursement were available (or was caused to be paid inappropriately), our business could potentially be subject to a range of broad-reaching health regulatory laws, including, for example, the federal health care anti-kickback statute, or the ACA’s “sunshine” provisions. In addition, even without third party reimbursement for the CoolSculpting Platform, state “consumer protection” laws generally prohibit unfair and deceptive marketing practices directed at consumers, and such laws are generally broad enough to prohibit a range of marketing activities with respect to health care products and services that may be acceptable in other industries.
We may be exposed to liabilities under the FCPA and other anti-corruption laws, and any determination that we violated these laws could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act of 1977, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. Also, similar worldwide anti-bribery laws, such as the U.K. Bribery Act and Chinese anti-corruption laws, generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Some of our distribution partners are located in parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. Although we have implemented policies and procedures to discourage these practices by our employees, our existing safeguards and any future improvements may prove to be less than effective, and our employees, consultants, sales agents or distributors may engage in conduct for which we might be held responsible. Violations of the FCPA or international anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold us liable for successor liability FCPA violations committed by companies in which we invest or that we acquire. We cannot assure you that our internal control policies and procedures will protect us from reckless or negligent acts committed by our employees, distributors, partners, consultants or agents.
We are subject to numerous environmental, health and safety laws and regulations, and must maintain licenses or permits, and non-compliance with these laws, regulations, licenses, or permits may expose us to significant costs or liabilities.
We are subject to numerous foreign, federal, state, and local environmental, health and safety laws and regulations relating to, among other matters, safe working conditions and environmental protection, including those governing the generation, storage, handling, use, transportation, and disposal of hazardous or potentially hazardous materials. Some of these laws and regulations require us to obtain licenses or permits to conduct our operations. Environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. If we violate or fail to comply with these laws, regulations, licenses, or permits, we could be fined or otherwise sanctioned by regulators. We cannot predict the impact on our business of
new or amended laws or regulations or any changes in the way existing and future laws and regulations are interpreted or enforced, nor can we ensure we will be able to obtain or maintain any required licenses or permits.
Risks Related to Our Intellectual Property
If we are unable to obtain, maintain, and enforce intellectual property protection covering our CoolSculpting system and any future products we develop, others may be able to make, use, or sell products substantially the same as ours, which could adversely affect our ability to compete in the market.
Our commercial success is dependent in part on obtaining, maintaining, and enforcing our intellectual property rights, including our patents and the patents we exclusively license. If we are unable to obtain, maintain, and enforce intellectual property protection covering our CoolSculpting system and any other products we develop, others may be able to make, use, or sell products that are substantially the same as ours without incurring the sizable development and licensing costs that we have incurred, which would adversely affect our ability to compete in the market.
We seek to obtain and maintain patents and other intellectual property rights to restrict the ability of others to market products that compete with our products. As of December 31, 2016, our patent portfolio comprised 146 issued patents and 82 pending patent applications, each of which we own solely or license exclusively. However, patents may not be issued on any pending or future patent applications we file and, moreover, issued patents owned or licensed to us now or in the future may be found by a court to be invalid or otherwise unenforceable. Also, even if our patents are determined by a court to be valid and enforceable, they may not be 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.
The patent positions of medical technology companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in patents in these fields has emerged to date in the United States or in many foreign jurisdictions. Both the U.S. Supreme Court and the Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. Similarly, foreign courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. In addition, the U.S. Congress is currently considering legislation that would change provisions of the patent law. We cannot predict future changes U.S. and foreign courts may make in the interpretation of patent laws or changes to patent laws which might be enacted into law by U.S. and foreign legislative bodies. Those changes may materially affect our patents, our ability to obtain patents or the patents and applications of our collaborators and licensors.
Future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage, which could adversely affect our financial condition and results of operations. For example:
| | • | others may be able to make systems or devices that are similar to ours but that are not covered by the claims of our patents; |
| | • | others may assert that our licensors or we were not the first to make the inventions covered by our issued patents or pending patent applications; |
| | • | our pending patent applications may not result in issued patents; |
| | • | our issued patents may not provide us with any competitive advantages or may be held invalid or unenforceable as a result of legal challenges by third parties; |
| | • | the claims of our issued patents or patent applications when issued may not cover our CoolSculpting system or the future products we develop; |
| | • | there may be dominating patents relevant to our controlled cooling technology of which we are not aware; |
| | • | there may be prior public disclosures that could invalidate our inventions or parts of our inventions of which we are not aware; |
| | • | the laws of foreign countries may not protect our proprietary rights to the same extent as the laws of the United States; and |
| | • | we may not develop additional proprietary technologies that are patentable. |
From time to time, we analyze our competitors' products and services, and may in the future seek to enforce our patents or other rights to counter perceived infringement. However, infringement claims can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that the patent we seek to enforce is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that the patent in question does not cover the technology in question. An adverse result in any litigation could put one or more of our patents at risk of being invalidated or interpreted narrowly. Similarly, some of our competitors may be able to devote significantly more resources to intellectual property litigation, and may have significantly broader patent portfolios to assert against us if we assert our rights against them. Finally, because of the substantial discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be disclosed or otherwise compromised during this type of litigation.
For example, in January 2013, the Mercantile Court in Spain rendered its ruling on the merits of Massachusetts General Hospital's, or MGH, and our request for a permanent injunction against Clinipro's LipoCryo device based on Clinipro's infringement of two European patents owned by MGH and globally licensed exclusively to us. While the Mercantile Court had earlier granted in 2012 MGH's and our request for a preliminary injunction, the Court, in the January 2013 ruling, denied the request for a permanent injunction, and the Mercantile Court’s ruling has been upheld on appeal. The Mercantile Court's ruling affects only Clinipro's activities in Spain. Further, although we and MGH did prevail against Clinipro in a patent infringement case in France, holding that an MGH patent exclusively licensed to us is valid and enforceable and enjoining Clinipro and its distributors from selling LipoCryo in France, Clinipro appealed that ruling. The French court of appeal overturned a portion of the ruling related to sufficiency of disclosure, which has the potential to affect certain claims in MGH's patents. We are entitled to and intend to pursue an appeal. However, there is no assurance that we will prevail.
We rely on a license relationship with Massachusetts General Hospital for much of our core intellectual property, and this arrangement could restrict the scope and enforcement of our intellectual property rights and limit our ability to successfully commercialize our products.
We have exclusively licensed certain intellectual property from the General Hospital Corporation, a not-for-profit Massachusetts Corporation, which owns and operates MGH related to our CoolSculpting system. We rely on MGH to file and prosecute patent applications and maintain patents and otherwise protect the intellectual property we license. We have not had and do not have primary control over these activities for certain of our patents or patent applications and other intellectual property rights we license, and therefore cannot guarantee that these patents and applications will be prosecuted or immediately enforced in a manner consistent with the best interests of our business. We cannot be certain that such activities by third parties have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents and other intellectual property rights. Additionally, we cannot control the publication or other disclosures of research carried out by MGH relating to technology that could otherwise prove patentable.
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, aesthetic and general practice markets. We also plan to explore potential therapeutic uses for our platform technology, either directly or through collaborative arrangements with strategic partners. Although MGH cannot restrict our future product development efforts, the terms of our license agreement with MGH may require us to pay MGH a royalty of up to 7% of net sales of future products we develop or that may be developed by our strategic partners. Whether we are required to pay a royalty will depend on whether our future products incorporate the intellectual property we licensed from MGH. Any royalty we are required to pay will reduce our income from sales of such future products and may make it more difficult for us to successfully commercialize these products directly or through a strategic partner.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.
We rely on trade-secret protection to protect our interests in proprietary know-how and for processes for which patents are difficult or impossible to obtain or enforce. We may not be able to protect our trade secrets adequately. We have limited control over the protection of trade secrets used by our third-party contract manufacturers and suppliers. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors and outside scientific advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third-party illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. We rely, in part, on non-disclosure and confidentiality agreements with our employees, consultants and other parties to protect our trade secrets and other proprietary technology. These agreements may be breached and we may not have adequate remedies for any breach. Moreover, others may independently develop equivalent proprietary information, and third parties may otherwise gain access to our trade secrets and proprietary knowledge. We may now or in the future incorporate open source software in our products' firmware. Open source software licenses can be ambiguous, and there is a risk that these licenses could be construed to require us to disclose or publish, in source code form, some or all of our proprietary firmware code. Any disclosure of confidential information into the public domain or to third parties could allow our competitors to learn our trade secrets and use the information in competition against us, which could adversely affect our competitive advantage.
Our CoolSculpting system and any future products or services we develop could be alleged to infringe patent rights of others, which may require costly litigation and, if we are not successful, could cause us to pay substantial damages or limit our ability to commercialize our products.
Our commercial success depends on our ability to develop, manufacture, and market our CoolSculpting system and use our proprietary controlled cooling technology without infringing the patents and other proprietary rights of third parties. As the medical technology and aesthetic product industries expand and more patents are issued, the risk increases that there may be patents issued to third parties that relate to our products and technology of which we are not aware or that we must challenge to continue our operations as currently contemplated. Our products may infringe or may be alleged to infringe these patents.
In addition, because patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing (or, in some cases, are not published until they issue as patents) and because publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our issued patents or our pending applications. Another party may have filed, and may in the future file, patent applications covering our products or technology similar to ours. Any such patent application may have priority over our patent applications or patents, which could further require us to obtain rights to issued patents covering such technologies. If another party has filed a U.S. patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the Patent and Trademark Office, or PTO, to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful if the other party had independently arrived at the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position with respect to such inventions.
There is substantial litigation involving patent and other intellectual property rights in the medical technology and aesthetic industries generally. If a third party claims that we or any collaborator infringes its intellectual property rights, we may face a number of issues, including, but not limited to: | | • | infringement and other intellectual property claims which, regardless of merit, may be expensive and time-consuming to litigate and may divert our management's attention from our core business; |
| | • | substantial damages for infringement, which we may have to pay if a court decides that the product at issue infringes on or violates the third party's rights, and if the court finds that the infringement was willful, we could be ordered to pay treble damages and the patent owner's attorneys' fees; |
| | • | a court prohibiting us from selling or licensing our products unless the third party licenses its product rights to us, which it is not required to do at a commercially reasonable price or at all; |
| | • | if a license is available from a third party, we may have to pay substantial royalties, upfront fees or grant cross-licenses to intellectual property rights for our products; and |
| | • | redesigning our products or processes so they do not infringe, which may not be possible at all or may require substantial monetary expenditures and time, during which our products may not be available for sale. |
Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Even if resolved in our favor, litigation or other legal proceedings relating to
intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Finally, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.
Our intellectual property rights will further be affected in ways that are difficult to anticipate by the provisions of the America Invents Act (2011).
Enacted in September 2011, the America Invents Act, or AIA, is the first major overhaul of the U.S. patent system since 1952, and includes a number of changes to established practices, which came into effect between September 2011 and March 2013. The most significant changes include the transition to a modified first-to-file system, the availability of new post-grant review for issued patents, various procedural changes including the third-party submission of prior art and the availability of derivation proceedings and supplemental examination, and an expanded prior commercial user rights defense to a claim of patent infringement. The scope of these changes and the lack of experience with their practical implementation, suggest a transitional period with some uncertainty over the next few years. Several provisions of the AIA will likely be tested in U.S. federal courts over time.
The changes to the U.S. patent system in the AIA will have an impact on our intellectual property rights and how business is conducted in general. For example, the recently implemented modified first-to-file system places a premium on filing as early as possible and appears to increase what is available as prior art, by changing the applicable definitions. In particular, the grace period in the year prior to the filing date is now limited to an inventor’s own publications, and third party publications occurring after a publication by the inventor. For patent applications filed on or after March 16, 2013, we may expect post-grant review challenges initiated up to nine months after the corresponding patent issues. While the AIA was intended to make the resolution of intellectual property disputes easier and less expensive, we may in the future have to prove that we are not infringing patents or we may be required to obtain licenses to such patents. However, we do not know whether such licenses will be available on commercially reasonable terms, or at all. Prosecution of patent applications, post-grant opposition proceedings, and litigation to establish the validity and scope of patents, to assert patent infringement claims against others and to defend against patent infringement claims by others will be expensive and time-consuming. There can be no assurance that, in the event that claims of any of our owned or licensed patents are challenged by one or more third parties, any court or patent authority ruling on such challenge will determine that such patent claims are valid and enforceable. An adverse outcome in such litigation or post grant proceeding could cause us to lose exclusivity relating to the subject matter delineated by such patent claims and may have a material adverse effect on our business. If a third party is found to have rights covering products or processes used by us, we could be forced to cease using the products or processes covered by the disputed rights, be subject to significant liabilities to such third party and/or be required to license technologies from such third party.
Risks Related to Our Common Stock
Our stock price has been and will likely continue to be volatile.
Our stock price is volatile and from October 19, 2011, the first day of trading of our common stock, to February 13, 2017, our stock has had low and high closing sales prices per share in the range from $3.20 to $55.93 per share. Among the factors that may cause the market price of our common stock to fluctuate are the risks described in this “Risk Factors” section and other factors, including:
| | • | fluctuations in our operating results or the operating results of our competitors; |
| | • | changes in estimates of our financial results or recommendations or cessation of coverage by securities analysts; |
| | • | changes in the estimates of the future size and growth rate of our market opportunity; |
| | • | changes in accounting principles or changes in interpretations of existing principles, which could affect our financial results; |
| | • | conditions and trends in the markets we serve; |
| | • | changes in general economic, industry, and market conditions; |
| | • | success of competitive technologies and procedures; |
| | • | changes in our pricing policies; |
| | • | announcements of significant new technologies, procedures, or acquisitions by us or our competitors; |
| | • | changes in legislation or regulatory policies, practices or actions; |
| | • | the commencement or outcome of litigation involving our company, our general industry or both; |
| | • | recruitment or departure of our executives and other key employees; |
| | • | changes in our capital structure, such as future issuances of securities or the incurrence of debt; |
| | • | actual or expected sales of our common stock by the holders of our common stock; |
| | • | the potential acquisition by Allergan plc; and |
| | • | the trading volume of our common stock. |
In addition, the stock market in general and the market for medical technology and aesthetic product companies in particular may experience a loss of investor confidence. The stock markets recently have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our common stock. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class-action litigation. Further, class-action litigation, even if unsuccessful, could be costly to defend and divert management's attention and resources, which could further materially harm our financial condition and results of operations.
The requirements of being a public company may strain our resources, divert management's attention, and affect our ability to attract and retain qualified board members. As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, orshall any information in
this report be incorporated by reference into any past or future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the Exchange Act, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act, the listing requirements of the securities exchange on which we trade and other applicable federalextent ZELTIQ specifically incorporates it by reference into such
filing. |
| Item 12. |
Security Ownership of Certain Beneficial Owners and Management and state securities rules and regulations. Compliance with these rules and regulations has legal and financial compliance costs, makes some activities difficult, time-consuming or costly and places demand on our business systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reportsRelated Stockholder Matters |
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides certain information with respect to our business and operating results.
As a public company in the United States, we and our independent registered public accounting firm are required pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, to furnish a report, among other things, on the effectiveness of our internal control over financial reporting, which we determined was not effective as of December 31, 2015 and December 31, 2016. In the event that we are not able to demonstrate compliance with Section 404 in a timely manner, or are unable to produce timely or accurate financial statements, we may be subject to sanctions or investigations by regulatory authorities such as the SEC and the securities exchange on which we trade and investors may lose confidence in our operating results, which would have a material adverse effect on our business and on the price of our common stock and our ability to access the capital markets.
In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management's time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results, which could lead to a loss of investor confidence in our financial statements and have an adverse effect on our stock price.
Effective internal controls are necessary for us to provide reliable and accurate financial statements and to effectively prevent fraud. We devote significant resources and time to comply with the internal control over financial reporting requirements of the Sarbanes Oxley Act of 2002. As further described in Part II Item 9A “Controls and Procedures,” management has concluded that, because of a material weakness in our risk assessment process, our disclosure controls and procedures and internal controls over financial reporting were not effective as of December 31, 2016 and December 31, 2015. New controls and control enhancements implemented in response to deficiencies identified from the material weakness existing as of December 31, 2015 were not sufficient to address the risk of material misstatement in 2016 and we cannot assure you that the processes, procedures and controls we continue to implement will result in remediation of the material weakness in 2017. Failure to remediate the material weakness, or additional material weaknesses in our internal control over financial reporting, could result in material
misstatements in our financial statements or cause us to fail to timely meet our reporting obligations. Inadequate internal controls could cause investors to lose confidence in our reported financial information, which could have a negative effect on investor confidence in our financial statements, the trading price of our stock and our access to capital.
Additionally, if we continue to fail to have effective controls and procedures for financial reporting in place, we could be unable to provide timely and accurate financial information and be subject to de-listing on the NASDAQ Global Select Market, SEC investigation, and civil or criminal sanctions and ourall of ZELTIQ’s equity compensation plans in effect as of
December 31, 2016.
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
| Plan Category |
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and
rights
(a) |
|
|
Weighted-average
exercise price of
outstanding options,
warrants and
rights
(b) |
|
|
Number of securities
remaining available for
issuance under equity
compensation plans
(excluding
securities
reflected in column (a)
(c) |
|
| Equity compensation plans approved by security holders (1) |
|
|
3,796,171 |
(2) |
|
$ |
8.84 |
(3) |
|
|
4,185,087 |
(4) |
| Equity compensation plans not approved by security holders |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
3,796,171 |
|
|
|
8.84 |
|
|
|
4,185,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Includes our 2005 Stock Option Plan, 2011 Equity Incentive Plan, 2011 Employee Stock Purchase Plan and the 2012 Stock Plan. |
| (2) |
Represents 2,484,985 shares subject to outstanding options, and 1,311,186 shares subject to outstanding restricted stock units and performance stock price could decline. |
We do not currently intend to pay dividends on our common stock.
We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. We currently intend to invest our future earnings, if any, to fund the development and growth of our business. The payment of dividends will be at the discretion of our Board of Directors and will depend on our results of operations, capital requirements, financial condition, future prospects, restrictions imposed by applicable law, any limitations on payments of dividends present in any debt agreements we may enter into and other factors our Board of Directors may deem relevant. If we do not pay dividends, your ability to achieve a return on our common stock will depend on any future appreciation in the market price of our common stock. There is no guarantee that our common stock will appreciate in value or even maintain the price at which our holders have purchased their common stock.
Our directors, executive officers, and entities with which they are affiliated hold a significant portion of our common stock, which may lead to conflicts of interest with other stockholders over corporate transactions and other corporate matters.
Our directors, executive officers, and entities with which they are affiliated beneficially own approximately 11% of our outstanding common stock as of February 24, 2017. This concentration of ownership may not be in the best interests of our other stockholders. We are not aware of any stockholder or voting agreements or understandings between or among our directors, officers, or holders of our outstanding common stock currently in place. However, these stockholders, acting together, would be able to exercise significant influence on all matters requiring stockholder approval, including the election of directors and significant corporate transactions such as mergers or other business combinations. This influence could delay, deter, or prevent a third party from acquiring or merging with us, which could adversely affect the market price of our common stock.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current directors and management team, and limit the market price of our common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may delay or prevent a change of control, discourage bids at a premium over the market price of our common stock, and adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock. These provisions include:
| |
• | dividing our board into three classes, with each class serving a staggered three-year term; |
| |
• | prohibiting our stockholders from calling a special meeting of stockholders or acting by written consent; |
| |
• | permitting our board to issue additional shares of our preferred stock, with such rights, preferences and privileges as they may designate, including the right to approve an acquisition or other changes in control; |
| |
• | establishing an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our Board of Directors; |
| |
• | providing that our directors may be removed only for cause; |
| |
• | providing that vacancies on our Board of Directors may be filled only by a majority of directors then in office, even though less than a quorum; and |
| |
• | requiring the approval of our Board of Directors or the holders of a super-majority of our outstanding shares of capital stock to amend our bylaws and certain provisions of our certificate of incorporation. |
Although we believe these provisions collectively provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management team by making it more difficult for stockholders to replace members of our board, which is responsible for appointing the members of our management.
Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging
or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. The restrictions contained in Section 203 are not applicable to any of our existing stockholders that currently own 15% or more of our outstanding voting stock.
| |
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
We occupy 71,670 square feet for our executive office in Pleasanton, California, under a lease which extends through October 2027, 19,465 square feet in our manufacturing facility in Dublin, California, under a lease which extends through May 2017, and 15,755 square feet of warehouse space in Livermore, California, under a lease which extends through May 2017. We occupy 47,880 square feet in our manufacturing facility in Galway, Ireland, under a lease which extends through June 2022. We also occupy office and warehouse space near Gatwick, United Kingdom, under a lease which extends through December 2018, Taipei, Taiwan, under a lease which extends through August 2018, and Reston, Virginia, under a lease which extends through September 2020. We hold 45,858 square feet of vacant office space in Pleasanton, California, under a lease which extends through March 2019, that we plan to sublease.
In January 2017, we signed a new manufacturing facility lease (through June 2023) in Dublin, California for 33,354 square feet as well as a new warehouse facility lease (through January 2022) in Livermore, California for 42,688 square feet (collectively "2017 lease facilities"). The new 2017 lease facilities are intended to replace our existing Dublin and Livermore facilities, which have leases that are set to expire in 2017.
| |
ITEM 3. | LEGAL PROCEEDINGS |
From time to time, we may be involved in legal and administrative proceedings and claims of various types. Based on the information presently available, we believe that there are no claims or actions pending or threatened against us, the ultimate resolution of which will have a material effect on our financial position, liquidity or results of operations, although the results of litigation are inherently uncertain.
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ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
| |
ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information for Common Stock
Our common stock trades on the NASDAQ Global Select Market under the symbol of “ZLTQ.” The following table sets forth on a per share basis, for the periods indicated, the high and low sale prices of our common stock as reported by the NASDAQ Global Select Market.
As of February 24, 2017, there were approximately 21 holders of record of our common stock. In addition, we believe that a significant number of beneficial owners of our common stock held their shares in street name.
Dividend Policy
We have never declared or paid any cash dividends on our common stock. We currently intend to retain all future earnings, if any, for use in our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future.
Performance Graph
The following graph shows the total stockholder return of an investment of $100 in cash on December 31, 2011 through December 31, 2016, for (1) our common stock, (2) the NASDAQ Composite index and (3) the NASDAQ Medical Equipment Index. All values assume reinvestment of the full amount of all dividends. No cash dividends have been declared on shares of our common stock. Stockholder returns over the indicated period are based on historical data and are not necessarily indicative of future stockholder returns.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Total Return as of |
| 12/31/11 | | 12/31/12 | | 12/31/13 | | 12/31/14 | | 12/31/15 | | 12/31/16 |
ZELTIQ Aesthetics, Inc. | $ | 100.00 |
| | $ | 40.76 |
| | $ | 166.46 |
| | $ | 245.69 |
| | $ | 251.14 |
| | $ | 383.10 |
|
NASDAQ Composite | 100.00 |
| | 116.41 |
| | 165.47 |
| | 188.69 |
| | 200.32 |
| | 216.54 |
|
NASDAQ Medical Equipment | 100.00 |
| | 109.53 |
| | 131.61 |
| | 152.86 |
| | 168.58 |
| | 180.31 |
|
Repurchases of Equity Securities
Not applicable.
| |
ITEM 6. | SELECTED FINANCIAL DATA |
The following tables set forth the selected consolidated financial data for each of the years in the five-year period ended December 31, 2016. The selected consolidated financial data is qualified in its entirety and should be read in conjunction with the Consolidated Financial Statements and related Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere in this Annual Report on Form 10-K. We have derived the statement of operations data for the years ended December 31, 2016, 2015 and 2014, and the balance sheet data as of December 31, 2016 and 2015, from the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The statement of operations data for the years ended December 31, 2013 and 2012, and the balance sheet data as of December 31, 2014, 2013 and 2012, were derived from the audited consolidated financial statements that are not included in this Annual Report on Form 10-K.
| |
ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with “Selected Financial Data” and our consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the section entitled Risk Factors in this Annual Report on Form 10-K. Also see "Cautionary Language Regarding Forward-Looking Statements" immediately prior to Part I of this Annual Report on Form 10-K.
Overview
We are a medical technology company focused on developing and commercializing products utilizing our proprietary controlled cooling technology platform. Our first commercial product, the CoolSculpting system, is designed to selectively reduce stubborn fat bulges. We generate revenue primarily from sales of our CoolSculpting system, add-on applicators and from sales of cycles in the form of consumable procedure packs to our customers. Our CoolSculpting system comprises a CoolSculpting control unit and our CoolSculpting applicators which are designed to allow a physician to treat a different size and shape fat bulge. With the launch of our CoolAdvantage and CoolAdvantage Plus applicators in June 2016 and December 2016, respectively, we currently offer eight CoolSculpting applicators for use with our CoolSculpting system.
We received clearance from the Food and Drug Administration ("FDA"), in September 2010 to market CoolSculpting for the selective reduction of fat around the flanks, an area commonly referred to as the “love handles.” In May 2012, CoolSculpting was cleared by the FDA for treatment of the abdomen area. In April 2014, CoolSculpting was cleared by the FDA for treatment of the thigh area, and, in January 2015, CoolSculpting was cleared by the FDA for treatment at lower temperatures which enables shorter treatment times. In September 2015, the FDA cleared CoolSculpting for treatment of the submental area under the chin, an area that is consistently ranked as one of the top areas of concern both by consumers and physicians. In March 2016, CoolSculpting was cleared for the additional treatment areas of around the bra strap, on the back, and underneath the buttocks or “banana roll.” Most recently, in November 2016, the FDA cleared the CoolSculpting treatment of the upper arm. Additionally, in July 2016, the CoolSculpting system achieved China FDA approval for non-invasive fat reduction of the abdomen and flanks.
We may seek additional regulatory clearances from the FDA to expand our United States marketed indications for CoolSculpting to other areas on the body. We have received regulatory approval or are otherwise free to market CoolSculpting in numerous international markets where use of the product is generally not limited to specific treatment areas. Customers in these markets commonly perform CoolSculpting procedures on the back and chest, in addition to the flanks, abdomen, thighs, submental area under the chin, as well as around the bra straps and underneath the buttocks. We recently launched a new family of applicators called CoolAdvantage. These applicators reduce treatment time by nearly half compared to our existing applicators due to lower temperatures. In June 2016, we released our first applicator from this family, which features an adaptable 3-in-1 configuration and enhanced cup design. Additionally, in December 2016, we launched the second applicator from this family, CoolAdvantage Plus, designed to address larger fat bulges.
In the United States and related territories, as well as Canada, we use our direct sales organization to selectively market CoolSculpting. In markets outside of North America, including Asia Pacific, Latin America and Europe, we sell CoolSculpting through both a direct sales organization as well as a network of distributors. We intend to continue developing our international sales and marketing organization to focus on increasing sales and strengthening our customer relationships. We also intend to seek regulatory approval to market CoolSculpting in key additional international markets, including markets in Asia and Europe. Revenue from markets outside of North America accounted for 20%, 24% and 23% of our total revenue for the years ended December 31, 2016, 2015 and 2014, respectively.
Our ongoing research and development activities are primarily focused on improving and enhancing our CoolSculpting system and CoolSculpting procedure. In addition to these development activities related to CoolSculpting, we are exploring additional uses of our proprietary controlled cooling technology platform for the dermatology, plastic surgery, aesthetic and general practice markets. We are also exploring potential therapeutic uses for our platform technology, either directly or through collaborative arrangements with strategic partners.
Recent Developments
On February 13, 2017, we entered into a definitive agreement with Allergan Holdco US, Inc. (which we refer to as Allergan US), a subsidiary of Allergan plc (which we refer to as Allergan), pursuant to which, upon the terms and subject to the conditions set forth therein, we would merge with and into a wholly-owned, indirect subsidiary of Allergan and continue on as a surviving entity and wholly-owned, indirect subsidiary of Allergan. The completion of the proposed acquisition is subject to the satisfaction of various closing conditions, including the approval of the merger by our stockholders. The merger is expected to be completed in the second half of 2017 at a price of $56.50 per share of common stock.
Financial Overview
Revenue
We generate revenue primarily from sales of our CoolSculpting system and from sales of consumables to our customers. We generated revenue of $354.2 million, $255.4 million and $174.5 million for the years ended December 31, 2016, 2015 and 2014, respectively.
System revenue. Sales of our CoolSculpting system include the CoolSculpting control unit and our CoolSculpting applicators. Sales of systems can include sales of systems to new customers that include our entire suite of applicators, as well as multi-system sales to new customers or sales to existing customers which may not include the entire suite of applicators. Additionally, some practices may purchase additional applicators, or add-on applicators, for existing systems. Our standard terms do not allow for trial or evaluation periods, rights of return, or refund payments contingent upon the customer obtaining financing or other terms that could impact the customer’s obligation. System revenue represented 45%, 51% and 53% of our total revenue
for the years ended December 31, 2016, 2015 and 2014, respectively. Our worldwide installed base grew by 28% from approximately 4,700 units as of December 31, 2015, to approximately 6,000 units as of December 31, 2016.
Consumable revenue. We generate consumable revenue through sales of cycles in the form of consumable procedure packs, each of which includes our consumable CoolGels, CoolLiners, Geltraps, skin wipes and in the case of our CoolSmooth procedure packs, disposable securement accessories, all of which are used by our customer during treatments. In addition, each consumable procedure pack includes a disposable computer cartridge that we market as the CoolCard. The CoolCard contains enabling software that permits our customers to perform a fixed number of CoolSculpting procedures, or cycles. Consumable revenue accounted for 55%, 49% and 47% of our total revenue for the years ended December 31, 2016, 2015 and 2014, respectively. We shipped 1.5 million, 1.0 million and 0.6 million CoolSculpting revenue cycles to our customers during the years ended December 31, 2016, 2015 and 2014, respectively.
Our business plan focuses on expanding our installed base of systems at customers, and increasing our consumable revenue by driving demand for CoolSculpting procedures through our targeted marketing programs. We anticipate that as we continue to implement our business plan and expand our installed base our consumable revenue will increase as a percentage of our total revenue.
Seasonality. Seasonal fluctuations in the number of patients seeking treatment and the availability of our customers are likely to continue to affect our business. Seasonal fluctuations occur in both system revenue and consumable revenue as well as by geographic region. Specifically, our customers often take vacation or are on holiday during the summer months and therefore tend to perform fewer procedures, particularly in certain international countries. These seasonal trends have caused and will likely continue to cause, fluctuations in our quarterly results, including fluctuations in sequential revenue growth rates.
Market in which we operate. The medical technology and aesthetic product markets are highly competitive and dynamic, and are characterized by rapid and substantial technological development and product innovations. We compete with many other technologies for consumer demand. Further, the aesthetic industry in which we operate is particularly vulnerable to economic trends. The decision to undergo a procedure from our systems is driven by consumer demand. Procedures performed using our systems are elective procedures, the cost of which must be borne by the patient, and are not reimbursable through government or private health insurance. In times of economic uncertainty or recession, individuals often reduce the amount of money that they spend on discretionary items, including aesthetic procedures. The general economic difficulties being experienced and the lack of availability of consumer credit for some of our customers' patients could adversely affect the markets in which we operate.
Critical Accounting Policies and Estimates
We have adopted various accounting policies to prepare the consolidated financial statements in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP"). The preparation of the consolidated financial statements, in conformity with U.S. GAAP, requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.
Our estimates and assumptions, including those related to revenue recognition (including customer incentives), customer programs and payments, product warranties, valuation of stock-based compensation, and income taxes are updated as appropriate, on an on-going basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates and assumptions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We derive our revenue from the sales of the CoolSculpting system, consisting of a control unit and applicators, and, from time to time, related extended warranty arrangements, and from the sale of cycles in the form of consumable procedure packs, each of which includes our consumable (CoolGels, CoolLiners, Geltraps, and skin wipes) and in the case of our CoolSmooth procedure packs, disposable securement accessories, all of which are used by our customer during treatments. We earn revenue from the sale of these products to our customers and to distributors. We recognize revenue when persuasive evidence of an arrangement exists, transfer of title to the customer has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Revenue is deferred in the event that any of the revenue recognition criteria is not met. Each consumable procedure pack includes a disposable computer cartridge that we market as the CoolCard. The CoolCard contains enabling software that permits our customers to perform a fixed number of CoolSculpting procedures, or cycles. We do not market this software separately from the CoolSculpting system or from the CoolCard. Rather, the functionality that the software provides is part of the overall CoolCard product. We market the CoolSculpting system as a non-invasive aesthetic device for the selective reduction of fat, not for its embedded software attributes included in the CoolCard that enable its use. We do not provide rights to upgrades and enhancements or post contract customer support for the embedded software. In addition, we do not incur significant software development costs or capitalize our software development costs. Based on this assessment, we consider the embedded software in the CoolCard incidental to the CoolCard product as a whole and determined that revenue recognition should not be governed by the provisions of Topic 985 of the FASB Accounting Standards Codification, or ASC.
Persuasive Evidence of an Arrangement. We use contracts or customer purchase orders to determine the existence of an arrangement.
Delivery. Our standard terms specify that title transfers upon shipment to the customer. We use third party shipping documents to verify that title has transferred.
Sales Price Fixed or Determinable. We assess whether the sales price is fixed or determinable at the time of the transaction. Sales prices are documented in the executed sales contract or purchase order received prior to shipment. 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.
Collectability. We assess whether collection is reasonably assured based on a number of factors, including the customer's past transaction history and credit worthiness.
Multiple-Element Arrangements. Typically, all products sold to a customer are delivered at the same time. If a partial delivery occurs as authorized by the customer, we allocate revenue to the various products based on their vendor-specific objective evidence of fair value, or VSOE, if VSOE exists according to ASC 605-25 as the basis of determining the relative selling price of each element. If VSOE does not exist, we may use third party evidence of fair value, or TPE, to determine the relative selling price of each element. If neither VSOE nor TPE exists, we may use management's best estimate of the sales price, or ESP, of each element to determine the relative selling price. We base the relative selling prices for control units, applicators, CoolCards and extended warranty on established price lists and separate, stand-alone sales of these elements. We establish best estimates within a range of selling prices considering multiple factors including, but not limited to, factors such as size of transaction, pricing strategies and market conditions. We believe the use of the ESP allows revenue recognition in a manner consistent with the underlying economics of the transaction. Our products do not require maintenance or support. Additionally, from time to time there may be undelivered elements in a multiple element arrangement, such elements generally being training or extended warranty. We defer revenue on undelivered elements of an arrangement and recognize it once all revenue recognition criteria have been met.
Shipping and handling costs. We expense shipping and handling costs as incurred and include them in cost of revenue. In those cases where we bill shipping and handling costs to customers, we classify the amounts billed as revenue.
Customer Programs and Payments
We regularly evaluate the adequacy of our estimates for cooperative marketing arrangements, customer incentive programs and pricing programs. Future market conditions and product transitions may require us to take action to change such programs. In addition, when the variables used to estimate these costs change, or if actual costs differ significantly from the estimates, we would be required to record incremental increases or reductions to sales, cost of goods sold or operating expenses.
Accruals for Customer Programs
We record an accrued liability for cooperative marketing arrangements and customer incentive programs. The estimated cost of these programs is recorded as a reduction of revenue or as an operating expense, if we receive a separately identifiable benefit from the customer and can reasonably estimate the fair value of that benefit. Significant management judgment and estimates must be used to determine the cost of these programs in any accounting period.
Cooperative Marketing Arrangements. We offer cooperative marketing programs primarily to our North American customers, allowing the customers to receive partial reimbursement for qualifying advertising expenditures which promote our product and brand. Customer participation and reimbursement amounts are estimated based on purchase levels of CoolCards. The objective of these arrangements is to encourage advertising and promotional events to increase sales of our products. Accruals for these marketing arrangements are recorded at the time of commitment, based on the related program parameters, review of qualifying advertising expenditures by the customer and historical reimbursement experience.
Customer Incentive Programs. Our customer incentive program consists of rebates for certain distributors based on purchase levels. Estimated costs of customer rebates and similar incentives are recorded at the later of the time the incentive is offered, based on the specific terms and conditions of the program or the time the related revenue is recognized. Accruals for performance-based incentives are recognized as a reduction of the sale price at the later of the time the incentive is offered, based on the specific terms and conditions of the program or the time the related revenue is recognized. Estimates of required accruals are determined based on negotiated terms, consideration of historical experience, anticipated volume of future purchases, and inventory levels in the channel. Certain incentive programs require management to estimate the number of customers who will actually redeem the incentive based on historical experience and the specific terms and conditions of these programs.
Accounting for Payments to Customers
We occasionally enter into transactions where we provide consideration to our customers in the forms of cash payments or stock-based awards in exchange for certain goods and services. We account for such payments to customers in accordance with ASC 605-50, Revenue Recognition: Customer Payments and Incentives, which requires management to characterize the payment as a reduction of revenue if we are unable to demonstrate the receipt of a benefit that is identifiable and sufficiently separable from the revenue transaction and reasonably estimate the fair value of the benefit identified. Significant management judgment and estimates must be used to determine the fair value of the benefit received in any period. For stock awards, we believe that the fair value of the awards is more reliably measured than the fair value of the benefit received. The fair value of the stock awards is measured as of the date at which either the commitment for performance by the customer to earn the award is reached or the date the customer’s performance is complete. Until that point is reached, the award is revalued at each reporting period with the true-up to fair value recorded in current period earnings.
Product Warranties
Sale of our control units and applicators includes a limited 12-month warranty on product quality for domestic customers and a limited 38-month (control units) and 14-month (applicators) warranty for international indirect customers. We offer a limited 14-month warranty for control units and applicators for our international direct customers.
We accrue warranty and related costs based on our best estimates when we determine that it is probable a charge or liability has been incurred and the amount of loss can be reasonably estimated. For new product introductions in which we may not have any historical experience, we make estimates for warranty claims based on a combination of historical experience of other similar products sold and qualitative and quantitative information. We exercise judgment in estimating the expected product warranty costs, using data such as the actual and projected product failure rates, estimated repair costs, freight, material, labor, and overhead costs. While we believe that historical experience provides a reliable basis for estimating such warranty cost, unforeseen quality issues or component failure rates could result in future costs in excess of such estimates, or alternatively, improved quality and reliability in our products could result in actual expenses that are below those currently estimated.
Valuation of Stock-Based Compensation
We recognize stock-based compensation cost for only those shares ultimately expected to vest over the requisite service period of the award. We estimate the fair value of stock options using a Black-Scholes valuation model, which requires the input of highly subjective assumptions, including the option’s expected term and stock price volatility. In addition, judgment is also required in estimating the number of stock-based awards that we expect to be forfeited. Forfeitures are estimated based on historical experience at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.
Income Taxes
We are subject to income taxes in multiple jurisdictions, including but not limited to the United States, Ireland and United Kingdom, and we use estimates in determining our 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. Since inception, we determined that a valuation allowance should be recorded against all of our domestic net deferred tax assets. We perform a quarterly assessment over the realizability of our deferred tax assets that requires us to exercise significant judgment and make estimates about our ability to generate revenue, gross profit, operating income and taxable income in future periods. Due to strong operating results in recent years, the expectation that we will continue to generate taxable income into the foreseeable future and our tax planning action of migrating and licensing certain intellectual property to our foreign entities, our assessment regarding whether it is more likely than not that we will realize our deferred tax assets has changed. We released $40.4 million of the valuation allowance on all domestic deferred tax assets except for California R&D credits during the fourth quarter of 2015. We continue to apply a valuation allowance against our California R&D credit deferred tax assets. In reaching this conclusion we considered, among other things, our recent financial and operating results (three years of cumulative income, eight consecutive quarters of profitability and strong revenue growth). We gave the most significant weight in our evaluation to the objective, direct positive evidence related to our recent strong financial results, particularly our positive levels of pre-tax income.
We follow the accounting guidance for uncertainties in income taxes, which prescribes a recognition threshold and measurement process for recording uncertain tax positions taken, or expected to be taken in a tax return, in the consolidated financial statements. Given the valuation allowance release described above, we believe our currently unrecognized tax benefits would, if recognized, affect our effective income tax rate.
We assess all material positions taken in any income tax return, including all significant uncertain tax 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.
Utilization of net operating losses and tax credit carryforwards may be limited by “ownership change” rules, as defined in Section 382 of the Internal Revenue Code. Similar rules may apply under state tax laws. We have assessed the application of Internal Revenue Code Section 382, during the fourth quarter of 2016, and concluded no limitation currently applies, and we will continue to monitor activities in the future. In the event we experience any subsequent changes in ownership, the amount of net operating losses and research and development credit carryovers available in any taxable year could be limited and may expire unutilized.
Out-of-period adjustments
See Note 1 in the Notes to Consolidated Financial Statements, which information is incorporated by reference here.
Results of Operations
Revenue (in thousands, except for percentages):
Overall, we experienced an increase in revenue primarily as a result of our national direct-to-consumer advertising campaign, the expansion of our sales force into new and existing key markets, increased focus and prioritization of our business through our sales team structure, training, and an increase in our installed base of CoolSculpting systems.
System revenue. In 2016 as compared to 2015, system revenue increased by $27.3 million, or 21%. Overall, we sold 1,366 systems in 2016, as compared to 1,458 systems in 2015. We continue to experience significant sales of add-on applicators to existing customers, driven by our CoolMini, CoolAdvantage and CoolAdvantage Plus applicators which we launched in September 2015, June 2016 and December 2016, respectively. Incremental add-on applicator revenue was $26.2 million in 2016, which substantially relates to our CoolAdvantage applicator, whereas in 2015, our incremental add-on revenue, related primarily to our CoolMini applicators, totaled $15.5 million. Add-on applicators allow our customers to optimize their existing system to fit different body shapes and sizes, as well as different body parts or regions of the body.
In 2015 as compared to 2014, system revenue increased by $37.7 million, or 41% driven by higher system sale volumes in both North America (primarily from large purchases from a single aesthetic chain) and our International markets. Overall, we sold 1,458 systems in 2015, as compared to 1,001 systems in 2014. We also experienced an increase in sales of add-on applicators to existing customers primarily related to our launch of our CoolSmooth Pro and CoolMini applicators in 2015. Such total incremental add-on applicator revenue was $15.5 million in 2015, which is primarily related to our CoolMini applicator, whereas in 2014, our incremental add-on revenue, related primarily to our CoolSmooth applicators, totaled $9.6 million.
Consumable revenue. In 2016 as compared to 2015, consumable revenue increased by $71.4 million, or 57%, primarily due to the growth of our worldwide installed base of CoolSculpting systems and an increased number of consumable procedure packs shipped to our customers as a result of our targeted marketing programs in 2016 and the release of our CoolAdvantage applicators, which require a different consumable procedure pack and carry a higher average selling price than our procedure packs for legacy applicators. Overall, we shipped approximately 1.5 million, 1.0 million and 0.6 million CoolSculpting revenue cycles to our customers in 2016, 2015 and 2014, respectively.
In 2015 as compared to 2014, consumable revenue increased by $43.2 million, or 53%, primarily driven by the growth of our worldwide installed base of CoolSculpting systems and an increased number of consumable procedure packs shipped to our customers as a result of our targeted marketing programs in 2015 and the release of our CoolMini applicator which requires a different consumable procedure pack and carries a higher average selling price than our procedure packs for other applicators.
Gross Profit (in thousands, except for percentages):
Gross margin may fluctuate with product and regional mix, selling prices, material costs and revenue levels.
In 2016 as compared to 2015, gross margin decreased by 0.1 percentage points. The decrease in gross margin was due to the launch of our newer applicators, CoolAdvantage and CoolAdvantage Plus, which contribute a lower gross margin relative to our corporate average, as well as increases in warranty and inventory-related expenses. The decrease was partially offset by a higher percentage of total revenue attributable to consumables which carry a higher gross margin relative to our corporate average.
In 2015 as compared to 2014, gross margin decreased by 0.4 percentage points. The decrease in gross margin was due to lower average selling prices in 2015 driven by the combination of sales to international customers, large purchases from a single aesthetic chain, and our CoolSmooth PRO exchange program, as well as the launch of the CoolMini applicator, which carries a lower gross margin profile than the legacy applicators we offer.
Operating Expenses (in thousands, except for percentages):
Sales and marketing. In 2016 as compared to 2015, sales and marketing (S&M) expenses increased $48.7 million primarily due to $18.3 million of higher personnel and stock-based compensation expenses due to incremental headcount in 2016 and increased variable compensation from revenue growth, as well as s $18.3 million increase in advertising, public relations and collateral production expenses due primarily to our national direct-to-consumer advertising campaign. Our cooperative marketing expenses increased by $4.8 million due primarily to a higher number of eligible customers in the program in 2016. Travel expenses increased by $2.1 million in connection with sales efforts and continuous training of our salesforce.
In 2015 as compared to 2014, S&M expenses increased $41.9 million primarily due to $17.5 million of higher personnel and stock-based compensation expenses due to incremental headcount in 2015 and increased variable compensation resulting from revenue growth, and a $12.7 million increase in advertising, public relations and collateral production expenses due to our direct-to-consumer advertising campaign which was launched in the second quarter of 2015. Travel expenses increased by $5.1 million in connection with sales efforts and continuous training of our salesforce. Our cooperative marketing expenses increased by $3.0 million due primarily to a higher number of eligible customers in the program in 2015. Lastly, allocable costs related to rent and administrative functions increased by $2.2 million related to additional headcount and higher operating costs as a result of our growth.
General and administrative. In 2016 as compared to 2015, general and administrative (G&A) expenses increased $8.8 million primarily due to $5.8 million of higher personnel and stock-based compensation expenses related to incremental headcount to support growth in our business, $1.0 million of legal expenses from continuing IP enforcement and patient claims settlements, $1.2 million related to a lease termination charge for moving our corporate offices in Pleasanton, California, and $0.7 million of other operating expenses related to the growth in our business.
In 2015 as compared to 2014, G&A expenses increased $8.5 primarily due to an increase in payroll and personnel related costs of $4.2 million of higher personnel and stock-based compensation expenses related to incremental headcount to support growth in our business including our international market, $2.6 million of legal expenses mainly from continuing IP enforcement and patient claims settlements, and $1.7 million other operating expenses related to the growth in our business.
Research and development. In 2016 as compared to 2015, research and development (R&D) expenses increased by $2.6 million primarily due to $1.0 million of higher personnel and stock-based compensation expenses from an increase in headcount, $1.0 million of higher clinical, operational and development expenses as we continue to explore ways to leverage our proprietary cooling platform for additional applications and indications, and $0.5 million of increased operational, facilities and allocable expenses associated with higher R&D headcount in 2016.
In 2015 as compared to 2014, R&D expenses increased $4.7 million primarily due to $2.6 million of higher personnel and stock-based compensation expenses from an increase in headcount, $1.3 million of higher clinical, operational and development expenses as we continue to explore ways to leverage our proprietary cooling platform for additional applications and indications, and $0.6 million of incremental operational expenses associated with higher R&D headcount in 2015.
Interest Income (Expense) and Other Income (Expense), Net (in thousands, except for percentages):
Interest income (expense), net. In 2016 as compared to 2015, we incurred interest expense from sales tax filings combined with lower interest income attributable to a decline in the average balance of our investments. In 2015 as compared to 2014, interest income was relatively unchanged.
Other income (expense), net. In 2016 as compared to 2015, other income (expense), net was primarily the result of foreign exchange net gains driven by the re-measurement of currencies and liabilities denominated in currencies other than the functional currencies. In 2015 as compared to 2014, other income (expense), net was relatively unchanged.
Income Taxes
Net income was impacted by tax expense of $14.1 million, of which $11.4 million is a deferred tax expense. We continue to apply a valuation allowance against our California research and development credit deferred tax assets based on the fact that we have concluded that such amounts are unlikely to be realized in future periods. Our provision for (benefit from) income taxes for the years ended December 31, 2016 and 2015 of $14.1 million and $(38.5) million, respectively, was for U.S. Federal, certain state and corporate taxes in foreign jurisdictions and certain income tax uncertainties, including interest and penalties.
Beginning in 2015, we began implementing an international tax structure that includes a research and development cost-sharing arrangement, certain licenses and other contractual arrangements between us and our wholly-owned foreign subsidiaries. As a result of these changes, we anticipate that our consolidated pre-tax income will be subject to foreign tax at relatively lower tax rates when compared to the United States federal statutory tax rate and, as a consequence, our effective income tax rate is expected to be lower than the United States federal statutory rate. Our future effective income tax rates could be adversely affected if tax authorities challenge our international tax structure or if the relative mix of United States and international income changes for any reason.
Liquidity and Capital Resources
The following table summarizes our working capital, cash and cash equivalents, short-term and long-term investments as of December 31, 2016, 2015 and 2014 (in thousands):
We believe that cash held in the U.S., in addition to cash from operations, is sufficient to fund our U.S. operating requirements. Cash held outside the U.S. has historically been used to fund international operations, although those amounts may be used for the repayment of intercompany loans. As of December 31, 2016, cash held outside the U.S. was $14.6 million. The majority of cash held outside the United States relates to undistributed earnings of our foreign subsidiaries which are considered by us to be indefinitely reinvested. Amounts held by foreign subsidiaries are generally subject to U.S. income tax on repatriation to the U.S. We currently have no plans to repatriate any foreign earnings back to the U.S. Our intent is to reinvest these funds outside of the U.S. indefinitely, and we believe our cash flows provided by our U.S. operations will meet our U.S. liquidity needs for the foreseeable future.
Summary Statement of Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2016, 2015 and 2014 (in thousands):
Cash Flows for the Years Ended December 31, 2016, 2015 and 2014
Operating activities.
Net cash provided by operating activities was $16.4 million in 2016, and consisted of a net income of $0.7 million and non-cash items of $34.8 million, offset by a net change in operating assets and liabilities of $19.2 million. Non-cash items in 2016 consisted primarily of a stock-based compensation expense of $17.2 million, depreciation and amortization expense of $3.6 million, and the deferred income tax provision of $11.4 million. The significant items in the change in operating assets and liabilities include cash used resulting from increases in inventory of $12.5 million, accounts receivable of $23.5 million, and other current and non-current assets of $4.1 million. These uses of cash were offset in part by an increase in accounts payable of $6.3 million, deferred revenue of $1.7 million, and current and non-current liabilities of $12.9 million. We experienced an increase in inventory to support expected customer demand and to support the recent launch of our CoolAdvantage family of applicators. The increase in accounts receivable is a function of the increase in sales as well as timing of payment receipts from customers. The increase in other current and non-current assets is primarily due to timing of payments and receivables for credit card payments in transit. The increase in current and non-current liabilities was driven by the timing of invoice receipt and payments to vendors, higher accrued warranty, an increase in accrued compensation related expenses as a result of an increase in headcount and variable compensation, and a lease termination liability we recorded in 2016. The increase in deferred revenue is primarily driven by our increase in revenue deferral for CoolSculpting University (CSU) customer training that has not yet occurred.
Net cash provided by operating activities was $7.7 million in 2015, and consisted of a net income of $41.8 million and non-cash items of $23.5 million, offset by a net change in operating assets and liabilities of $10.5 million. Non-cash items in 2015 consisted primarily of a stock-based compensation expense of $13.2 million, depreciation and amortization expense of $2.4 million, offset by the deferred income tax benefit of $40.4 million resulting from the release of the deferred tax asset valuation allowance. The significant items in the change in operating assets and liabilities include cash used resulting from increases in inventory of $12.9 million, accounts receivable of $12.9 million, and other current and non-current assets of $5.3 million. These uses of cash were offset in part by an increase in accounts payable of $4.5 million, deferred revenue of $2.3 million, and other current and non-current liabilities of $13.9 million. We experienced an increase in inventory as we continued to build inventory to support expected customer demand, as well as increases in purchases of materials to support demand for our recently launched CoolMini applicator. The increase in accounts receivable is a function of the increase in sales as well as timing of payment receipts from customers. The increase in other current and non-current assets is primarily due to timing of new contracts, payments and receivables for credit card payments in transit. The increase in other current and non-current liabilities was driven by the timing of invoice receipt and payments to vendors, higher accrued royalty and sales tax payable as result of an increase in sales, an increase in marketing accruals in conjunction with our sales and marketing initiatives, an increase in accrued compensation as a result of an increase in headcount and variable compensation, an increase in taxes payable due to an increase in net income, and due to the increase in accrued legal expenses as we continue to enforce our intellectual property domestically and overseas. The increase in deferred revenue is primarily driven by our increase in sales volume, an increase in extended warranty sales and the deferral of revenue related to discounts on extended warranties offered in conjunction with customer incentive plans, as well as an increase in revenue deferral for customer training that has not yet occurred.
Net cash used in operating activities was $0.9 million in 2014, and consisted of a net income of $1.5 million and non-cash items of $12.6 million, offset by a net change in operating assets and liabilities of $15.0 million. Non-cash items in 2014 consisted primarily of a stock-based compensation expense of $9.4 million, depreciation and amortization expense of $1.8 million, and excess and obsolete inventory expense of $0.9 million. The significant items in the change in operating assets and liabilities include cash used resulting from increases in inventory of $6.9 million, accounts receivable of $11.2 million, and other current and non-current assets of $2.4 million. These uses of cash were offset in part by an increase in accounts payable of $0.6 million, deferred revenue of $2.9 million, and other current and non-current liabilities of $2.0 million. We experienced an increase in inventory as we continued to build inventory to support expected customer demand, increases in purchases of materials to support demand for our CoolSmooth applicator launched in 2014 as well as compliance requirements for products being sold in the European Union. The increase in accounts receivable is a function of the increase in sales as well as timing of payment receipts from customers. The increase in other current and non-current assets is primarily due to timing of payments, as well as receivables for credit card payments in transit. The increase in current and non-current liabilities was driven by the timing of invoice receipt and payments to vendors, higher accrued royalty as result of an increase in sales, an increase in advance payments primarily from international customers due to timing of payment receipt and related shipment and due to an increase in accrued compensation as a result of an increase in headcount. The increase in deferred revenue is primarily a result of an increase in extended warranty sales and the deferral of revenue related to discounts on extended warranties offered in
conjunction with customer incentive plans, as well as an increase in revenue deferral for customer attendance of the CSU customer training that has not yet occurred.
Investing activities.
In 2016, net cash provided by investing activities was $5.3 million primarily due to the sale of investments of $8.7 million, proceeds from the maturity of investments of $7.3 million, offset by purchases of investments of $3.2 million and property and equipment of $7.1 million related to leasehold improvements, furniture and fixtures and certain software to support the growth and expansion of our business and related facilities.
In 2015, net cash provided by investing activities was $0.4 million primarily due to the proceeds from the maturity of investments of $20.7 million, offset by purchases of investments of $16.0 million and property and equipment of $4.3 million.
In 2014, net cash provided by investing activities was $6.4 million primarily due to the proceeds from the maturity of investments of $21.4 million, offset by purchases of investments of $13.4 million and property and equipment of $2.3 million.
Financing activities.
In 2016, net cash used in financing activities was $1.1 million, which primarily comprised $7.2 million used to settle income tax withholding liabilities related to vested restricted stock units (RSUs), partially offset by proceeds of $1.9 million related to stock option exercises, $3.2 million from stock issued under the employee stock purchase plan (ESPP) and $1.2 million related to excess tax benefits from stock-based compensation.
In 2015, net cash used in financing activities was $0.4 million, which primarily comprised $8.3 million used to settle income tax withholding liabilities related to vested RSUs, partially offset by proceeds of $4.1 million related to stock option exercises, $2.5 million from stock issued under the ESPP and $1.4 million related to excess tax benefits from stock-based compensation.
In 2014, net cash used in financing activities was $2.2 million, which was primarily comprised of $6.6 million used to settle income tax withholding liabilities related to vested RSUs, partially offset by proceeds of $2.8 million related to stock option exercises, $1.5 million from stock issued under the ESPP and $0.1 million related to excess tax benefits from stock-based compensation.
Contractual Obligations and Commitments
We have certain fixed contractual obligations and commitments that include capital lease obligations, operating lease obligations and purchase commitments. Changes in our business needs, fluctuating interest rates, and other factors may result in actual payments differing from the estimates. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the table 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, 2016 (in thousands):
The contractual obligations table above excludes our gross liability for unrecognized tax benefits which totaled $1.0 million, including estimated interest and penalties, as of December 31, 2016, and is classified in long-term income taxes payable. We are unable to make a reasonably reliable estimate of the timing of payments in individual years due to uncertainties in the timing of tax audits, if any, or their outcomes. Therefore, our liability for unrecognized tax benefits is not included in the table above.
Massachusetts General Hospital Royalty Payments
In May 2005, we entered into an agreement with Massachusetts General Hospital, or MGH, to obtain an exclusive license to develop and commercialize the patent and the core technology that underlies our CoolSculpting system. We are obligated to pay a 7% royalty on net sales, as defined in the agreement, of CoolSculpting systems, applicators and procedure packs.
In September 2015, we entered into a new agreement with MGH to obtain an exclusive license to develop and commercialize certain patents and technology for the treatment of acne and certain related skin conditions. We are obligated to pay a 3% royalty on net sales, as defined in such agreement, of products incorporating such technology.
Related Party Transactions
See Note 6 "Related Party Transactions" of the Notes to Consolidated Financial Statements, which information is incorporated by reference here.
Recent Accounting Pronouncements
See Note 2 "Basis of Presentation and Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements, which information is incorporated by reference here.
Off-balance Sheet Arrangements
As of December 31, 2016, 2015 and 2014, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
ITEM 7A. 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. Our exposure to foreign currency exchange risk has been insignificant because the majority of our revenue and our expenses are incurred and paid in U.S. dollars.
Interest Rate Fluctuations
We hold cash equivalents as well as short-term and long-term fixed income securities. All maturities are less than two years. Our holdings include fixed and floating rate securities. Changes in interest rates could impact our anticipated interest income. The fair value of our holdings may be adversely impacted due to a rise in interest rates; as a result, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have declined in fair value due to changes in interest rates. As of December 31, 2016 and 2015, we had approximately $3.6 million and $16.4 million invested in available-for-sale investments, respectively. An immediate 10% change in interest rates would not have had a material impact on our future operating results and cash flows.
We do not have interest bearing liabilities as of December 31, 2016, and therefore, we are not subject to risks from an immediate interest rate increase.
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 results of operations.
Foreign Exchange
We use the U.S. dollar as the reporting currency for our consolidated financial statements. Any significant revaluation of the British Pound and Euro may materially and adversely affect our results of operations upon translation of our United Kingdom and Ireland subsidiaries' financial statements into U.S. dollars. We generate revenue in British Pounds and Euros and a portion of our labor and manufacturing overhead expenses are in Euros. Additionally, a portion of our operating expenses are in British Pounds and Euro. Therefore, a fluctuation in the British Pound and Euro against the U.S. dollar could impact our gross profit, gross profit margin and operating expenses upon translation to U.S. dollars. A 10% appreciation or depreciation in British Pounds and Euros against the U.S. dollar would have had an immaterial impact on our results of operations for fiscal 2016, 2015 and 2014.
We expect our international revenues to continue to be denominated largely in U.S. dollars. We also believe that our international operations will likely expand in the future if our business continues to grow. As a result, we anticipate that we may experience increased exposure to the risks of fluctuating currencies and may choose to engage in currency hedging activities to reduce these risks. However, we cannot be certain that any such hedging activities will be effective, or available to us at commercially reasonable rates. To date, we have not entered into any hedging transactions or used any other derivative financial instruments.
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of ZELTIQ Aesthetics, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows present fairly, in all material respects, the financial position of ZELTIQ Aesthetics, Inc. and its subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because a material weakness in internal control over financial reporting related to the Company’s risk assessment process existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in the Management's Report on Internal Control over Financial Reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2016 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in management's report referred to above. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 1, 2017
ZELTIQ Aesthetics, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
ZELTIQ Aesthetics, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
ZELTIQ Aesthetics, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
ZELTIQ Aesthetics, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
ZELTIQ Aesthetics, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
ZELTIQ Aesthetics, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
ZELTIQ Aesthetics, Inc.
Consolidated Statements of Cash Flows
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
ZELTIQ Aesthetics, Inc.
Notes to Consolidated Financial Statements
1. The Company and Basis of Presentation
ZELTIQ Aesthetics, Inc. (the “Company”) was incorporated in the state of Delaware on March 22, 2005. The Company was founded to develop and commercialize a non-invasive product for the selective reduction of fat. Its first commercial product, the CoolSculpting system, is designed to selectively reduce stubborn fat bulges. 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 leads to fat cell elimination through a natural biological process known as apoptosis, without causing scar tissue or damage to the skin, nerves, or surrounding tissues. The Company generates revenue from sales of its CoolSculpting system and from sales of consumables to its customers.
In August 2011, the Company incorporated ZELTIQ Limited as a wholly-owned subsidiary in the United Kingdom to serve as its sales office for direct sales in Europe. In December 2014, the Company incorporated ZELTIQ Ireland Limited and ZELTIQ Ireland International Limited as wholly-owned subsidiaries in Ireland for additional office support in Europe. In December 2015, the Company also incorporated ZELTIQ Ireland International Holdings Unlimited Company. All intercompany transactions and balances have been eliminated in consolidation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of net sales and expenses during the reported periods. Significant items subject to management’s estimates include revenue recognition, allowance for doubtful accounts, valuation allowance for deferred tax assets, stock‑based compensation, income tax uncertainties, valuation of intangible assets, and warranty accrual. Actual results could differ materially from those estimates and assumptions.
Reclassification
Certain amounts in the prior year's consolidated balance sheet have been reclassified to conform to the current year's presentation. In addition, certain amounts in prior years’ cash flows in operating and financing activities were reclassified within their respective sections to conform to the current year’s presentation. These reclassifications had no impact on previously reported consolidated statements of operations.
Out-of-period adjustments
In the fourth quarter of 2016, the Company recorded an out-of-period correcting adjustment of $0.9 million to increase sales and marketing expense by $0.9 million, with a corresponding increase to accrued compensation, of which $0.4 million is related to the second quarter of 2016, and the remaining $0.5 million is related to prior years. In addition, the Company recorded an out-of-period correcting adjustment of $0.3 million to decrease general and administrative expense, with a corresponding increase to accounts receivable, related to other quarters in 2016. During prior periods in 2016, the Company also recorded certain out-of-period correcting adjustments that increased cost of revenue by $0.8 million, which originated in the year ended December 31, 2015 or prior.
As a result, the aggregate impact of the out-of-period adjustments recorded in 2016 was an increase of $0.8 million to cost of revenue, $0.5 million to other operating expenses and $0.8 million to net income, net of tax effect, in the year ended December 31, 2016. The Company does not believe that such amounts are material to any prior period consolidated financial statements, and the impact of correcting these misstatements as out-of-period adjustments is not material to the consolidated financial statements for each respective quarterly and annual period.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. The primary estimates underlying the Company's financial statements include the value of revenue elements, accruals for discretionary customer programs and payments, product warranties, inventory valuation, allowance for doubtful accounts receivable, assumptions regarding variables used in calculating the fair value of the Company's equity awards, fair value of investments, useful lives of intangibles, income taxes and contingent liabilities. Actual results could differ from those estimates.
Significant Risks and Uncertainties
The Company's future results of operations involve a number of risks and uncertainties. Factors that could affect the Company's future operating results and cause actual results to vary materially from expectations include, but are not limited to, rapid technological change, continued acceptance of the Company's products, competition from substitute products and larger companies, ability to protect proprietary technology from copy-cat or counterfeit versions the Company's products, strategic relationships and dependence on key individuals. If the Company fails to adhere to ongoing Food and Drug Administration, or FDA, Quality System Regulation, the FDA may withdraw its market clearance or take other action. The Company relies on sole-source suppliers to manufacture some of the components used in its product. The Company's manufacturers and suppliers may encounter supply interruptions or problems during manufacturing due to a variety of reasons, including failure to comply with applicable regulations, including the FDA's Quality System Regulation, equipment malfunction and environmental factors, any of which could delay or impede the Company's ability to meet demand.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, marketable securities and trade receivables. The Company's cash equivalents and marketable securities are held in safekeeping by large, credit worthy financial institutions. The Company invests its excess cash primarily in U.S. banks, government and agency bonds, money market funds and corporate obligations. The Company has established guidelines relative to credit ratings, diversification and maturities that seek to maintain safety and liquidity. Deposits in these banks may exceed the amounts of insurance provided on such deposits. To date, the Company has not experienced any losses on its deposits of cash and cash equivalents.
The Company controls credit risk through credit approvals, credit limits, and monitoring procedures. The Company performs periodic credit evaluations of its customers and generally does not require collateral. Accounts receivable are recorded net of an allowance for doubtful accounts. The allowance for doubtful accounts is based on management's assessment of the collectability of specific customer accounts and the aging of the related invoices, and represents the Company's best estimate of probable credit losses in its existing trade accounts receivable.
The allowance for doubtful accounts consisted of the following activity for years ended December 31, 2016, 2015 and 2014 (in thousands):
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Investments
The Company invests its excess cash balances primarily in certificates of deposit, commercial paper, corporate bonds, and U.S. Government agency securities. Investments with original maturities greater than 90 days that mature less than one year from the consolidated balance sheet date are classified as short-term investments. The Company classifies all of its investments as available-for-sale and records such assets at estimated fair value in the consolidated balance sheets, with unrealized gains and losses, if any, reported as a component of accumulated other comprehensive income (loss) in stockholders' equity. Realized gains and losses from maturities of all such securities are reported in earnings and computed using the specific identification cost method. Realized gains or losses and charges for other-than-temporary declines in value, if any, on available-for-sale securities are reported in other income (expense), net as incurred. The Company periodically evaluates these investments for other-than-temporary impairment.
Inventory
Inventory is stated at the lower of cost (which approximates actual cost on a first-in, first-out basis) or market. Inventory that is obsolete or in excess of forecasted usage is written down to its estimated net realizable value based on assumptions about future demand and market conditions. Inventory write-downs are charged to cost of revenue and establish a new cost basis for the inventory.
Other Receivables from Banks and Restricted Cash
At December 31, 2016 and 2015, other receivables from banks for customer credit card transactions was $4.6 million and $3.3 million, respectively, and is included in "Prepaid expenses and other current assets" on the consolidated balance sheets.
At December 31, 2016 and 2015, cash of $0.8 million and $0.5 million, respectively, was restricted from withdrawal and held by banks in the form of certificates of deposit. These certificates of deposit were held as collateral for the facility lease agreements in Pleasanton, California, and for the Company's United Kingdom banking facilities and credit card programs.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to expense as incurred. Assets not yet placed in use are not depreciated.
The useful lives of the property and equipment are as follows:
Intangible Asset
The intangible asset consists of an exclusive license agreement for commercializing patents and other technology. All milestone payments subsequent to the date of the FDA approval are capitalized as purchased technology when paid, and are subsequently amortized into cost of revenue using the straight-line method over the estimated remaining useful life of the technology, not to exceed the term of the agreement or the life of the patent.
Impairment of Long-lived Assets
The Company reviews property and equipment and the intangible asset for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amount to the future undiscounted net cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the assets' fair value determined using the projected discounted future net cash flows arising from the asset.
Through December 31, 2016, there have been no significant impairments of long-lived assets.
Revenue Recognition
The Company’s revenue is derived from the sales of the CoolSculpting system, consisting of a control unit and applicators, and, from time to time, related extended warranty arrangements, and from the sale of cycles in the form of consumable procedure packs, each of which includes consumable (CoolGels, CoolLiners, Geltraps, and skin wipes) and in the case of the Company's CoolSmooth procedure packs, disposable securement accessories, all of which are used by the Company's customer during treatments. The Company earns revenue from the sale of these products to its customers and to distributors. The Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title to the customer has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Revenue is deferred in the event that any of the revenue recognition criteria is not met. Each consumable procedure pack includes a disposable computer cartridge that the Company markets as the CoolCard. The CoolCard contains enabling software that permits the Company's customers to perform a fixed number of CoolSculpting procedures, or cycles. This software is not marketed separately from the CoolSculpting system or from the CoolCard. Rather, the functionality that the software provides is part of the overall CoolCard product. The CoolSculpting system is marketed as a non-invasive aesthetic device for the selective reduction of fat, not for its embedded software attributes included in the CoolCard that enable its use. The Company does not provide rights to upgrades and enhancements or post-contract customer support for the embedded software. In addition, the Company does not incur significant software development costs or capitalize its software development costs. Based on this assessment, the Company considers the embedded software in the CoolCard incidental to the CoolCard product as a whole and determined that revenue recognition should not be governed by the provisions of Topic 985 of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC).
Persuasive Evidence of an Arrangement. The Company uses contracts or customer purchase orders to determine the existence of an arrangement.
Delivery. The Company's standard terms specify that title transfers upon shipment to the customer. The Company uses third party shipping documents to verify that title has transferred.
Sales Price Fixed or Determinable. The Company assesses whether the sales price is fixed or determinable at the time of the transaction. Sales prices are documented in the executed sales contract or purchase order received prior to shipment. The Company’s 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.
Collectability. The Company assesses whether collection is reasonably assured based on a number of factors, including the customer’s past transaction history and credit worthiness.
Multiple-Element Arrangements. Typically, all products sold to a customer are delivered at the same time. If a partial delivery occurs as authorized by the customer, the Company allocates revenue to the various products based on their vendor-specific objective evidence of fair value, or VSOE, if VSOE exists according to ASC 605-25 as the basis of determining the relative selling price of each element. If VSOE does not exist, the Company may use third party evidence of fair value, or TPE, to determine the relative selling price of each element. If neither VSOE nor TPE exists, the Company may use management’s best estimate of the sales price, or ESP, of each element to determine the relative selling price. The relative selling prices for control units, applicators, CoolCards and extended warranty are based on established price lists and separate, stand-alone sales of these elements. The Company establishes best estimates within a range of selling prices considering multiple factors including, but not limited to, factors such as size of transaction, pricing strategies and market conditions. The Company believes the use of the ESP allows revenue recognition in a manner consistent with the underlying economics of the transaction. The Company’s products do not require maintenance or support. Additionally, from time to time there may be undelivered elements in a multiple element arrangement, such elements generally being training or extended warranty. The Company defers revenue on undelivered elements of an arrangement and recognizes it once all revenue recognition criteria have been met.
Customer Programs and Payments
The Company regularly evaluates the adequacy of its estimates for cooperative marketing arrangements, customer incentive programs and pricing programs. Future market conditions and product transitions may require the Company to take action to change such programs. In addition, when the variables used to estimate these costs change, or if actual costs differ significantly from the estimates, the Company would be required to record incremental increases or reductions to sales, cost of goods sold or operating expenses.
Accruals for Customer Programs
The Company records an accrued liability for cooperative marketing arrangements and customer incentive programs. The estimated cost of these programs is recorded as a reduction of revenue or as an operating expense, if the Company receives a separately identifiable benefit from the customer and can reasonably estimate the fair value of that benefit. Significant management judgment and estimates must be used to determine the cost of these programs in any accounting period.
Cooperative Marketing Arrangements. The Company offers cooperative marketing programs primarily to its North American customers, allowing the customers to receive partial reimbursement for qualifying advertising expenditures which promote the Company's product and brand. Customer participation and reimbursement amounts are estimated based on purchase levels of CoolCards. The objective of these arrangements is to encourage advertising and promotional events to increase sales of the Company's products. Accruals for these marketing arrangements are recorded at the later of time of sale, or time of commitment, based on the related program parameters, review of qualifying advertising expenditures by the customer and historical reimbursement experience. Accrued cooperative marketing as of December 31, 2016 and 2015 was $3.9 million and $2.5 million, respectively, and is included with "accrued marketing expenses" (See Note 4).
Customer Incentive Programs. The Company's customer incentive program consists of rebates for certain distributors based on purchase levels. Estimated costs of customer rebates and similar incentives are recorded at the later of the time the incentive is offered, based on the specific terms and conditions of the program or the time the related revenue is recognized. Accruals for performance-based incentives are recognized as a reduction of the sale price at the later of the time the incentive is offered, based on the specific terms and conditions of the program, or the time the related revenue is recognized. Estimates of required accruals are determined based on negotiated terms, consideration of historical experience, anticipated volume of future purchases, and inventory levels in the channel. Certain incentive programs require management to estimate the number of customers who will actually redeem the incentive based on historical experience and the specific terms and conditions of these programs. Accrued customer incentives as of December 31, 2016 and 2015 were $1.7 million and $2.1 million, respectively, and are included in "accrued expenses and other current liabilities" on the consolidated balance sheets.
Accounting for Payments to Customers
The Company occasionally enters into transactions where it provides consideration to its customers in the forms of cash payments or stock-based awards in exchange for certain goods and services. The Company accounts for such payments to customers in accordance with ASC 605-50, Revenue Recognition: Customer Payments and Incentives, which requires management to characterize the payment as a reduction of revenue if it is unable to demonstrate the receipt of a benefit that is identifiable and sufficiently separable from the revenue transaction and reasonably estimate the fair value of the benefit identified. Significant management judgment and estimates must be used to determine the fair value of the benefit received in any period. For stock awards, the Company believes that the fair value of the awards is more reliably measured than the fair value of the benefit received. The fair value of the stock awards is measured as of the date at which either the commitment for performance by the customer to earn the award is reached or the date the customer’s performance is complete. Until that point is reached, the award is revalued at each reporting period with the true-up to fair value recorded in current period earnings.
Shipping and Handling
Shipping and handling costs charged to customers are recorded as revenue. Shipping costs related to products sold to customers are included in cost of revenue.
Advertising costs
The cost of advertising and media is expensed as incurred. For the years ended December 31, 2016, 2015 and 2014, advertising costs totaled $34.7 million, $17.4 million and $7.9 million, respectively.
Product Warranties
Sale of control units and applicators includes a limited 12-month warranty on product quality for domestic customers and a limited 38-month (control units) and 14-month (applicators) warranty for international indirect customers. The Company also offers a limited 14-month warranty for control units and applicators for its international direct customers.
Warranty and related costs are accrued for based on the Company's best estimates when management determines that it is probable a charge or liability has been incurred and the amount of loss can be reasonably estimated. For new product introductions in which the Company may not have any historical experience, management makes estimates for warranty claims based on a combination of historical experience of other similar products sold and qualitative and quantitative information. The Company exercises judgment in estimating the expected product warranty costs, using data such as the actual and projected product failure rates, estimated repair costs, freight, material, labor, and overhead costs. While management believes that historical experience provides a reliable basis for estimating such warranty cost, unforeseen quality issues or component failure rates could result in future costs in excess of such estimates, or alternatively, improved quality and reliability in the Company's products could result in actual expenses that are below those currently estimated.
The table below represents the activity in the warranty accrual included in "Accrued expenses and other current liabilities" on the consolidated balance sheets. The change in estimates was not significant in any years presented (in thousands):
Not included in the table above are charges and settlements related to the Company's extended warranty program of $3.1 million, $1.1 million and $0.3 million in 2016, 2015 and 2014, respectively.
Research and Development
Research and development costs are charged to expense when incurred. Major components of research and development expenses consist of personnel costs, including salaries and benefits, and research, regulatory affairs, clinical, and development costs.
Stock-Based Compensation
The Company accounts for share-based compensation costs in accordance with the accounting standards for share-based compensation, which require that all share-based payments to employees be recognized in the consolidated statements of operations based on their fair values.
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• | The fair value of stock options ("options") on the grant date is estimated using the Black-Scholes option-pricing model using the single-option approach. The Black-Scholes option pricing model requires the use of highly subjective and complex assumptions, including the option's expected term and the price volatility of the underlying stock, to determine the fair value of award. The Company recognizes the expense associated with options using a single-award approach over the requisite service period. |
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• | The fair value of Restricted Stock Units ("RSUs") is based on the stock price on the grant date using a single-award approach. The RSUs are subject to a service vesting condition and are recognized on a straight-line basis over the requisite service period. For RSUs to non-employees, the Company recognizes expense on an accelerated attribution method and these equity awards are re-measured at fair value at the end of each reporting period, with the changes in fair value recorded to stock-based compensation expense in the period in which the change occurs. |
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• | The fair value of Performance Restricted Stock Units ("PRSUs") with service and performance conditions is based on the estimated number of PRSUs anticipated to be received by the recipient at the end of the performance period. Expense is recognized when it is probable that the performance condition will be met using the accelerated attribution method over the requisite service period. |
The Company recognizes share-based compensation expense for the portion of the equity award that is expected to vest over the requisite service period for those awards and develops an estimate of the number of share-based awards which will ultimately vest, primarily based on historical experience. The estimated forfeiture rate is reassessed periodically throughout the requisite service period. Such estimates are revised if they differ materially from actual forfeitures. As required, the forfeiture estimates will be adjusted to reflect actual forfeitures when an award vests. For the award types discussed above, if an employee terminates employment prior to being vested in an award, then the award is forfeited.
Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse and for operating losses and tax credit carryforwards. The Company estimates its income taxes and amounts ultimately payable or recoverable in multiple tax jurisdictions around the world. Estimates involve interpretations of regulations and are inherently complex. Resolution of income tax treatments in individual jurisdictions may not be known for many years after completion of any fiscal year. The Company is required to evaluate the realizability of its deferred tax assets on an ongoing basis to determine whether there is a need for a valuation allowance with respect to such deferred tax assets. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized. Significant management judgment is required in determining any valuation allowance recorded against deferred tax assets. In evaluating the ability to recover deferred tax assets, the Company considers all available positive and negative evidence giving greater weight to its recent cumulative losses and its ability to carryback losses against prior taxable income and, commensurate with objective verifiability, the forecast of future taxable income including the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.
The Company recognizes and measures uncertain tax positions taken or expected to be taken in a tax return if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company adjusts these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest. The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax provision. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheet.
The Company files annual income tax returns in multiple taxing jurisdictions around the world. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, the Company believes that its reserves for income taxes reflect the most likely outcome. The Company adjusts these reserves, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position could require the use of cash or loss of tax attributes.
At December 31, 2015, based on the Company's evaluation of the positive and negative evidence described in Note 10-Income Taxes, the Company concluded that the positive evidence outweighed the negative evidence and that it was more likely than not that the Company will realize all of its U.S. federal and state deferred tax assets, except for deferred tax assets related to California R&D credits.
Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by component of each year was as follows (in thousands):
Foreign currency translation
All assets and liabilities of the Company's non-U.S. operations are translated into U.S. dollars at the period-end exchange rates and the resulting translation adjustments are included in other comprehensive income. The functional currencies of the Company's non-U.S. operations are generally designated in their respective local currencies. Gains or losses arising from currency exchange rate fluctuations on transactions denominated in a currency other than the local functional currency are included in other income (expense), net. In 2016, the Company began to record gains and losses arising from currency exchange rate fluctuation in connection with the classification of certain intercompany balances. These intercompany balances are eliminated as part of the Company’s consolidation process, however the foreign currency effects are reported in “Other income (expense), net” in the consolidated statements of operations. Foreign currency gains/(losses) were $2.0 million, $(0.3) million and $(0.3) million in 2016, 2015 and 2014, respectively.
Recent Accounting Pronouncements not yet effective
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) to supersede nearly all existing revenue recognition guidance under GAAP. The objective of the updated guidance is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. This standard update contains principles that the Company will apply to determine the measurement of revenue and timing of when it is recognized. This guidance allows for two methods of adoption: (a) full retrospective adoption, meaning the guidance is applied to all periods presented, or (b) modified retrospective adoption, meaning the cumulative effect of applying this guidance is recognized as an adjustment to the fiscal 2018 opening accumulated deficit balance. The Company has not selected the transition method and is continuing to assess the overall impact the adoption of this ASU on its consolidated financial statements. The Company expects to adopt this new guidance in the first quarter of 2018.
In July 2015, the FASB issued ASU No. 2015-11 to amend ASC Topic 330, Inventory (Topic 330) to simplify the measurement of inventory. The amendments require that an entity measure inventory at the lower of cost and net realizable value instead of the lower of cost and market. This guidance will be effective for the Company in the first quarter of 2017. The Company does not anticipate the new guidance will have a material impact on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU will be effective for the Company in the first quarter of 2019. The Company is evaluating the impact of the adoption of this update on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. The ASU simplifies several aspects of the accounting for employee share-based payments including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This ASU will be effective for the Company in the first quarter of 2017. The Company is currently evaluating the impact this new guidance will have on its consolidated financial statements and related disclosures.
In May 2016, the FASB issued ASU No. 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 pursuant to Staff announcements at the March 3, 2016 EITF Meeting ("ASU 2016-11"). The update rescinds from the FASB Accounting Standards Codification certain SEC paragraphs as a result of two SEC Staff Announcements at the March 3, 2016 meeting. The amendments in ASU 2016-11, as applicable to the Company, related to Topic 605 will be effective for the Company in the first quarter of 2018. The Company is assessing the impact of this new guidance on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. The new guidance will be effective for the Company starting in the first quarter of fiscal 2021, with early adoption permitted. The Company has not evaluated the impact that this ASU will have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), which intends to reduce diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. This guidance will be
effective for the Company in the first quarter of 2018. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740). This ASU amended its guidance for tax accounting for intra-entity asset transfers. The amendment removes the prohibition against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The amendment will be effective for the Company in the first quarter of 2018. The amendment is required to be adopted on a modified retrospective basis. The Company has not evaluated the impact that this ASU will have on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 320), which amended the guidance on the classification and presentation of restricted cash in the statement of cash flow. The amendment requires entities to include restricted cash and restricted cash equivalents in its cash and cash equivalents in the statement of cash flow. The amendment will be effective for the Company in the first quarter of 2018 and is required to be adopted retrospectively. The Company has not yet evaluated the impact that this ASU will have on its consolidated financial statements.
3. Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
•Level 1—Quoted prices in active markets for identical assets or liabilities.
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• | Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
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• | Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The categorization of a financial instrument within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The Company classifies its cash equivalents and investments within Level 1 and Level 2, as it uses quoted market prices or alternative pricing sources and models utilizing market observable inputs. The following tables set forth the fair value of the Company’s financial assets and liabilities by level within the fair value hierarchy (in thousands):
In 2016 and 2015, the Company did not have any transfers of financial assets measured at fair value on a recurring basis to or from Level 1, Level 2 or Level 3. The Company did not hold any Level 3 assets or liabilities as of December 31, 2016 and December 31, 2015.
The carrying amounts of the Company’s cash equivalents, accounts receivable and accounts payable approximate fair value due to their relatively short maturities.
Investments
The Company's short-term and long-term investments as of December 31, 2016 were as follows (in thousands):
The Company's short-term and long-term investments as of December 31, 2015 were as follows (in thousands):
In 2016 and 2015, gains or losses realized on the sale of investments were insignificant.
The contractual maturities of the Company's short-term and long-term investments as of December 31, 2016 are as follows (in thousands):
When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below the amortized cost basis, review of current market liquidity, interest rate risk, the financial condition of the issuer, as well as credit rating downgrades. The Company believes that the unrealized losses are not other-than-temporary. The Company does not have a foreseeable need to liquidate the portfolio and anticipates recovering the full cost of the securities either as market conditions improve, or as the securities mature.
4. Balance Sheet Components
Inventory
The components of inventory consisted of the following (in thousands):
Property and equipment, net
Property and equipment, net comprised the following (in thousands):
Depreciation and amortization expense related to property and equipment was $3.0 million, $1.7 million and $1.1 million in 2016, 2015 and 2014, respectively.
Accrued expenses and other current liabilities
Items included in "Accrued expenses and other current liabilities" on the Company's consolidated balance sheets that are in excess of 5% of total current liabilities are as follows (in thousands):
5. License Agreement with Massachusetts General Hospital
Intangible asset consists of an exclusive license agreement with Massachusetts General Hospital (MGH) for commercializing patents and other technology. All milestone payments payable by the Company pursuant to the terms of the agreement subsequent to the date of the FDA clearance were capitalized as purchased technology when paid, and are subsequently amortized into cost of revenue using the straight-line method over the estimated remaining useful life of the technology, not to exceed the term of the agreement or the life of the patent.
In September 2015, the Company entered into a new agreement with MGH to obtain an exclusive license to develop and commercialize certain patents and technology for the treatment of acne and certain related skin conditions. The Company is obligated to pay a 3% royalty on net sales, as defined in this agreement, of products incorporating such technology.
Intangible asset, net was as follows (in thousands):
The amortization expense of the intangible asset was $0.7 million per year in 2016, 2015 and 2014.
The total estimated annual future amortization expense of this intangible asset as of December 31, 2016, is as follows (in thousands):
6. Related Party Transactions
The Company entered into a distribution agreement with ADVANCE Medical, Inc. and its wholly owned subsidiaries, Immunotech and BIOGEN, or ADVANCE, dated March 18, 2011, as the Company's exclusive distributor of CoolSculpting in Brazil and Mexico, as amended on August 29, 2011, February 27, 2012 and September 4, 2012. The distribution agreement was further amended on August 15, 2014, whereby ADVANCE is no longer a distributor in Mexico, effective November 13, 2014. As the exclusive distributor in Brazil, ADVANCE is required to purchase a minimum quantity of the Company’s products each calendar quarter throughout the term of the distribution agreement which expires on December 31, 2018. Venrock, a principal stockholder of the Company, owns an equity interest in ADVANCE Medical, Ltd., the parent company of ADVANCE. Dr. Bryan E. Roberts, who was a member of the Company's Board of Directors until the Company's annual meeting of stockholders in June 2016, is also a partner of Venrock Associates. ADVANCE purchases product with payment terms up to 180 days, and to date no amounts have been determined to be unrecoverable. The revenue recognized by the Company under this distribution agreement in 2016, 2015 and 2014, was $2.0 million, $3.6 million and $1.9 million, respectively. The accounts receivable balance under this distribution agreement as of December 31, 2016 and 2015, was $0.5 million and $1.7 million, respectively.
As of December 31, 2016, the Company held cash equivalents with a total fair value of $3.1 million in a money market fund managed by a related party, BlackRock, Inc., which held 4,084,079 shares of the Company's common stock, representing approximately 10.2% of the Company's outstanding common stock at that date.
7. Commitments and Contingencies
Operating Lease Obligations
The Company leases certain manufacturing, office, research facilities, and equipment under operating leases that expire at various times, the longest of which expires in 2027. Rent expense for non-cancellable operating leases with scheduled rent increases is recognized on a straight-line basis over the lease term. Future minimum lease payments for the next five years and thereafter are as follows (in thousands):
Rent expense in 2016, 2015 and 2014 was $3.0 million, $2.5 million and $1.5 million, respectively.
In 2016, the Company entered into two new operating leases: one lease for the Company’s executive offices (headquarters) in Pleasanton, California (“new Pleasanton lease”) which will expire in October 2027 (as amended) and another lease for the manufacturing facility in Galway, Ireland which will expire in June 2022. In connection with the new Pleasanton lease, the Company made a decision to vacate its existing Pleasanton headquarters in November 2016, which is under an operating lease through March 2019. In 2016, the Company recorded a charge of $1.2 million (net of deferred rent credit releases) for the fair value of the lease liability.
Purchase Commitments
The Company had non-cancellable purchase obligations to contract manufacturers and suppliers for $4.9 million at December 31, 2016.
Unrecognized Tax Benefits
The Company's gross liability for unrecognized tax benefits totaled $1.0 million, including estimated interest and penalties, as of December 31, 2016, and is classified in long-term income taxes payable. The Company is unable to make a reasonably reliable estimate of the timing of payments in individual years due to uncertainties in the timing of tax audits, if any, or their outcomes.
Legal Matters
From time to time, the Company may be involved in legal and administrative proceedings and claims of various types. Additionally, the Company may be subject to insurance related claims resulting from matters associated with CoolSculpting treatments. The Company records a liability in its consolidated financial statements for these matters when a loss is known and considered probable and the amount can be reasonably estimated. Management reviews these estimates in each accounting period as additional information becomes known and adjusts the loss provision when appropriate. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in the consolidated financial statements. If a loss is probable but the amount of loss cannot be reasonably estimated, the Company discloses the loss contingency and an estimate of possible loss or range of loss (unless such an estimate cannot be made). The Company does not recognize gain contingencies until they are realized. Legal costs incurred in connection with loss contingencies are expensed as incurred.
Product Liability Contingencies
The Company has historically been and continues to be predominantly self-insured for any product liability losses related to its products. The Company obtains third-party insurance to limit its exposure to these claims, but this insurance is subject to a cap on reimbursement. Product liability losses are, by their nature, uncertain and are based upon complex judgments and probabilities. The Company accrues for reported claims and estimates for incurred, but not reported claims, to the extent that such losses can be reasonably estimated. The Company determines its accruals for probable product liability losses based on various factors, including historical claims and settlement experience. The total amount of self-insured product liability claims settled (i.e. paid) in 2016 and 2015 was $3.4 million and $0.7 million, respectively. The self-insured product liability claims
settlement in 2014 was not material. The amount of reported and estimated incurred but not known self-insured product liability claims pending was $1.6 million and $1.1 million as of December 31, 2016 and 2015, respectively, which is recorded within "accrued expenses and other current liabilities" on the Company's consolidated balance sheets and expected to be paid within one year.
Indemnifications
In the normal course of business, the Company enters into contracts that contain a variety of representations and warranties and provide for general indemnifications. The Company's exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made. To date, the Company has not paid any claims, and the Company believes that the estimated fair value of these indemnification obligations is minimal and has not accrued any amounts for these obligations.
8. Stock-Based Compensation
The Company’s stock plans are limited to employees, directors, and consultants. Shares reserved for future issuance under the stockunits. Excludes securities that may be issued under our Employee Stock
Purchase Plan.
| (3) |
Calculation excludes shares subject to outstanding restricted stock units and performance stock units which do not have an exercise price. |
| (4) |
Represents, as of December 31, 2016, 3,856,415 shares of our common stock reserved for future issuance under our equity compensation plans may bereferred to used for grants of options, RSUs, PRSUs and other types of awards. Options granted under the stock plans are either incentive or nonqualified stock options and generally become exercisable in equal monthly installments over a period of |
four years from the date of grant (after the first anniversary of grant) and expire generally ten years from the grant date. RSUs generally vest in equal annual installments over a four-year period. PRSUs generally vest over the performance period when the performance conditions are met.
The Board of Directors authorizes the granting of options, RSUs, PRSUs and other type of awards to employees and consultants. The exercise prices of the options shall not be less than the fair market value of common stock on the date of grant. The fair value of RSUs granted is determined based on the number of RSUs granted and the quoted price of the Company's common stock on the date of grant. As of December 31, 2016, approximately 3.9 million shares remained available for issuance under the Company's stock plans.
The Company also sponsors the Employee Stock Purchase Plan (the "ESPP") in which eligible employees may contribute up to 20% (subject to certain limitations) of their base compensation to purchase shares of common stock. Each offering period consists of one six-month purchase period. The purchase price for shares of common stock under the ESPP is 85% of the lesser of the fair market value of the Company's common stock on the first day of the offering period or the purchase date. The ESPP offering periods will commence on or about the first trading days of December and June of each year and end on or about the last trading days of the next May and November, respectively.
Stock-based compensation consists of the following (in thousands):
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(A) | This amount relates to an equity grant to a non-employee customer that was recorded as a reduction of revenue. |
Stock Options
The fair value of each option is estimated at the date of grant using the Black-Scholes option pricing formula with the following assumptions:
Determining Fair Value for Options
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• | Expected Term. Starting in 2015, the Company modified its approach by including its own historical data along with the expected term of the identified peer group companies and will continue to apply this methodology until a sufficient historical information regarding its own expected term becomes available. |
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• | Volatility. Starting in 2015, the Company modified its approach by including its own common stock trading history along with the volatility of the identified peer group companies. The expected stock price volatility is estimated using a combination of historical and peer group volatility to derive the expected volatility assumption. The Company believes the blended volatility is more representative of future stock price trends over the expected life of the options rather than just using historical or peer group volatility and will continue to apply this methodology until a sufficient historical information regarding the volatility of its own stock price becomes available. |
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• | Risk-Free Interest Rate. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. |
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• | Dividend Yield. The Company has never paid any dividends and does not plan to pay dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model. |
Option activity is summarized as follows:
As of December 31, 2016, there was $2.9 million of unrecognized compensation expense, net of estimated forfeitures, related to options, which the Company expects to recognize over a weighted average period of 3.2 years. The aggregate intrinsic value of in-the-money options outstanding as of December 31, 2016 was $5.7 million. The total intrinsic value of options exercised in 2016, 2015,in footnote (1) above, and 328,672 shares of our common
stock reserved for future issuance under our Employee Stock Purchase Plan. The maximum number of shares subject to purchase rights under the Employee Stock Purchase Plan is a function of stock price and total employee contributions. As such, we
and 2014 was $1.5 million, $2.8 million and $3.2 million, respectively. The weighted average grant-date fair value of options granted in 2016, 2015 and 2014 was $11.15, $18.19 and $6.77 per share, respectively.
The following table summarizes information about stock options outstanding as of December 31, 2016:
Restricted Stock Units
Activity related to RSUs is set forth below:
Amounts in the table above are inclusive of PRSUs granted and released in their respective years. See next section below for a discussion related to PRSUs.
As of December 31, 2016, the Company had $20.8 million of unrecognized compensation expense, net of estimated forfeitures, which it expects to recognize over a weighted average period of 3.2 years. The aggregate intrinsic value of the RSUs outstanding was $57.1 million.
Performance Restricted Stock Units (PRSUs)
From time to time, the Company will issue PRSUs to senior executives. In 2016, 2015 and 2014, the Company granted 40,000, 64,938, and 40,000 PRSUs, respectively, to certain senior executives, which are accounted for as equity awards. The number of units that ultimately vest depends on achieving certain performance criteria and can range from 0% to 100% of the number of units granted. The performance criteria are specific to the roles of each of the executivescannot reasonably determine the number of shares currently subject to purchase rights.
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and are set by the Compensation
Committee of the Board of Directors. The performance-based restricted stock units have no dividend or voting rights during the performance period. Each of the performance-based restricted stock units represents the contingent right to receive one share of the Company's common stock if the vesting conditions are satisfied. Compensation expense related to these grants is based on the grant date fair value of the award.
Equity Modification related to the Company's former Chief Financial Officer
On February 25, 2016, the Company's former Chief Financial Officer and the Company mutually agreed that the former Chief Financial Officer would cease to be an officer and employee of the Company which resulted in the Company incurring $0.3 million in termination benefits. In addition, stock-based compensation expense relating to the modifications of the former Chief Financial Officer's options and RSUs totaled $1.1 million in 2016.
9. Employee Benefit Plans
The Company sponsors a 401(k) retirement savings plan which covers substantially all U.S. employees (the “Retirement Plan”). Under the Retirement Plan, employees may elect to contribute up to 90% of their eligible compensation to the Retirement Plan with the Company making a matching contributions of 100%, up to the first 3% of eligible employees' contributions, plus 50% of the next 2% of employees' contributions. Employees vest immediately in the matching contribution. The Company's matching 401(k) contributions were $2.3 million, $1.8 million and $1.5 million for the years ended December 31, 2016, 2015 and 2014, respectively.
10. Income Taxes
The domestic and foreign components of income (loss) before income taxes were as follows (in thousands):
Provision for (benefit from) income taxes consisted of the following (in thousands):
The following is a reconciliation of the statutory federal income tax rate to the Company's effective tax:
The impact of foreign operations primarily relates to the differential between the United States federal statutory rate and lower foreign statutory rates, including a charge for a license payment made in one of the Company's foreign subsidiaries which is incurred in a zero tax rate jurisdiction, due to the Company's tax planning action described below. Tax effects of temporary differences that give rise to significant portions of the deferred tax assets are presented below (in thousands):
As of December 31, 2016, the Company had federal and state net operating loss carryforwards of $96.4 million and $94.1 million, respectively. The federal net operating losses begin expiring in 2025 and state net operating losses begin expiring in 2017. As of December 31, 2016, the Company had credit carryforwards of approximately $5.0 million and $5.8 million available to reduce future taxable income, if any, for federal and state income tax purposes, respectively. The federal research and development credit carryforwards expire beginning 2025, and state credits can be carried forward indefinitely.
The federal and state net operating losses include $26.9 million and $1.0 million of excess stock based compensation that will result in increases to additional paid in capital, when realized.
The valuation allowance for deferred tax assets consisted of the following activity for the years ended December 31, 2016, 2015 and 2014 (in thousands):
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(1) | Of this deduction, $40.4 million relates to the release in the valuation allowance, which was recorded as a deferred tax benefit during the year end December 31, 2015. |
Utilization of net operating losses and tax credit carryforwards may be limited by ownership change rules, as defined in Section 382 of the Internal Revenue Code. Similar rules may apply under state tax laws. The Company has assessed the application of Internal Revenue Code Section 382, during the fourth quarter of 2016, and concluded no limitation currently applies, and the Company will continue to monitor activities in the future. In the event the Company experiences any subsequent changes in ownership, the amount of net operating losses and research and development credit carryovers available in any taxable year could be limited and may expire unutilized.
During the year ended December 31, 2016, the amount of gross unrecognized tax benefits increased by $6.4 million. The total amount of unrecognized tax benefits was $9.3 million as of December 31, 2016. The Company recognizes interest and penalties related to uncertain tax positions as part of the income tax provision. To date, such interest and penalties have not been material.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
While it is often difficult to predict the final outcome of any particular uncertain tax position, management does not believe that it is reasonably possible that the estimates of unrecognized tax benefits will significantly change during the next twelve months.
Each quarter the Company assesses the recoverability of its deferred tax assets under ASC 740, Income Taxes. The Company is required to establish a valuation allowance for any portion of the assets that the Company concludes is not more likely than not realizable. The Company's assessment considers, among other things, the three year cumulative net income, positive pretax net income and taxable income, forecasts of its future taxable income, carryforward periods, and its utilization experience with operating loss and tax credit carryforwards and tax planning actions.
Management believes that, based on a number of factors, which include the Company's historical operating performance and cumulative U.S. taxable income during the three most recent years, the Company's tax planning action of migrating and licensing certain intellectual property to its foreign subsidiaries as well as its forecasted future taxable income, it is more-likely-than-not that it will realize a benefit from its Federal and certain State deferred tax assets within allowable net loss carryforward periods. As such, in fourth quarter of 2015, the Company released a valuation allowance of $40.4 million against its Federal and certain State deferred tax assets, with a corresponding deferred tax benefit during the quarter. Due to strong results during recent years and increased confidence that the Company will continue to generate taxable income into the foreseeable future, the Company's assessment regarding the potential to realize its deferred tax assets changed.
With respect to California deferred tax assets, the Company believes that, except for California R&D credits, all other deferred tax assets would be realized in the future. Although the Company anticipates generating taxable income in California in future years, expected continued generation of California R&D credits along with existing net operating loss carryforwards of $70 million will be sufficient to offset California taxable income in the foreseeable future. As such, the Company's ability to utilize its current California R&D credit carryforwards is not more likely than not, and the Company continues to apply a valuation allowance against these deferred tax assets. For other states' deferred tax assets, the Company believes it is more likely than not that those deferred tax assets will be realized in the future and as a result does not apply a valuation allowance against those deferred tax assets.
As of December 31, 2015, U.S. income taxes and foreign withholding taxes associated with the repatriation of undistributed earnings of foreign subsidiaries were not provided for on a cumulative total of $0.6 million. The Company intends to reinvest these earnings indefinitely in the Company's foreign subsidiaries. If these earnings were distributed in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, the Company would be subject to additional U.S. income taxes and foreign withholding taxes, net of related foreign tax credits. Determination of the amount of any unrecognized deferred income tax liability related to these earnings is not practicable because of the complexities of the hypothetical calculation.
The Company files income tax returns in the U.S. federal and state jurisdictions, in the United Kingdom and Ireland and all returns since inception remain open to examination.
On December 18, 2015, the President signed into law the Protecting Americans from Tax Hikes Act of 2015, which retroactively extends several expired tax provisions. Among the extended provisions is the Section 41 research credit for qualified research expenditures incurred through the end of 2015. The benefit of the reinstated credit impacted the consolidated statement of operations in the period of enactment, which was the fourth quarter of 2015 due to the reversal of the valuation allowance on federal research and development credit carryforwards.
11. Net income per share
The Company calculates basic net income per share using net income and the weighted-average number of shares outstanding during the reporting period. Diluted net income includes any dilutive effect of outstanding options and RSUs. PRSUs are excluded from the shares used to compute diluted EPS until the performance conditions associated with the PRSUs are met.
A reconciliation of the numerator and denominator used in the calculation of the basic and diluted net income per share is as follows (in thousands, except for per share amounts):
Potential common share equivalents that have been excluded where the inclusion would be anti-dilutive are as follows (in thousands):
12. Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company has one business activity and there are no segment managers who are held accountable for operations. Accordingly, the Company has a single reportable segment structure. All of the Company’s principal operations and decision-making functions are located in the United States.
No individual customer accounted for more than 10% of annual revenue in 2016 and 2014. One aesthetic chain, along with its affiliated franchises, accounted for 10% of revenue in 2015. One aesthetic chain, along with its affiliated franchises, accounted for 10% of accounts receivable as of December 31, 2015. No individual customer accounted for more than 10% of accounts receivable as of December 31, 2016.
Revenue by geographic location, based on the location to where the product was shipped, is summarized as follows (in thousands):
North America includes the United States and related territories as well as Canada. International is the rest of the world. Revenue for the United States was $263.7 million, $180.5 million and $125.0 million in 2016, 2015 and 2014, respectively.
Revenue by product category is summarized as follows (in thousands):
Property and equipment, net, classified by major locations in which the Company operates were as follows (in thousands):
13. Subsequent Events (unaudited)
In January 2017, the Company signed a new manufacturing facility lease (through June 2023) in Dublin, California for 85,441 square feet as well as a new warehouse facility lease (through January 2022) in Livermore, California for 42,688 square feet (collectively "2017 lease facilities"). The new 2017 lease facilities are intended to replace the Company's existing Dublin and Livermore facilities, which have leases that are set to expire in 2017.
On February 13, 2017, the Company entered into a definitive agreement with Allergan Holdco US, Inc. (“Allergan US”) and Blizzard Merger Sub, Inc. (“Merger Sub”), each a subsidiary of Allergan plc (“Allergan”), pursuant to which, upon the terms and subject to the conditions set forth therein, Merger Sub will merge with and into the Company, with the Company continuing as the surviving entity and becoming a wholly-owned, indirect subsidiary of Allergan. As a result of the merger, each share of the Company’s common stock issued and outstanding immediately prior to the effective time of the merger (other than shares held (1) by the Company (or held in the Company’s treasury), (2) by Allergan US, Merger Sub or any other wholly owned subsidiary of Allergan US or (3) by stockholders of the Company who have validly exercised their dissenters’ rights under Delaware law) will be converted into the right to receive $56.50 in cash, without interest and subject to any required tax withholding. Subject to the satisfaction or waiver of various closing conditions, including the approval of the merger by the Company's stockholders and the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the merger is expected to be completed in the second half of 2017.
Supplementary Financial Data (unaudited)
The following table presents selected unaudited consolidated financial data for each of the eight quarters in the two-year period ended December 31, 2016. The selected quarterly financial data should be read in conjunction with the Company's consolidated financial statements and the related notes and "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations." This information has been derived from the Company's unaudited consolidated financial statements that, in management's opinion, reflect all recurring adjustments necessary to fairly state this information when read in conjunction with the Company's consolidated financial statements and the related notes appearing in the section entitled "Consolidated Financial Statements," Net income (loss) per share-basic and diluted, for the four quarters of each fiscal year may not sum to the total for the fiscal year because of the different number of shares outstanding during each period. The results of operations for any quarter are not necessarily indicative of the results to be expected for any future period.
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(1) | In the fourth quarter of 2015, the Company released $40.4 million of its deferred tax asset valuation allowance. See Note 11 to the Consolidated Financial Statements. |
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(2) | In the fourth quarter of 2016, the Company recorded a $1.2 million charge for the fair value of the lease liability relating to its decision to vacate its existing Pleasanton headquarters. See Note 7 to the Consolidated Financial Statements. |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on our management's evaluation (with the participation of our principal executive officer and principal financial officer), as of December 31, 2016, the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the "Exchange Act")) were not effective due to a material weakness in internal control over financial reporting described below in Management's Report on Internal Control over Financial Reporting.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d 15(f) under the Exchange Act). Our management, with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. This evaluation was based on the framework established in “Internal Control-Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment under the framework in “Internal Control-Integrated Framework” (2013), our management concluded that a material weakness exists as described below. A material weakness is “a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.”
We did not maintain effective controls in our risk assessment process. When the material weakness was originally identified as of December 31, 2015, rapid growth in the size and scale of the business had made certain existing controls inadequate and the new controls and control enhancements implemented have not been sufficient to address the risk of material misstatement in 2016. The material weakness resulted in immaterial misstatements in the current year, including those associated with out-of-period adjustments, related to the completeness and accuracy of accrued liabilities, cost of revenue, operating expenses and related disclosures. These misstatements were primarily the result of a lack of controls over the completeness and accuracy of data used in accounting calculations and the appropriateness of presentation of certain transactions.
Additionally, the material weakness could result in further misstatements of account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, our management has determined that this control deficiency constitutes a material weakness.
Because of the material weakness, management concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2016 based on criteria in “Internal Control-Integrated Framework” (2013) issued by the COSO.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in this Annual Report on Form 10-K.
Management’s Plan to Remediate the Material Weakness
In order to remediate the material weakness, management has initiated or will initiate the following steps:
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• | We hired a Director of Internal Controls in September 2016 who has commenced and intends to continue improving the design, implementation, execution and supervision of internal controls within the organization; |
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• | Management intends to continue improving the detailed financial reporting risk assessment process to broaden the scope of areas previously identified as requiring improvement, and design new and enhanced control activities to address these areas; and |
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• | Management intends to continue evaluating the form and frequency of existing control activities and implement additional changes to improve the precision and timeliness of controls in the financial reporting process. |
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Inherent Limitations on the Effectiveness of Controls
Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems' objectives are being met. Further, the design of any control systems must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based, in part, on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
ITEM 9B. OTHER INFORMATION
Not applicable
PART III
| |
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The following information is included in our Notice of Annual Meeting of Stockholders and Proxy Statement to be filed within 120 days after our fiscal year end of December 31, 2016, or the Proxy Statement, and is incorporated herein by reference:
| |
• | Information regarding our directors and any persons nominated to become a director, as well as with respect to some other required board matters, set forth under Proposal 1 entitled “Election of Directors” and under “Information Regarding the Board of Directors and Corporate Governance” in the Proxy Statement. |
| |
• | Information regarding our executive officers is set forth under “Executive Officers” in the Proxy Statement. |
| |
• | Information regarding our audit committee and our designated “audit committee financial expert” is set forth under the caption “Information Regarding the Board of Directors and Corporate Governance” in the Proxy Statement. |
| |
• | Information on our code of business conduct and ethics for directors, officers and employees set forth under the caption “Code of Business Conduct” under “Information Regarding the Board of Directors and Corporate Governance - Information Regarding Committees of the Board of Directors” in the Proxy Statement. |
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• | Information regarding Section 16(a) beneficial ownership reporting compliance set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. |
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• | Information regarding procedures by which stockholders may recommend nominees to our board of directors is set forth under the caption “Consideration and Qualifications of Director Nominees” under “Information Regarding the Board of Directors and Corporate Governance” in the Proxy Statement. |
| |
ITEM 11. | EXECUTIVE COMPENSATION |
Information regarding compensation of our named executive officers is set forth under the caption “Executive Compensation” in the Proxy Statement, which information is incorporated herein by reference.
Information regarding compensation of our directors is set forth under the caption "Director Compensation" in the Proxy Statement, which information is incorporated herein by reference.
Information relating to compensation policies and practices as they relate to risk management is set forth under the caption “Information Regarding the Board of Directors and Corporate Governance - Information Regarding Committees of the Board of Directors - Compensation Committee” in the Proxy Statement, which information is incorporated herein by reference.
Information regarding compensation committee interlocks is set forth under the caption “Information Regarding the Board of Directors and Corporate Governance - Information Regarding Committees of the Board of Directors - Compensation Committee Interlocks and Insider Participation" in the Proxy Statement, which information is incorporated herein by reference.
The Compensation Committee Report is set forth under the caption "Compensation Committee Report" under “Information Regarding the Board of Directors and Corporate Governance - Information Regarding Committees of the Board of Directors” in the Proxy Statement, which report is incorporated herein by reference.
| |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Information regarding security ownership of certain beneficial owners and management is set forth under
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership of shares of our common stock as of March 1, 2017, by:
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• |
|
each of the executive officers named in the Summary Compensation Table, referred to as the “named executive officers”; |
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• |
|
all executive officers and directors of ZELTIQ as a group; and |
| |
• |
|
all those known by us to be beneficial owners of more than five percent of our common stock. |
The information in the table below regarding the beneficial owners of 5% or more of our common stock is based on our review of Schedule 13D
and Schedule 13G filings with the Securities and Exchange Commission. Each person listed below has sole voting and investment power with respect to the shares beneficially owned, unless otherwise stated.
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| Name and Address |
|
ZELTIQ
Common
Stock Direct |
|
|
Stock options
exercisable
within 60
days(1) |
|
|
Restricted
Stock Units
distributable
within 60
days(2) |
|
|
Total
Beneficial
Ownership |
|
|
Percentage of
Common
Stock
Beneficially
Owned(3) |
|
| 5% Holders: |
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
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| Entities affiliated with Capital World Investors (4) |
|
|
3,122,044 |
|
|
|
— |
|
|
|
— |
|
|
|
3,122,044 |
|
|
|
7.7 |
% |
| Entities affiliated with FMR LLC (5) |
|
|
5,996,556 |
|
|
|
— |
|
|
|
— |
|
|
|
5,996,556 |
|
|
|
14.8 |
% |
| The Vanguard Group (6) |
|
|
2,384,670 |
|
|
|
— |
|
|
|
— |
|
|
|
2,384,670 |
|
|
|
5.9 |
% |
| AllianceBernstein L.P. (7) |
|
|
2,019,990 |
|
|
|
— |
|
|
|
— |
|
|
|
2,019,990 |
|
|
|
5.0 |
% |
| Blackrock, Inc. (8) |
|
|
4,084,079 |
|
|
|
— |
|
|
|
— |
|
|
|
4,084,079 |
|
|
|
10.1 |
% |
|
|
|
|
|
|
| Directors: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mark J. Foley (9) |
|
|
108,478 |
|
|
|
1,528,284 |
|
|
|
— |
|
|
|
1,636,762 |
|
|
|
3.9 |
% |
| David J. Endicott |
|
|
6,892 |
|
|
|
— |
|
|
|
1,585 |
|
|
|
8,477 |
|
|
|
* |
|
| Mary Fisher |
|
|
8,056 |
|
|
|
— |
|
|
|
1,033 |
|
|
|
9,080 |
|
|
|
* |
|
| D. Keith Grossman |
|
|
10,517 |
|
|
|
48,987 |
|
|
|
1,152 |
|
|
|
60,656 |
|
|
|
* |
|
| Kevin C. O’Boyle |
|
|
9,919 |
|
|
|
82,907 |
|
|
|
1,033 |
|
|
|
93,859 |
|
|
|
* |
|
| Andrew N. Schiff, M.D.(10) |
|
|
1,608,813 |
|
|
|
1,589 |
|
|
|
1,033 |
|
|
|
1,611,435 |
|
|
|
4.0 |
% |
|
|
|
|
|
|
| Other Named Executive Officers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Todd E. Zavodnick |
|
|
16,948 |
|
|
|
— |
|
|
|
— |
|
|
|
16,948 |
|
|
|
* |
|
| Taylor C. Harris |
|
|
9,158 |
|
|
|
28,819 |
|
|
|
— |
|
|
|
37,977 |
|
|
|
* |
|
| Patrick F. Williams (11) |
|
|
10,920 |
|
|
|
1,674 |
|
|
|
— |
|
|
|
12,594 |
|
|
|
* |
|
| Sergio Garcia |
|
|
46,994 |
|
|
|
47,380 |
|
|
|
— |
|
|
|
94,374 |
|
|
|
* |
|
| Keith J. Sullivan (12) |
|
|
79,198 |
|
|
|
94,125 |
|
|
|
10,000 |
|
|
|
183,232 |
|
|
|
* |
|
|
|
|
|
|
|
| All executive officers and directors as a group (14 persons) (13) |
|
|
1,845,304 |
|
|
|
1,784,548 |
|
|
|
12,048 |
|
|
|
3,641,900 |
|
|
|
8.6 |
% |
| * |
Represents less than 1% |
| (1) |
Represents shares of common stock that the holder may acquire upon the exercise of currently vested options or options that will become vested within 60 days of March 1, 2017. |
| (2) |
Represents shares of common stock that the holder may acquire upon the vesting of restricted stock units that will vest within 60 days after March 1, 2017. |
28
| (3) |
The percentage of shares beneficially owned is based on 40,415,174 shares of Common Stock outstanding as of March 1, 2017. Shares of Common Stock subject to restricted stock unit awards or options which are
currently vested or exercisable or which will become vested or exercisable within 60 days after March 1, 2017, are deemed to be beneficially owned by the person holding such restricted stock units or options for the purpose of computing the
percentage of ownership of such person but are not treated as outstanding for the purpose of computing the percentage of any other person. |
| (4) |
Based on a Schedule 13G/A filed with the SEC on February 13, 2017, reporting beneficial ownership as of December 31, 2016. Capital World Investors, a division of Capital Research and Management Company,
has sole voting and dispositive power over these shares, and holds more than five percent of the outstanding Common Stock of ZELTIQ on behalf of SMALLCAP World Fund, Inc. Capital World Investors disclaims beneficial ownership of these shares. The
address of the principal business office of Capital World Investors is 333 South Hope Street, Los Angeles, CA 90071. |
| (5) |
Based on a Schedule 13G/A filed with the SEC on February 14, 2017, reporting beneficial ownership as of December 31, 2016. Each of FMR LLC and Abigale P. Johnson have sole dispositive power over all of
these shares, and FMR LLC has sole voting power over 479,708 of these shares. Abigail P. Johnson is a Director, the Chairman and the Chief Executive Officer of FMR LLC. The address of the principal business office of FMR LLC and Ms. Johnson is
245 Summer Street, Boston, MA 02210. On March 10, 2017, FMR LLC filed a Schedule 13G/A filed with the SEC reporting that it no longer owned 5% of our common stock, and continued to hold only 22 shares. |
| (6) |
Based on a Schedule 13G filed with the SEC on February 10, 2017, reporting beneficial ownership as of December 31, 2016. The Vanguard Group has sole voting power over 70,068 of these shares, shared voting
power over 1,700 of these shares, sole dispositive power over 2,314,625 of these shares, and shared dispositive power over 70,168 of these shares. The address of the principal business office of The Vanguard Group is 100 Vanguard Blvd., Malvern,
PA 19355. |
| (7) |
Based on a Schedule 13G filed with the SEC on February 10, 2017, reporting beneficial ownership as of December 31, 2016. AllianceBernstein L.P. has sole voting power over 1,846,739 of these shares, sole
dispositive power over 1,976,270 of these shares, and shared dispositive power over 43,720 of these shares. The address of the principal business office of AllianceBernstein L.P. is 1345 Avenue of the Americas, New York NY 10105. |
| (8) |
Based on a Schedule 13G filed with the SEC on February 9, 2017, reporting beneficial ownership as of December 31, 2016. BlackRock Inc. has sole voting power over 4,002,084 of these shares, and sole
dispositive power over all of these shares. The address of the principal business office of BlackRock Inc. is 55 East 52nd Street, New York, NY 10055. |
| (9) |
Mr. Foley is also a named executive officer. |
| (10) |
Shares held directly include 1,597,742 shares held by entities affiliated with Aisling Capital III, L.P. Dr. Schiff disclaims any beneficial ownership of these shares held by Aisling except to the extent of any
pecuniary interest therein. Also included are 87 shares held in trust for the benefit of Dr. Schiff’s children. |
| (11) |
Mr. Williams ceased to be our Chief Financial Officer on April 18, 2016. |
| (12) |
Mr. Sullivan’s direct ownership includes 5,000 shares acquired by an IRA. Mr. Sullivan ceased to be an executive officer on January 16, 2017. |
| (13) |
Includes amounts set forth in the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statementtable above for our named executive officers (other than Mr. Williams and Mr. Sullivan, who are no longer executive officers), and shares beneficially owned by five executive
officers who are not named executive officers. |
In addition to the amounts set forth in the foregoing table, which information isbased on the
incorporated herein by reference.
merger agreement, Allergan US has the right to acquire all of the issued and outstanding shares of our common stock, subject to the terms of the merger agreement. Depending upon the timing of the merger, Allergan US may acquire the shares of common
stock within 60 days of the date of the foregoing table. Allergan plc beneficially owns any shares beneficially owned by Allergan US. The address for Allergan US is: 2444 Dupont Drive, Irvine, CA 92612. The address for Allergan plc is:
Clonshaugh Business and Technology Park, Coolock, Dublin, D17 E400, Ireland.
29
Information regarding securities authorized for issuance under our equity compensation plans is
| Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
TRANSACTIONS WITH RELATED PERSONS
Policy for Approval of Related Party Transactions
Our Audit Committee is responsible for reviewing and approving all transactions in which we are a participant and in which any parties related
to us, including our executive officers, directors, beneficial owners of more than 5% of our securities, immediate family members of the foregoing persons, and any other persons whom our Board of Directors determines may be considered related
parties, has or will have a direct or indirect material interest. If advanced approval is not feasible, the Audit Committee has the authority to ratify a related party transaction at the next Audit Committee meeting. For purposes of our Audit
Committee charter, a material interest is deemed to be any consideration received by such a party in excess of $120,000 per year.
In
reviewing and approving such transactions, the Audit Committee shall obtain, or shall direct our management to obtain on its behalf, all information that our committee believes to be relevant and important to a review of the transaction prior to its
approval. Following receipt of the necessary information, a discussion shall be held of the relevant factors if deemed to be necessary by our committee prior to approval. If a discussion is not deemed to be necessary, approval may be given by
written consent of our committee. This approval authority may also be delegated to the chairman of the Audit Committee in respect of any transaction in which the expected amount is less than $500,000. No related party transaction may be entered into
prior to the completion of these procedures.
The Audit Committee or its chairman, as the case may be, shall approve only those related
party transactions that are determined to be in, or not inconsistent with, the best interests of us and our stockholders, taking into account all available facts and circumstances as our committee or the chairman determines in good faith to be
necessary. These facts and circumstances will typically include, but not be limited to, the material terms of the transaction, the nature of the related party’s interest in the transaction, the significance of the transaction to the related
party and the nature of our relationship with the related party, the significance of the transaction to us, and whether the transaction would be likely to impair (or create an appearance of impairing) the judgment of a director or executive officer
to act in our best interest. No member of the Audit Committee may participate in any review, consideration, or approval of any related party transaction with respect to which the member or any of his or her immediate family members is the related
party, except that such member of the Audit Committee will be required to provide all material information concerning the related party transaction to the Audit Committee.
INFORMATION REGARDING THE BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
INDEPENDENCE OF THE BOARD OF DIRECTORS
As
required under the NASDAQ Stock Market (“NASDAQ”) listing standards, a majority of the members of a listed company’s board of directors must qualify as “independent,” as affirmatively determined by the board of directors.
The Board of Directors consults with ZELTIQ’s counsel to ensure that the Board of Directors’ determinations are consistent with relevant securities and other laws and regulations regarding the definition of “independent,”
including those set forth under the caption “Securities Authorized for Issuance under Equity Compensation Plans” in the Proxy Statement, which information is incorporated herein by reference.
| |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Information regarding certain relationships and related transactions is set forth under the caption "Transactions With Related Persons" in the Proxy Statement, which information is incorporated herein by reference.'
Information regarding director independence is set forth under the caption “Information Regarding the Board of Directors and Corporate Governancein pertinent listing standards of NASDAQ, as in effect from time to time.
Consistent with these considerations,
after review of all relevant identified transactions or relationships between each director, or any of his or her family members, and ZELTIQ, its senior management and its independent auditors, the Board of Directors has affirmatively determined
- Independence of The Board of Directors” in thethat the following six directors are independent directors within the meaning of the applicable NASDAQ listing standards: Ms. Fisher, Mr. Grossman, Mr. O’Boyle, Mr. Endicott and Dr. Schiff. In making this determination,
the Board of Directors found that Proxy Statement, which information is incorporated herein by reference.
| |
ITEM 14. none of these directors or nominees for director had a material or other disqualifying relationship with ZELTIQ.
30
Mr. Foley, ZELTIQ’s President and Chief Executive Officer, is not an
independent director by virtue of his employment with ZELTIQ.
| Item 14. |
PRINCIPAL ACCOUNTING FEES AND SERVICES |
Information regarding principal auditor fees and services is set forth under “Proposal 2 - Ratification of Selection of Independent Registered Public Accounting Firm - Principal Accountant Fees and Services”Principal Accounting Fees and Services |
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table represents aggregate fees billed to ZELTIQ for the fiscal years ended December 31, 2016, and December 31, 2015,
by PricewaterhouseCoopers LLP, ZELTIQ’s principal accountant.
|
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|
|
| |
|
Fiscal Year Ended |
|
| |
|
2016 |
|
|
2015 |
|
| Audit Fees (1) |
|
$ |
2,429,896 |
|
|
$ |
2,284,049 |
|
| Audit-related Fees |
|
|
— |
|
|
|
— |
|
| Tax Fees (2) |
|
|
17,000 |
|
|
|
56,445 |
|
| All Other Fees |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
| Total Fees |
|
$ |
2,446,896 |
|
|
$ |
2,340,494 |
|
|
|
|
|
|
|
|
|
|
| (1) |
Audit Fees represent fees and out-of-pocket expenses whether or not yet invoiced for professional services provided in connection with the
audit of ZELTIQ’s financial statements, review of ZELTIQ’s quarterly financial statements, review of our registration statements on Forms S-3 and S-8, and
audit services provided in connection with other regulatory filings. |
| (2) |
Tax Fees consist of fees for professional services rendered during the fiscal year related to federal, state and international tax compliance and planning and tax advice. |
All fees described above were pre-approved by the Audit Committee.
PRE-APPROVAL POLICIES AND PROCEDURES
The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by ZELTIQ’s independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services. The independent registered public
accounting firm and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm in the Proxy Statement, which information is incorporated herein by reference.
accordance with this policy.
31
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Form 10-K
1. Consolidated Financial Statements and Supplementary Financial Data:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Supplementary Financial Data
2. Financial Statements Schedules
All schedules have been omitted because they are not required, not applicable, or the required information is included in the consolidated financial statements or notes thereto.
3.Exhibits
The exhibits listed in the Exhibits Index, immediately following the signature page to this Form 10-K, are filed or incorporated by reference as part of this Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
|
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| |
| | ZELTIQ Aesthetics, Inc.
| ZELTIQ Aesthetics, Inc. |
|
|
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|
|
Date: | March 1, 2017 Date:April 27, 2017 |
By: |
|
|
By: | |
|
| |
| |
|
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|
|
|
Taylor C. Harris |
| | |
| |
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|
|
|
|
Senior Vice President and Chief Financial Officer |
| | |
| |
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|
|
|
(Duly Authorized Officer, Principal Financial and Accounting Officer) |
| | | |
32
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Mark J. Foley, Sergio Garcia and Taylor C. Harris, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him or her and in his or her name, place, and stead, in any and all capacities, to sign any and all amendments to this
Exhibit Index
To Amendment No. 1 to Annual Report on Form Form 10-K, and to file the same,/A
with exhibits thereto and other documents in |
|
|
| Exhibit |
connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, |
Description of document |
full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
|
|
| 31.1 |
| | | |
Signature | | Title | | Date |
| | | | |
/s/ Mark J. Foley | | President, Chief Executive Officer | | March 1, 2017 |
Mark J. Foley | | and Director (Principal Executive Officer) | | |
| | | | |
/s/ Taylor C. Harris | | Senior Vice President and Chief | | March 1, 2017 |
Taylor C. Harris | | Financial Officer (Duly Authorized Officer, Principal Financial and Accounting Officer) | | |
| | | | |
/s/ Mary M. Fisher | | Director | | March 1, 2017 |
Mary M. Fisher | | | | |
| | | | |
/s/ D. Keith Grossman | | Director | | March 1, 2017 |
D. Keith Grossman | | | | |
| | | | |
/s/ Kevin C. O'Boyle | | Director | | March 1, 2017 |
Kevin C. O'Boyle | | | | |
| | | | |
/s/ David J. Endicott | | Director | | March 1, 2017 |
David J. Endicott | | | | |
| | | | |
/s/ Andrew N. Schiff, M.D. | | Director | | March 1, 2017 |
Andrew N. Schiff, M.D. | | | | |
EXHIBIT INDEX
Listed and indexed below are all Exhibits filed as part of this report.
|
| | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference |
Exhibit No. | | Description | | Filed Herewith | | Form | | File No. | | Exhibit No. | | Date Filed |
3.1 |
| | Amended and Restated Certificate of Incorporation of ZELTIQ Aesthetics, Inc. | | | | 10-Q | | 001-35318
| | 3.1 |
| | 4/26/2013 |
3.2 |
| | Amended and Restated Bylaws of ZELTIQ Aesthetics, Inc. | | | | 8-K | | 001-35318 | | 3.1 |
| | 2/20/2015 |
4.1 |
| | Reference is made to Exhibits 3.1 and 3.2. | | | | | | | | | | |
4.2 |
| | Form of Stock Certificate. | | | | S-1/A | | 333-175514 | | 4.1 |
| | 9/23/2011 |
10.1 |
| # | Amended and Restated Exclusive License Agreement, dated September 21, 2011, by and between ZELTIQ Aesthetics, Inc. (as successor in interest to Juniper Medical, Inc.) and The General Hospital Corporation d/b/a Massachusetts General Hospital. | | | | S-1/A | | 333-175514 | | 10.4 |
| | 10/11/2011 |
10.2 |
| | Office Building Lease, dated December 22, 2006, by and between ZELTIQ Aesthetics, Inc. (as successor in interest to Juniper Medical, Inc.) and Hacienda Portfolio Venture LLC (as successor in interest to Crosstown Ventures II, LLC). | | | | S-1/A | | 333-175514 | | 10.4 |
| | 8/17/2011 |
10.3 |
| | First Amendment to Office Building Lease, dated December 22, 2006, by and between ZELTIQ Aesthetics, Inc. (as successor in interest to Juniper Medical, Inc.) and Hacienda Portfolio Venture LLC (as successor in interest to Crosstown Ventures II, LLC). | | | | S-1/A | | 333-175514 | | 10.5 |
| | 8/17/2011 |
10.4 |
| | Second Amendment to Office Building Lease, dated September 24, 2010, by and between ZELTIQ Aesthetics, Inc. (as successor in interest to Juniper Medical, Inc.) and Hacienda Portfolio Venture LLC (as successor in interest to Crosstown Ventures II, LLC). | | | | S-1/A | | 333-175514 | | 10.6 |
| | 8/17/2011 |
10.5 |
| | Third Amendment to Office Building Lease, dated August 7, 2012, by and between ZELTIQ Aesthetics, Inc. (as successor in interest to Juniper Medical, Inc.) and Hacienda Portfolio Venture LLC (as successor in interest to Crosstown Ventures II, LLC). | | | | 10-K | | 001-35318 | | 10.5 |
| | 2/26/2014 |
10.6 |
| | Fourth Amendment to Office Building Lease, dated April 22, 2013, by and between ZELTIQ Aesthetics, Inc. (as successor in interest to Juniper Medical, Inc.) and Hacienda Portfolio Venture LLC (as successor in interest to Crosstown Ventures II, LLC). | | | | 10-K | | 001-35318 | | 10.6 |
| | 2/26/2014 |
10.7 |
| | Fifth Amendment to Office Building Lease, dated June 19, 2014, by and between ZELTIQ Aesthetics, Inc. and Hacienda Portfolio Venture LLC. | | | | 10-Q | | 001-35318 | | 10.1 |
| | 7/29/2014 |
10.8 |
| | Building Lease, dated October 3, 2013, by and between ZELTIQ Aesthetics, Inc. and Westcore Greenville, LLC. | | | | 10-K | | 001-35318 | | 10.7 |
| | 2/26/2014 |
10.9 |
| | First Amendment to Building Lease, dated May 5, 2014, by and between ZELTIQ Aesthetics, Inc. and Westcore Greenville, LLC. | | | | 10-Q | | 001-35318 | | 10.2 |
| | 7/29/2014 |
|
| | | | | | | | | | | | | | |
10.10 |
| | Third Amended and Restated Investor Rights Agreement, dated May 26, 2010, by and among ZELTIQ Aesthetics, Inc. and the individuals and entities listed on Exhibit A attached thereto. | | | | S-1 | | 333-175514 | | 10.23 |
| | 7/13/2011 |
10.11 |
| * | Form of Indemnification Agreement, by and between ZELTIQ Aesthetics, Inc. and each of its directors and officers. | | | | S-1 | | 333-175514 | | 10.17 |
| | 7/13/2011 |
10.12 |
| * | 2005 Stock Incentive Plan. | | | | S-1/A | | 333-175514 | | 10.11 |
| | 8/17/2011 |
10.13 |
| * | Form of Stock Option Agreement under 2005 Stock Incentive Plan. | | | | S-1/A | | 333-175514 | | 10.12 |
| | 8/17/2011 |
10.14 |
| * | Amendment to 2005 Stock Incentive Plan. | | | | S-1/A | | 333-175514 | | 10.13 |
| | 8/17/2011 |
10.15 |
| * | 2011 Equity Incentive Plan. | | | | S-8 | | 333-175514 | | 99.1 |
| | 3/13/2013 |
10.16 |
| * | Form of Stock Option Agreement under 2011 Equity Incentive Plan. | | | | S-1/A | | 333-175514 | | 10.15 |
| | 9/23/2011 |
10.17 |
| * | Form of Restricted Stock Unit Agreement under the 2011 Stock Incentive Plan. | | | | S-1/A | | 333-175514 | | 10.16 |
| | 9/23/2011 |
10.18 |
| * | Form of Restricted Stock Agreement under the 2011 Stock Incentive Plan. | | | | S-1/A | | 333-175514 | | 10.17 |
| | 9/23/2011 |
10.19 |
| * | Form of Notice of Grant of Restricted Stock Unit under the 2011 Stock Incentive Plan. | | | | S-1/A | | 333-175514 | | 10.18 |
| | 9/23/2011 |
10.20 |
| * | Form of Notice of Grant of Restricted Stock under the 2011 Stock Incentive Plan. | | | | S-1/A | | 333-175514 | | 10.19 |
| | 9/23/2011 |
10.21 |
| * | Form of Notice of Grant of Stock Option under the 2011 Stock Incentive Plan. | | | | S-1/A | | 333-175514 | | 10.20 |
| | 9/23/2011 |
10.22 |
| * | 2011 Employee Stock Purchase Plan. | | | | S-1/A | | 333-175514 | | 10.21 |
| | 9/23/2011 |
10.23 |
| | Third Amendment to Office Building Lease dated August 7, 2012 by and between ZELTIQ Aesthetics, Inc. and Hacienda Portfolio Venture LLC. | | | | 10-Q | | 001-35318 | | 10.15 |
| | 11/8/2012 |
10.24 |
| * | ZELTIQ Aesthetics, Inc. 2012 Stock Plan. | | | | S-8 | | 333-183131 | | 99.1 |
| | 8/7/2012 |
10.25 |
| * | 2017 Compensation Arrangements with Named Executive Officers | | | | 8-K | | 001-35318 | | Item 5.2 |
| | 1/24/2017 |
10.26 |
| * | Form of Stock Option Agreement Under 2012 Stock Plan. | | | | 10-K | | 001-35318 | | 10.50 |
| | 3/13/2013 |
10.27 |
| * | Form of Restricted Stock Units Agreement Under 2012 Stock Plan. | | | | 10-K | | 001-35318 | | 10.51 |
| | 3/13/2013 |
10.28 |
| * | Form of Restricted Stock Agreement Under 2012 Stock Plan. | | | | 10-K | | 001-35318 | | 10.52 |
| | 3/13/2013 |
10.29 |
| * | Form of Notice of Grant of Stock Option Under 2012 Stock Plan. | | | | 10-K | | 001-35318 | | 10.53 |
| | 3/13/2013 |
10.30 |
| * | Form of Notice of Grant of Restricted Stock Units Under 2012 Stock Plan. | | | | 10-K | | 001-35318 | | 10.54 |
| | 3/13/2013 |
10.31 |
| * | Form of Notice of Grant of Restricted Stock Under 2012 Stock Plan. | | | | 10-K | | 001-35318 | | 10.55 |
| | 3/13/2013 |
10.32 |
| * | Compensation Arrangements with Non-Employee Directors | | | | 10-Q | | 001-35318 | | 10.1 |
| | 5/11/2016 |
10.33 |
| * | Amended and Restated Offer Letter, dated February 25, 2016, between Keith Sullivan and ZELTIQ Aesthetics, Inc. | | | | 10-Q | | 001-35318 | | 10.6 |
| | 5/11/2016 |
10.34 |
| * | Amended and Restated Offer Letter, dated February 25, 2016, between Sergio Garcia and ZELTIQ Aesthetics, Inc. | | | | 10-Q | | 001-35318 | | 10.7 |
| | 5/11/2016 |
10.35 |
| * | Amended and Restated Offer Letter, dated February 25, 2016, between Carl Lamm and ZELTIQ Aesthetics, Inc. | | | | 10-Q | | 001-35318 | | 10.8 |
| | 5/11/2016 |
10.36 |
| * | Amended and Restated Offer Letter, dated February 25, 2014, between Len DeBenedictis and ZELTIQ Aesthetics, Inc. | | | | 10-Q | | 001-35318 | | 10.4 |
| | 4/30/2014 |
|
| | | | | | | | | | | | | | |
10.37 |
| * | Amended and Restated Offer Letter, dated February 25, 2014, between Patrick Williams and ZELTIQ Aesthetics, Inc. | | | | 10-Q | | 001-35318 | | 10.5 |
| | 4/30/2014 |
10.38 |
| * | Amended and Restated Offer Letter, dated February 25, 2014, between Mark Foley and ZELTIQ Aesthetics, Inc. | | | | 10-Q | | 001-35318 | | 10.5 |
| | 5/11/2016 |
10.39 |
| * | 2016 Compensation Arrangements with Executive Officers
| | | | 8-K | | 001-35318 | | Item 5.02 | | 2/29/2016 |
10.40 |
| * | Amendment to Amended and Restated Offer Letter, dated November 10, 2014, between Keith Sullivan and ZELTIQ Aesthetics, Inc. | | | | 10-Q | | 001-35318 | | 10.1 |
| | 5/5/2015 |
10.41 |
| * | Relocation Agreement, dated February 19, 2015, between Keith Sullivan and ZELTIQ Aesthetics, Inc. | | | | 10-Q | | 001-35318 | | 10.2 |
| | 5/5/2015 |
10.42 |
| * | Amended Relocation Agreement, dated March 12, 2015, between Keith Sullivan and ZELTIQ Aesthetics, Inc. | | | | 10-Q | | 001-35318 | | 10.3 |
| | 5/5/2015 |
10.43 |
| * | Offer Letter, dated February 25, 2016, between Taylor Harris and ZELTIQ Aesthetics, Inc.
| | | | 10-Q | | 001-35318 | | 10.2 |
| | 5/11/2016 |
10.44 |
| | Second Amendment to Building Lease, dated April 28, 2015, by and between ZELTIQ Aesthetics, Inc. and Westcore Greenville, LLC. | | | | 10-Q | | 001-35318 | | 10.1 |
| | 7/30/2015 |
10.45 |
| * | Amended and Restated Offer Letter, dated July 1, 2015, between Leonard DeBenedictis and ZELTIQ Aesthetics, Inc. | | | | 10-Q | | 001-35318 | | 10.2 |
| | 7/30/2015 |
10.46 |
| * | Employee Offer Letter Amendment; Compensation Adjustment and Performance Stock Unit Grant dated August 19, 2015, by and between Carl Lamm and ZELTIQ Aesthetics. | | | | 10-Q | | 001-35318 | | 10.2 |
| | 10/28/2015 |
10.47 |
| * | Employee Offer Letter Amendment; Ireland Assignment Details, dated August 20, 2015, by and between Carl Lamm and ZELTIQ Aesthetics, Inc. | | | | 10-Q | | 001-35318 | | 10.3 |
| | 10/28/2015 |
10.48 |
| * | Exclusive License Agreement, dated September 8, 2015, by and between ZELTIQ Aesthetics, and Massachusetts General Hospital. | | | | 10-Q | | 001-35318 | | 10.1 |
| | 10/28/2015 |
10.49 |
| * | Employee Offer Letter, dated December 16, 2015, by and between Todd Zavodnick and ZELTIQ Aesthetics, Inc. | | | | 10-K | | 001-35318 | | 10.49 |
| | 3/15/2016 |
10.50 |
| | Patrick Williams severance and consulting agreement
| | | | 10-Q | | 001-35318 | | 10.3 |
| | 5/11/2016 |
10.51 |
| | Amended and Restated Offer Letter, dated February 25, 2016, between Brad Hauser and ZELTIQ Aesthetics, Inc.
| | | | 10-Q | | 001-35318 | | 10.9 |
| | 5/11/2016 |
10.52 |
| | Agreement, dated April 28, 2016, between ZELTIQ Ireland Unlimited Company, Seamus Desmond and Denis O'Callaghan, and Zenimax
| | | | 10-Q | | 001-35318 | | 10.1 |
| | 8/9/2016 |
10.53 |
| | Agreement, dated May 10, 2016, between ZELTIQ Aesthetics, Inc. and SFI Pleasanton, LLC, relating to office space in Pleasanton | | | | 10-Q | | 001-35318 | | 10.2 |
| | 8/9/2016 |
10.54 |
| | ZELTIQ Aesthetics, Inc. 2016 Executive Performance Plan
| | | | | | | | Appendix | | 4/29/2016 |
10.55 |
| | Severance and Consulting Agreement, dated January 5, 2017, by and between Keith Sullivan and ZELTIQ Aesthetics, Inc.
| | X | | | | | | | | |
|
| | | | | | | | | | | | | | |
10.56 |
| | Offer Letter, dated January 18, 2017, by and between Danika Harrison and ZELTIQ Aesthetics, Inc.
| | X | | | | | | | | |
10.57 |
| | Offer Letter, dated November 28, 2017, by and between Mike Fitzgerald and ZELTIQ Aesthetics, Inc.
| | X | | | | | | | | |
10.58 |
| | Amendment to Offer Letter, dated January 17, 2017, by and between Brent Hauser and ZELTIQ Aesthetics, Inc.
| | X | | | | | | | | |
10.59 |
| | Agreement, dated January 20, 2017, between ZELTIQ Aesthetics, Inc. and SFII Creekside, LLC, relating to manufacturing space in Dublin, California | | X | | | | | | | | |
10.60 |
| | Agreement, dated January 31, 2017, between ZELTIQ Aesthetics, Inc. and Lawrence Drive Investors LLC, relating to warehouse space in Livermore, California | | X | | | | | | | | |
12.1 |
| | Calculation of Ratio of Earnings to Fixed Charges. | | X | | | | | | | | |
21.1 |
| | List of subsidiaries. | | X | | | | | | | | |
23.1 |
| | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm. | | X | | | | | | | | |
24.1 |
| | Power of Attorney (see signature page to this Form 10-K). | | X | | | | | | | | |
31.1 |
| | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | X | | | | | | | | |
Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2
| |
|
| 31.2 |
| | Certification of Principal |
Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | X | | | | | | | | |
32.1 |
| | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | X | | | | | | | | |
101.INS |
| | XBRL Instance Document | | X | | | | | | | | |
101.SCH |
| | XBRL Taxonomy Extension Schema | | X | | | | | | | | |
101.CAL |
| | XBRL Taxonomy Extension Calculation Linkbase | | X | | | | | | | | |
101.DEF |
| | XBRL Taxonomy Extension Definition Linkbase | | X | | | | | | | | |
101.LAB |
| | XBRL Taxonomy Extension Label Linkbase | | X | | | | | | | | |
101.PRE |
| | XBRL Taxonomy Extension Presentation Linkbase | | X | | | | | | | | |
______________________
| |
# | Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a grant of confidential treatment. |
| |
* | Management Compensation Plan or Arrangement |
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
33
Exhibit 31.1
CERTIFICATION
I, Mark J. Foley, certify that:
1. Exhibit 31.1
Certification
I, Mark J. Foley, certify
that:
1. I have reviewed this Amendment No. 1 to
Form 10-K/A of ZELTIQ Aesthetics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
and
2. Based on
my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report.
|
|
|
|
|
|
|
| Date:April 27, 2017 |
|
|
|
|
March 1,
| |
2017 | |
| |
|
|
|
/s/ Mark J. Foley | |
/s/ Mark J. Foley |
Mark J. Foley | |
|
|
|
|
|
|
Mark J. Foley |
| |
|
|
|
|
|
President and Chief Executive Officer | |
(Principal Executive Officer) | |
|
|
|
|
|
|
(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
I, Taylor C. Harris, certify that:
1. Exhibit 31.2
Certification
I, Taylor C. Harris,
certify that:
1. I have reviewed this Amendment No. 1 to
Form 10-K/A of ZELTIQ Aesthetics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
and
2. Based on
my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report.
|
|
|
|
|
| Date:April 27, 2017 |
|
|
|
|
March 1,
| |
2017 | |
| |
/s/ Taylor C. Harris | |
|
|
/s/ Taylor C. Harris |
Taylor C. Harris | |
|
|
|
Taylor C. Harris |
Chief Financial Officer | |
|
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
|
|
(Principal Financial and Accounting Officer) | |
Officer)
