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Zeltiq Aesthetics (NASDAQ:ZLTQ)

Q1 2014 Results Earnings Conference Call

April 29, 2014, 4:30 p.m. ET

Executives

Nick Laudico - Investor Relations

Mark Foley - President and Chief Executive Officer

Patrick Williams - Senior Vice President and Chief Financial Officer

Analysts

Ben Andrew - William Blair

Tycho Peterson - JPMorgan

Bill Plovanic - Canaccord

Richard Newitter - Leerink Swann

Jeremy Feffer - Cantor Fitzgerald

David Roman - Goldman Sachs

Anthony Vendetti - Maxim Group

Jon Block - Stifel

Operator

Good day, ladies and gentlemen, and welcome to the Zeltiq’s first quarter 2014 earnings conference call. [Operator instructions.] I would now like to turn the conference over to Nick Laudico from the Ruth Group. Sir, you may begin.

Nick Laudico

Thanks, operator. Welcome to Zeltiq’s first quarter 2014 earnings conference call. Zeltiq’s senior management on the call today will be Mark Foley, president and chief executive officer, and Patrick Williams, senior vice president and chief financial officer.

Our discussion today, including the Q&A session, will include forward-looking statements reflecting management’s current forecasts of certain aspects of the company’s future business, including its guidance for 2014. Forward-looking statements are denoted by such words as will, would, believe, should, expect, outlook, estimate, plan, goal, anticipate, project, potential, forecast, and similar expressions that look towards future events or performance.

Forward-looking statements are based on current information that is, by its nature, dynamic and subject to rapid and even abrupt changes. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied in our statements. Such risks and uncertainties are discussed in today’s press release and can also be found in the caption “risk factors” in the company’s filings with the Securities and Exchange Commission, including the latest annual report on form 10-K filed with the Securities and Exchange Commission on February 26, 2014.

This conference call is the property of Zeltiq Aesthetics and any recording or rebroadcast of this conference call is expressly prohibited without the written consent of Zeltiq Aesthetics. After management’s prepared comments, there will be a question-and-answer session.

With that, I’d like to turn the call over to Mark.

Mark Foley

Thanks, Nick. Good afternoon everyone, and thank you for joining today’s conference call. On today’s call, I will provide you with an update on our performance, discuss the progress we are making on our growth initiatives, and review the significant momentum we are experiencing in the market. I will then turn the call over to our CFO, Patrick Williams, who will provide a more detailed financial overview, where he will review updates to our 2014 guidance and provide new business metrics to enhance visibility into our business.

Let me begin with some key takeaways now that the new management team has been in place for a full year and we have our first year over year comparison under the new leadership team. First, our decision to invest in growth of our global sales force is paying off, and we expect continued momentum and productivity as we move through 2014 and beyond.

Second, we remain bullish on our ability to place systems and further penetrate the growing noninvasive body contouring market. Third, we are highly focused on driving utilization and increasing the high margin consumable revenue piece of our business. And fourth, we continue to deliver on our R&D initiatives and are making good progress with our pipeline that will enable us to expand the areas we treat and improve the way we deliver our therapy.

Our success across these areas resulted in first quarter revenue of $31 million, which is an increase of 55% over our Q1 2013 revenue of $20 million. Our performance in the quarter was broad-based, as we continued to experience strong system demand and growing utilization, combined with a stronger international contribution.

Q1 2014 marks the fifth consecutive quarter of better than expected revenue performance and our third consecutive quarter of 50%-plus year over year revenue growth. With the rapid change and turnaround in our business has come an evolving set of challenges and opportunities. I’m extremely pleased with the progress we have made as a senior team and as an organization as a whole.

We have significantly enhanced the team, and have expanded across all areas of the company. We have adjusted our sales and marketing strategy, enhanced our clinical outcomes, and revamped our R&D pipeline.

Throughout all of this change, one thing has remained constant, and that is the technology. It is abundantly clear that our CoolSculpting technology delivered outstanding outcomes when deployed by properly trained and supported practices. The impressive results we have posted under the new team would not have been possible without the clinical efficacy and the wow outcomes we are able to deliver on a safe and reproducible basis.

To reinforce this, the ASDS, or American Society for Dermatologic Surgery, recently released their 2013 data, which showed that CoolSculpting accounted for more than half of all invasive and noninvasive body treatments, including liposuction, performed by their physicians.

As we consider the long term growth drivers of our business, we are strengthening our knowledge of actual patient usage or sell through utilization of our systems, which is being captured by CoolConnect, our point of sale data collection tool.

We have seen that there is a definite seasonality related to our business for both systems and consumables, which is why our comments will continue to stress the importance of understanding their year over year trends.

We will continue to evolve and improve how we track and communicate the health of our business, which Patrick will address in more detail during his section, but moving forward, you will see a greater focus on account versus system utilization, year over year versus quarter over quarter comparisons due to the seasonality of our business, revenue cycles shipped versus total cycles shipped, the number of and performance of multisystem accounts, sell through versus sell-in utilization data, and a shift in our financial focus from quarterly cash management to an adjusted EBITDA measure.

With that, I’d like to turn to our outstanding first quarter results. Of the $31 million in revenue that we generated in the first quarter, 53% came from consumables, which compares favorably to our 2014 full year guidance of 15% consumable revenue and our Q1 results of 45% consumable revenue.

As previously stated, we remain focused on increasing utilization and growing the consumable portion of our business. On our Q4 2013 earnings call, we provided 2014 full year guidance, which anticipated a similar number of systems placements to full year 2013, especially in North America, with growth coming primarily from our consumables business.

Our first quarter revenue composition was in line with this guidance, and included significant absolute dollar growth as consumable revenue grew 85% year over year and system revenue grew 31% year over year. At the end of Q1 2014, our worldwide installed base grew to over 2,315 systems across approximately 2,000 accounts.

Based on the growing momentum we are experiencing in the marketplace, and the strength of our results, we are raising full year revenue guidance to between $137 million to $140 million. Additionally, we remain on track for our full year operating targets as communicated as part of our 2014 guidance.

To remind you, they are consumable revenue contribution of approximately 50%, gross margin of approximately 70%, total operating expenses of approximately 80% of total revenue, and generation of cash in the second half of 2014, which we have consistently guided to, since the beginning of 2013.

Regarding cash burn, we previously communicated that we would burn approximately $10 million in the first half of 2014 and generate approximately $5 million in cash during the second half of 2014. During the quarter, we decided to increase our investment in inventory to accommodate anticipated demand, experienced an increase in our DSOs, and had significant tax payments relating to the vesting of performance and restricted stock awards as a result of the large increase in our stock price.

We feel confident in our ability to deliver full year operating cash burn of approximately $5 million when excluding the cash tax payments associated with the remittances associated with these stock awards.

Due to our rapid growth and associated fluctuations that can occur in working capital on a quarter to quarter basis, we will be moving to an adjusted EBITDA metric on a go-forward basis. We remain focused on being good stewards of our capital and do not anticipate the need to raise additional capital to fund our organic growth efforts.

Additionally, with our current cash balance and the rapid growth we are experiencing, we are more inclined to invest out in front of our initiatives that are working to ensure that we continue to capture the momentum in the marketplace.

In addition to our Q1 financial results, we announced and implemented a number of significant growth drivers in the quarter. Let me review a few of those with you. First, we recently received FDA clearance for thigh treatments based on compelling and statistically significant randomized clinical trial data which was provided to the FDA as part of our submission.

This approval expands the on-label indications for our CoolSculpting system and all of our applicators to include flanks, abdomen, and thighs. More importantly, the results from our clinical trial further validate the safety, efficacy, and versatility of our technology to selectively target fat in other areas of the body.

Second, on the product side, we launched our groundbreaking new surface applicator, CoolSmooth. We began taking preorders for CoolSmooth in late January, after rolling it out to our sales force during our global sales meeting. Early demand has been strong, and grew as we moved into the March tradeshow season.

Through the end of Q1, we have sold approximately 400 applicators, either separately or in conjunction with the new system purchases, and began shipping these applicators in April. Based on strong market interest in CoolSmooth, we chose to increase our investment in inventory to satisfy stronger than anticipated demand.

Additionally, since CoolSmooth treatments take two hours, we have had several accounts indicate interest in buying a second system so that they can do two treatment areas at the same time in order to shorten procedure times for the patient. As a result, CoolSmooth may drive a greater number of second or multisystem sales.

Third, also in the quarter we significantly expanded our global sales force, especially in North America, where we nearly doubled our practice development managers or PDMs. This large expansion resulted in the creation of a fifth region in North America and a full realignment and resizing of territories.

With both new and existing representatives adjusting to their new territories, we experienced a slower start to the quarter and saw productivity pick up in March, and this has continued into April.

System ASPs, when normalized to exclude add-on applicator revenue, are consistent with Q1 2013, and are actually up from Q4 2013 for North America and international, indicating that we did not need to discount to drive system placements.

Fourth, our R&D pipeline continues to provide meaningful near term and future growth opportunities. As we continue to improve the optimal deployment of our proprietary cooling technology, we are encouraged by the progress we are making in the following areas: expanding the areas we treat, including the cementum, enhancing the efficacy and efficiency of our treatments, evaluating the use of CoolSmooth to treat cellulite and skin tightening, and evaluating our core cooling technology for the treatment of acne.

Now I would like to provide a little more background on CoolSmooth, review the performance of our sales team, and share some other business metrics. CoolSmooth, our revolutionary new non-suction-based conformable surface applicator, has already begun to demonstrate its value in expanding treatments to other areas of the body with non-pinchable fat, such as the outer thigh, and the results to date have been very promising.

Its ability to treat areas with less or non-pinchable fat by eliminating the need to draw tissue away from the body provides us with a platform upon which we can build and further improve the technology. This innovative new applicator has also been a source of significant physician interest and the energy at the recent spring tradeshows has been palpable.

For example, at the recently concluded ASAPS, or American Society for Aesthetic Plastic Surgery, meeting in San Francisco, we hosted an evening event which included a panel presentation by four leading plastic surgeons who have incorporated CoolSculpting into their practice. Over 150 people attended the event, so many people in fact that we did not have enough room to accommodate everyone, due to the incredible turnout. We are very pleased with the momentum we are experiencing with this new product launch.

Our bifurcated sales force continues to be a major driver of our success in further penetrating the noninvasive body contouring marketplace, and we believe is without peer in the industry. With regard to system placements, we continue to see a strong and expanding pipeline of new leads, with the first quarter showing an increase in new system sales opportunities, which now totals about five times the number of systems we sold in 2013 in North America.

Multisystem placements remain steady, at about 20% of all systems sold, and we expect system sales to existing customers to continue to make up a material portion of our new system sales. These customers that figured out how to leverage the innovative tools we provide to achieve excellent outcomes, deliver satisfied patients, and wow results can ultimately drive increased productivity and economics for their business.

Additionally, we remain confident in our ability to consistently grow our installed base over the next several years. With respect to utilization, we have armed our PDMs with a number of new tools to enhance their ability to support our customers.

Through the launch of CoolConnect, microsites, our new branding campaign, CoolSmooth, and additional CoolSculpting University classes, our PDMs are coming up to speed on these new initiatives and are helping our CoolSculpting practices to capture a portion of the $22.4 million U.S. patients that have indicated an interest in CoolSculpting.

Additionally, our internal data suggests that we have treated less than 3% of the existing practice patients within our North American CoolSculpting accounts. When compared to the estimated 100,000 patients we treated in the U.S. last year, we believe that we have significant opportunity to grow and expand the market with both existing practice patients and the broader non-aesthetic consumer market.

From our earlier comments regarding seasonality, we continue to be pleased with our consumables sales growth and the utilization trends we are seeing on a year over year basis. We continue to believe that investing in our consumables sales force and this aspect of our business will result in improved productivity and higher consumable revenue in 2014 and beyond.

From a metrics standpoint. Our North American data is much more telling, since we have both a direct sales force and all systems are now equipped with CoolConnect. On the international side, getting quality data is a little more difficult, since we work through a distributor network, making the implementation of CoolConnect more challenging.

Over time, we plan to increase our international PDM presence with in-country personnel and also have decided to accelerate the rollout of CoolConnect in our international markets. We are now tracking and will provide quarterly utilization metrics on a per-account basis. We believe this more accurately reflects the productivity of our systems in the field by taking into consideration those accounts that have multiple system placements. Multisystem accounts outperform single system accounts on average by 3x to 4x, and the number of multisystem accounts continues to steadily grow.

Q1 2014 saw significant year over year growth in our global utilization, which Patrick will address in more detail. We believe that our ability to consistently improve our account utilization and our productivity will be tied to three main things.

One, the optimal ratio of PDMs to CoolSculpting accounts to adequately support our customers. This is what drove us to significantly increase and realign our PDM field organization at the beginning of the year. Two, new tools and programs designed to enhance our ability to support our practices, and three, a distilled down and scalable practice roadmap to success.

Having already discussed our PDM field organization expansion, and the new tools we introduced to support our practices, I will now turn to our practice roadmap, which we call our Five Steps to $200,000.

Our average account generates approximately $240,000 in gross revenue of which we receive $40,000 in consumable revenue. Therefore, and this is the compelling part, even if a customer is just average, they can add $200,000 in profit to their practice.

We launched this five-step program at our global sales meeting and have begun to introduce it to our customers. While we have been teaching certain parts of the program since 2013, we recognize the importance of each step and the need to link them together to achieve the desired result.

The five steps are as follows. One, full practice adoption of the treatment to transformation protocol through trainings like our CoolSculpting University program. Two, treating key staff in the practice with CoolSculpting, creating true ambassadors for the product that have experienced wow results. Three, working closely with the front desk personnel to drive increased conversion of interested patients. Four, hosting cool events to drive incremental grassroots patient awareness. And five, establishing a physician to consumer digital strategy through the use of microsites and paper clip programs.

We believe this distilled down five-step program will be a key driver of enhanced utilization over the course of the year as well as an important competitive differentiator. At this early stage of our five-step program, one of our most important and impactful drivers of utilization appears to be CoolSculpting University. Since its launch, we have seen incredible success with this program and have now increased the number of classes to almost 30 for 2014 versus prior expectations of approximately 20 classes.

CSU is clearly showcasing its value based on the utilization metrics we have been tracking since the program’s launch. CSU attendees are outperforming on utilization by about 20% to 30% when compared to accounts that have not attended a session. Existing accounts that attend CSU also clearly show utilization uptick following class attendance. CSU alumni are still relatively young in their CoolSculpting tenure, since we only began our first class in Q3 of 2013, yet we believe this early data justifies expanding the number of classes.

I will now turn the call over to Patrick for his financial review.

Patrick Williams

Thanks, Mark. Before I begin reviewing our financial results, I would like to point out our supplemental financial information, which has been posted on our website under investor relations. We have added additional metrics which we believe are important to understanding our business and quarterly results. These new metrics include unaudited historical data to allow for easier comparisons.

Revenue for Q1 2014 was $31 million, up 55% from $20 million in Q1 2013. North America accounted for $22.8 million or approximately 74% of revenue in Q1 2014 versus 83% in Q1 2013. North America revenue grew 30% year over year. We saw strong growth in our international markets, which accounted for $8.2 million, or 143%, year over year growth.

As we mentioned in our Q4 2013 earnings call, we expect momentum to increase internationally during 2014 as our new sales management applies successful marketing strategies in international markets, particularly in our direct Europe and indirect Asia Pacific markets.

We had a very strong finish to the quarter, with March being an exceptionally strong month for both systems and consumable revenue. As Mark mentioned, there is seasonality in our business, and we believe our strong exit to the quarter was likely due to typical seasonality along with our newly expanded and geographically realigned sales force starting to come up to speed.

Worldwide system revenue in the quarter was $14.5 million, or up 31% compared to $11.1 million in Q1 2013. As a reminder, any add-on applicator revenue is included in our system revenue line, so it can mask the true growth or dollars associated with system placements, as well as the true ASP.

Add-on applicator revenue in the quarter was approximately $300,000, and did not include any contribution from CoolSmooth, since we did not begin shipping until April. Last year, Q1 2013 add-on applicator revenue was much higher due to both our CoolFit and CoolCurve Plus launches, and came in at about $2 million.

Backing out this add-on applicator revenue provides a true ASP for our systems, which remained steady in North America and slightly up in international on a year over year basis. We did see a greater contribution from international than we have seen historically, with international contributing approximately 30% of system revenue.

Consumable revenue in the quarter was $16.5 million, or up 85% compared to $8.9 million in Q1 2013. We also saw slightly greater contribution of international consumable revenue in the quarter of 23%.

Consumable revenue as a percentage of total revenue was a strong 53% compared to 45% in Q1 2013. Historically, the company has reported total cycles shipped, which included both revenue cycles and nonrevenue producing cycles. These nonrevenue cycles have been, and will continue to be, a part of our business, but they artificially reduce the per cycle ASP calculation since we have not consistently provided the number of nonrevenue cycles.

These nonrevenue cycles are primarily used when we provide complementary treatments for staff members during training at our accounts, as well as during the demo process and the certification process for customers. This has been a longstanding business practice, but now that it is formerly part of our five-step program, we believe we may see an increase in this number, which has tracked around 10% of total cycles shipped over the last few years.

Going forward, we will only cite revenue generating cycles in order to provide a more accurate representation of the cycles that are driving our revenue and have provided these historical numbers in our financial supplemental.

Total revenue cycles shipped in the quarter were $126,059, up 86% year over year. International comprised 31% of revenue cycles shipped in the quarter, versus 25% in Q1 2013. We shipped 179 systems worldwide during the quarter, up 60% from Q1 2013. We shipped 114 systems in North America, or 27% year over year growth, and 65 systems in international, or a 195% year over year growth. This brings our worldwide installed base to 2,354 systems, or up 48% compared to Q1 2013.

From a utilization standpoint, we had much greater visibility into our North America end customer and thus more accuracy on the number of accounts opened in any given quarter. Over time, we expect to gain greater visibility to our international business and see more multisystem accounts. But for now, we assume a one system to one account ratio internationally.

Using this assumption, we added 83 new accounts in North America, or up 36% year over year, and 65 internationally, or up 195% year over year. We are also moving to measure revenue cycle utilization by account. However, this only reflects selling utilization. As we collect more data points with CoolConnect, we will look to include the actual usage at the patient level, or sell through utilization in our discussion. Providing this sell through utilization will help provide better transparency as to the time lag associated with an account’s initial purchase and subsequent usage.

Global revenue utilization by account for Q1 2014 was approximately one cycle per account per day, compared to 0.76 in Q1 2013, which is up over 30% year over year. North America revenue cycle utilization per account was 1.1 for Q1 2014 compared to 0.97 for Q1 2013, which is up approximately 13% year over year. You will also find the historical trends for this metric in our financial supplement.

Another key metric that may signal increased utilization over time is the number of multisystem accounts versus single system accounts. We will provide this metric for North America only, and have seen this percent steadily increase. We believe an account that has multiple systems has embraced the treatment to transformation protocol and is realizing the value that CoolSculpting can bring to their practice. At the end of Q1 2014, about 17% of all accounts in North America were multisystem, versus 14% in Q1 2013.

Before going to the rest of the income statement, I wanted to talk about the changes in working capital we saw this quarter, which impacted our cash usage. Our cash, cash equivalents, and investments at the end of Q1 2014 were $41.2 million, compared to $51.6 million at the end of Q1 2013. The higher usage of cash in the first quarter is similar to what we saw in Q1 2013, which you recall was followed by a positive or break even thereafter.

2013 was a year of piloting and of better understanding our business trends. We demonstrated the ability to manage operating expenses and cash as we formulated our longer term strategy. We now have further insight based on our increased experience and supporting data that we believe shows there is a significant opportunity to invest in various aspects of our business to position us for longer term growth.

As Mark mentioned, the higher working capital usage this quarter can be primarily attributed to three things: higher inventory, higher days sales outstanding or DSOs, and tax payments related to the vesting of performance and restricted stock. I will now go into more detail on each.

During the quarter, we saw increasing excitement and demand for CoolSmooth so we made the decision to pull forward the inventory and build finished goods ahead of demand for our CoolSmooth applicator as well as for systems. We have already received feedback that CoolSmooth positively influences potential customer decisions to buy a system or even a second system, and we plan to fully leverage this unique opportunity in the noninvasive body contouring market.

As well, due to new compliance standards that go into effect in the European Union this July, we executed upon a plan to build finished goods and ship to the E.U. prior to the effective date. While we expect to be fully compliant with these requirements by the July deadline, we made the decision to increase our European inventory in advance of this deadline as a safeguard to ensure we can meet customer demand.

Based on our current forecast, we do not anticipate any incremental risk related to excess or obsolescence, and expect to reduce our inventory levels as we move through the second half of the year.

We experienced higher DSOs in the quarter of approximately 36 days compared to 27 days in Q1 2013. The higher DSOs can be attributed to two things. First, the normal first quarter trend of higher revenue in the last month of the quarter negative impacts our ability to collect the cash within the quarter, simply due to the number of days to cycle through the normal collection process.

Second, we saw a decrease in the mix of customers choosing to pay with credit cards. Other than prepayments, credit card collections are the fastest way we collect cash and result in receipt of the cash in around 3 to 7 business days.

We do not expect the collectability of these receivables to be an issue, as evidenced by our continued low bad debt expense and reserve. To date, in the second quarter, we have already collected a significant amount of cash, which further supports the collectability of our accounts receivable.

Finally, we used about $2.5 million of cash to satisfy required tax payments associated with the vesting of employee performance and restricted stock awards. Mechanically, when these stock awards vest, the employee surrenders approximately 30% to 50% of the vested stock back to the company stock plan to cover the tax obligation, at which point the company pays the required tax withholding liability on behalf of the employee in exchange for these returned shares.

This transaction does not impact our stock based compensation expense and is a balance sheet transaction only between additional paid in capital, or APIC, and cash. Q1 was materially different from prior quarters, due to the vesting of certain performance based awards tied to stock price performance as well as the annual vesting of restricted stock tied to the company wide ramps we made last year in Q1 2013.

In the future, we will likely see additional cash usage related to the vesting of shares and related tax payments, but the amount is highly dependent on the stock price at some future date, and the vesting of certain units is dependent on hitting performance metrics.

With that said, the quarterly and full year impact are much more difficult to forecast, but if performance metrics are triggered and the stock price maintains or appreciates from today’s level, then there could be up to an additional $3.5 million for the balance of the year or a $6 million impact on the full year.

We have a very strong balance sheet with zero debt and remain very well capitalized to support our current initiatives. Much of the first half cash usage is related to working capital and excluding the cash tax payment for stock units, we are still on track for the full year and generating cash in the second half of the year as previously communicated.

Still, we now expect to see higher cash usage than previously expected of $15 million to $20 million in the first half, followed by a much higher cash generation in the second half of $10 million to $15 million. Both of these numbers include the cash tax payment I previously referenced.

We will continue to be good stewards of our cash, but will also make the necessary working capital investments needed to drive our top line growth. Because of our rapid expansion, high revenue growth, and performance based culture, we will likely continue to see some quarter to quarter variability in our working capital and ultimately cash usage, which leads us to supplementing our metrics on a go forward basis.

We will now begin referencing an adjusted EBITDA margin percent which we define as earnings before interest, tax, depreciation, amortization, and stock based compensation. Essentially, we are removing noncash items for this non-GAAP measure.

We believe this metric to be more indicative of our core operating performance and facilitates a more meaningful comparison of our operating results. Please refer to our supplemental financial information posted on our website for all the detail that I will cover on today’s call, as well as for the detail on reconciling adjusted EBITDA to its GAAP counterpart.

Gross margin was 71% in the quarter, compared to 63% in Q1 2013. The year over year increase is a result of higher contribution from consumables as well as improvements in our cost of goods sold, and, amongst other things, our 2013 manufacturing insourcing effort, which went live in Q2 of 2013.

As we noted during our Q4 2013 call, we chose to make up front investments in the first quarter of 2014 that we believe will anchor robust revenue growth through this year and over the long term. Those items include significant additions to our global sales force and putting into place the infrastructure necessary to support a higher revenue demand if it were to come in. We do not expect to make material increases in our fixed infrastructure if demand does come in above our expectations, which should result in strong incremental margin translation.

Sales and marketing expense in the quarter was $20.2 million or 65% of revenue, compared to $12.5 million or 63% of revenue for Q1 2013. Our sales and marketing expenses in the first quarter and also for the first half of the year have annual recurring items related to things like our global sales meeting and major tradeshows.

There are also some nonrecurring items related to the marketing buildup and associated marketing collateral for the new CoolSmooth products and our decision to invest more heavily in our CoolConnect platform on both data analysis services and to accelerate retrofitting of our international systems.

Looking into the second half of 2014, we expect a significant decrease in these types of sales and marketing expenses, given that they do not happen in the second half of the year. R&D expense in the quarter was $4.3 million or 14% of revenue, compared to $3.7 million or 19% of revenue in Q1 2013.

G&A expense in the quarter was $4.7 million or 15% of revenue, compared to $3.8 million or 19% for Q1 2013. Our net loss for Q1 2014 was $7.3 million compared to $7.5 million for Q1 2013, and on a per-share basis, we had a $0.20 loss per share compared to a $0.21 loss per share for Q1 2013.

Previously mentioned, we will now begin discussing adjusted EBITDA margin percent as part of our results overview. Adjusted EBITDA for Q1 2014 was minus 15% of revenue, versus minus 30% of revenue in Q1 2013.

The significant year over year improvement can be mainly attributed to two things, our higher gross margin, driven primarily by the cost of goods reduction we have seen from our insourcing manufacturing efforts, and to a lesser extent, the larger contribution from consumable revenue, and two, lower R&D and G&A as a percentage of revenue as we leverage our fixed cost structure as our revenue grows.

I will now turn to a discussion of our 2014 guidance. We are updating guidance for the full year 2014 and adding the adjusted EBITDA margin percent previously mentioned. Of note is that both our gross margin and operating expenses guidance remain unchanged and on track with our prior guidance. A reconciliation can be found in our supplemental.

Increasing revenue to $137 million to $140 million, which represents a 23% to 25% year over year growth; consumable revenue of approximately 50%, unchanged from prior guidance; full year gross margin of approximately 70%, unchanged from prior guidance; total operating expenses as a percentage of total full year revenue of approximately 80%, also unchanged from prior guidance; as well as the opex components, also remained unchanged from prior guidance and area strong follows. R&D expense of approximately 14% of total full year revenue, G&A expense of approximately 12% of total full year revenue, and sales and marketing expense of approximately 54% of total full year revenue.

As previously mentioned, there are a number of nonrecurring expenses related to the first half of the year and we will see sales and marketing as a percentage of revenue leverage down considerably in the second half of the year.

We continue to expect full year other income expenses, as well as tax expense, to be minimal at around $250,000. To help bridge to our new adjusted EBITDA metric, we are providing the following expenses for the first time: depreciation and amortization for the full year of approximately $2 million; stock based compensation of approximately $8.5 million for the full year, which is dependent on stock price and achievement of performance milestones.

This results in a full year adjusted EBITDA margin of approximately minus 3%, with the fourth quarter being positive. We still expect weighted average shares of basic common stock outstanding of approximately 37.5 million shares.

I will now turn it back to Mark for closing comments.

Mark Foley

Thanks, Patrick. We’re very pleased with our financial and operational performance in the first quarter. Our results were driven by cross-functional execution and further supported by the new strategic initiatives we have put in place.

I’m very encouraged by the momentum we are experiencing in the marketplace and with the further progress we are making on our growth initiatives. These include further differentiating our technology and brands, growing our global sales organization, expanding our practice partnership to drive utilization, leveraging our technology platform to treat more body areas, achieving deeper penetration of the large and growing market for noninvasive body contouring, and expanding the market with what we believe to be the most innovative and unique technology in the industry.

The noninvasive body contouring market is still in its infancy, and we are leading the charge. With less than 15% penetration of our 10,000 core aesthetic accounts in the U.S., and a strong pipeline of system leads that is 5x our North American system sales in 2013, we believe that we can consistently grow system sales, particularly when we include multisystem sales, the noncore channel, and our international opportunity.

Additionally, with less than 3% brand awareness with consumers, we believe that we can significantly increase the number of aesthetic and nonaesthetic patients that get treatment as brand awareness increases and as patients increasingly share their wow results online and with family and friends.

Lastly, with the robust product pipeline, we anticipate that we will be able to continue to expand the areas we treat, improve the efficiency and outcomes of our procedure, and expand into new markets.

Q1 2014 marks the first full quarter for year over year comparisons under the new management team, and I’ve now finished my second year as CEO after initially taking over in April 2012. I’ve spent the last two years ensuring we have the right products, people, and processes in place to drive robust growth of our game-changing CoolSculpting technology.

I’ve spent time with our customers to better understand what it takes to be successful in this space, and we have piloted many programs to help determine the best course of action. We are very bullish on our long term prospects, and the last several quarters are proving that we have the right team in place to deliver strong, sustainable revenue growth in conjunction with profitability and cash generation as we move towards the back half of 2014 and beyond.

We will now take your questions.

Question-and-Answer Session

Operator

[Operator instructions.] And the first question is from Ben Andrew of William Blair.

Ben Andrew - William Blair

First, can you talk a little bit about CoolSmooth? As we roll here into the second quarter, obviously very strong results. But with CoolSmooth just rolling out, and the new cards that come with that, we’ve been expecting a bolus on that. So can you give us a sense of what that may be Q2 versus the year, and how much of that contributed to the guidance increase?

Mark Foley

On the CoolSmooth side of it, as we communicated in our prepared remarks, we took orders for approximately 400 units in Q1. That didn’t really include much in the way of card revenue, so collectively that’s a little over $3 million as we go into Q2. The raise that we have in terms of the revenue for the full year doesn’t include any sort of material change to the CoolSmooth applicator revenue that we built in originally. So there’s potentially some upside as we move through the balance of the year based on some of the interest that we’re seeing.

Ben Andrew - William Blair

And I know you gave some comments about the multisystem order potential because of CoolSmooth. Talk a little bit more about that. [unintelligible], two devices as well as two system, correct? And obviously they could leverage an inventory of cards. But how big of an opportunity really is that across the installed base? Is it 10%, 30% of your customers?

Mark Foley

Well, we’re still trying to understand it. I think as we pointed out in our scripted comments, about 17% of our North America accounts have more than one system. So we would expect that those accounts with more than one system will likely buy two CoolSmooths. You know, if they’re doing the saddlebags or the outer thigh, they can do both of those at the same time. So in the course of two hours, they’re treating both sides.

So it’s hard to say. Our multisystem or second system purchases have been tracking pretty consistently on a quarterly basis, where they're about 20% of our system sales. So to kind of say where that could go, it’s hard to say. Having just come out of three tradeshows in the last six weeks, it’s getting a lot of discussion. I think we still need to see whether or not this is going to spur more of our existing accounts to buy a second system.

Ben Andrew - William Blair

And then the utilization trends were really positive in the quarter, and it’s something we’ve been looking for to improve. Internationally as well. When you talk about the international investments in PDMs, over what timeframe do you think that gets implemented? And is that baked into the opex guidance for 2014?

Mark Foley

We’ve already made some of that investment. In our direct European market, we already did make some increases in our capital and in our PDM field organization. We started to put some PDMs in APAC in and Latin America, and so those are already baked into the operating expense numbers. And I think going forward, we’ll continue to sort of evaluate how the revenue and the growth is tracking in these different areas. And so our thought would be that if we were to add more throughout the year, they would be sort of in a one or two here and there, and that we would expect that the incremental revenue would cover those expenses.

Operator

And the next question is from Tycho Peterson of JPMorgan.

Tycho Peterson - JPMorgan

You talked about utilization having a nice 13% increase year over year. Can you maybe talk about where you anticipate that trending for the remainder of the year and what impact CoolSmooth and CoolConnect could have on that?

Mark Foley

If you look back for our 2014 guidance, what we communicated was that we expected similar utilization on a year over year basis, and that the increase would come from a larger installed base. All of the programs and a lot of our focus are really designed to grow utilization, so right now the guidance assumes consistent utilization, just on a larger system base going forward.

We’re still waiting to see with CoolSmooth. There’s two ways that CoolSmooth will go. Either it will cannibalize existing cycles, so that when they use CoolSmooth, they’re not using something else, and the net effect is that utilization is consistent. Or CoolSmooth will help to drive incremental utilization in new patients.

And until we have a little bit more clarity as to how this is actually playing out in the field, we’re reluctant to provide any incremental guidance versus what we’ve already done. And just as a reminder, we only started shipping it in April of this year, so just this month, so it’s still relatively new for us.

Patrick Williams

And on the utilization, just to be clear, our global utilization is actually up year over year. And that’s on a per account basis. In North America, you cited a 13%. It’s just because we have more visibility to that. But things are going very well overall. Once again, as Mark said, we had assumed that sort of flat utilization across our global installed system base was contemplated in our guidance.

And I think the only thing else I would add is CoolConnect, kind of answering your question, you know, the ability of CoolConnect to track our multisystem accounts, the ability of CoolConnect to track our CSU customers, some of the ones that have been microsites, if you listened to our prepared comments, we know a multisystem account can do 3x or 4x utilization. And then on top of that, you’ve got the CSU customers that are doing anywhere from 20% to 30% higher in a very short period after they graduate from the class.

So we’re very bullish on the things that we’re doing. And I think that bullishness can transfer over to CoolSmooth. As Mark said, we’ve got to see how it plays out in the marketplace over the next quarter or two.

Tycho Peterson - JPMorgan

And Patrick, some of the increased focus on EBITDA, maybe you can just talk about what led to this increased focus and any impact you think it will have on the leverage you guys have in driving the model, and maybe where you see room for the most ability to drive leverage?

Patrick Williams

I’m not sure I’d call it an increased focus. It’s more of just finally giving the number that people have already calculated. Because our guidance has not changed. If you look at our gross margin guidance, if you look at our opex guidance that we gave, all of those numbers are exactly the same. So the EBITDA guidance that’s out there is essentially the same one we gave before.

The reason to move to it is frankly because of the movement that we saw in working capital. We’re a high growth company, we’re the leaders in the space. We’re looking to do things from a marketing standpoint, from an infrastructure standpoint, with the sales force, and really take advantage of this position we have to grab patients and customers as quickly as possible.

So because of that, we’re spending some money on things such as inventory buildup. We want to be ahead of the demand, and the nice thing about our product line is we don’t have any E&O issue. Our card can sit on the shelf indefinitely, we’re still using the same system that we’ve used now for a couple of years, and so it’s a very low risk investment that we can make.

So as I said, I wanted to move away from sort of the working capital fluctuations you can get on a quarter to quarter basis, and give something that frankly is a little bit more predictable and more indicative of exactly what our profitability can look like as we move forward.

Operator

The next question is from Bill Plovanic with Canaccord.

Bill Plovanic - Canaccord

Really I’d like to drill down a little more into the investments that you’re making on the PDMs. Can we talk numbers? Where were you at the end of the quarter in the U.S., where do you expect to go? Where were you at year-end 2013 and that same question internationally?

Patrick Williams

As a reminder, on our Q4 2013 call, we talked about this. Essentially, the entire global sales force, including the practice development managers in North America and internationally, have been hired already. And so when we had our conference call at the end of February for Q4, we made the statement that we’re building up the infrastructure now. And so as incremental revenue comes in, and we continue to deliver at a higher revenue pace, we don’t see the need to have to add additional heads.

Mark mentioned a couple of instances where maybe, if revenue starts taking off in certain regions, we might have to add a PDM here or there. But wholly speaking, I would say that our infrastructure is in place to support a higher revenue number, and has been in place since essentially the end of January going into February.

This is one of the reasons why you’ll see a higher sales and marketing expense in the first quarter, especially as a percent. And as we work through and start having higher revenue as we go through the rest of the year, you’re going to see leverage come really from the sales and marketing line.

Mark Foley

And specifically in North America, we exited 2013 with 28 PDMs. We’re now at 50. We exited with 29 capital reps, we’re now at 34. We created an extra region in North America, so we added another regional manager and another practice development manager. And then internationally, we’ve added a handful of additional practice development management resources.

Bill Plovanic - Canaccord

But what you’re saying is, from now, it’s kind of onesies, twosies, in terms of what you’re adding, and the bulk of the spend is in place, so we’ll see the kind of leverage on the P&L as we move forward?

Mark Foley

Yeah, and in fact, I think from an absolute dollar standpoint, the sales and marketing line, you could actually see that number start to decrease or remain flat, which I know for some people, they don’t quite understand that, especially as revenue increases. But we had some fairly significant, as I said, sort of annual recurring stuff with our global sales meeting and our tradeshows. And it’s the nonrecurring items which were not insignificant. The CoolSmooth marketing collateral and all that, that cost quite a bit of money to get out there as we were preparing to launch this system.

Bill Plovanic - Canaccord

And then back on the PDMs, the current guidance basically provides or projects that utilization will remain unchanged, but obviously you’re making a lot of investments in the PDMs. In your expectation, given that you started this process March/April of 2013, with some PDMs, you were able to track their success, what should we expect to know, kind of a metric? Is it six months? You know, if they’re all in place by the end of January, February? Is it late Q2/early Q3 that if this is going to have an impact on utilization we’d see it there?

Patrick Williams

I think it’s about a six month thing. And the reason it’s six months is, as we’ve realigned these geographies, we’re sort of creating new relationships. So accounts that maybe had an established relationship, in order to make the geographies work and shrink down the territories, we’ve had to now introduce somebody new. We’ve rolled out a lot of new programs and it’s going to take a little while for them to kind of fully come up to speed on and implement in their practices.

So I would say that in Q3 we should see sort of a steady state situation where we’ll have a better feeling for the impact. Now, there’s going to be some moving parts as well. Seasonality in the business, so we’ll need to look at that on a year over year. And we’re still reliant on sell-in data versus sell-through data. So as CoolConnect comes online, we’ll have better visibility into actually what’s happening at the practice level on a daily basis versus trying to interpret what we think is happening based on cycle card purchases over time.

So yeah, I would say sort of six months should give us a much better sense for what steady state should look like.

Bill Plovanic - Canaccord

And then lastly, just as you look at your control unit placements in the quarter, very strong international number. And we saw the same in Q4, so it’s a couple of quarters here that you’ve started that focus internationally. Is this a result of investments towards the direct channel? Or are these your stocking distributors that are also driving it?

Mark Foley

You know, I think it’s both, really. We’ve certainly seen renewed traction in our direct markets in Europe, and I think we took a lot of what was working domestically with respect to treatment to transformation outcomes, partnership with the practice, all of those things. So we’ve seen good growth there.

Internationally as well, in our distributor market, I think we’re rolling out this same strategy. We put some PDM resources in alongside of our distributors. So we’re frankly seeing growth in both our direct and our indirect markets, and we would expect that we would continue to see nice growth in both of those markets going forward.

Operator

The next question is from Richard Newitter of Leerink Swann.

Richard Newitter - Leerink Swann

I just wanted to start off and ask, just because it’s something that’s been called out in other calls for other medtech companies, was there any impact from weather this quarter? I know you mentioned a strong March. I was just curious, any way you could quantify any impact that might have occurred from weather?

Mark Foley

You know, it’s hard to say, Rich. Obviously Q1 tends to be a little bit more back end loaded. We had a lot of changes at the beginning of the quarter. Global sales meeting. We continue to obviously have confidence in our ability to deliver on a solid number.

Could weather has played a little bit of an impact and caused things to get pushed out a little bit? Sure, possibly could have. We’ve got a strong base of our business in North America, and whether or not some people put off getting treatments, whether or not they’ll show up later, whether or not some of the physicians delayed buying a box, all could be factors that played into it. But again, it didn’t impact our performance in the quarter.

Richard Newitter - Leerink Swann

And Patrick, just maybe is there anything that, as we kind of build our models for the rest of the year, beyond what you’ve already stated in your opening remarks, that you would call out from an ASP standpoint or margin impact from kind of CoolSmooth? I’m just trying to think about what the price of CoolSmooth cartridges are versus other typical standard CoolSculpting cartridges. How does that potentially impact ASPs?

And then also, do you discount systems as you try to get more of these multisystem accounts up and running, particularly as you see potential increased demand for CoolSmooth and accounts looking to do more treatments while people are sitting there for an extra hour of treatment?

Patrick Williams

Sure, let me start with the cards, then I’ll go through the system and discounting. So on the cards side, with CoolSmooth, we’re selling it for the same price. So one of the reasons why we’re switching to a revenue cycle metric, it’s so that we have better transparency to what our ASPs are. And so we don’t discount on our cards now, moving forward. So really, the only thing that’s going to affect the ASP on a quarter to quarter basis is going to be the mix of our large applicator versus our small applicator.

In terms of where we’re going on the system side, I would say that as we go to second systems, they tend not to buy all five applicators when they buy the second system or the third or fourth system. So you will likely see a little bit of a decline in the ASP on a system basis.

But I think you’ll be able to break that out fairly easily because of the new transparency we’re giving. If you’ll notice, most of our second systems are really in North America at this point, and we’re providing that data in the supplemental financial information, where you can see what percent of our North America accounts are second system as well as single system. And so by default, you’ll be able to back in kind of what the revenue looks like on an ASP normalized basis.

And I guess finally, getting back to CoolSmooth, it’s early. There’s a reason why we built quite a bit of inventory on CoolSmooth and its systems. The cards on that standpoint, we don’t know what’s going to happen out in the field. Certainly, the bullish side of us wants to think that people are not going to change their buying patterns and they’re going to simply buy an additional CoolSmooth.

And so we could see an increase in our consumable revenue in Q2, only because of the fact that with CoolSmooth launching, people have to buy that card. It is a unique card for CoolSmooth that runs a two hour cycle. And so by default, if they buy the applicator, they have to buy the card. Because we’re giving transparency to our true ASPs now by breaking out the add-on applicator revenue, you’ll no longer have to try to figure out the math on that. We’re going to help provide that for you.

Operator

And the next question is from Jeremy Feffer of Cantor Fitzgerald.

Jeremy Feffer - Cantor Fitzgerald

First, just a minor housekeeping. You’re still sticking to about 50% of revenue from consumables for the year. You did 53 in the quarter. Is that 50 guidance still somewhat of a baseline, or is there something we should be thinking about, revenue mix, over the rest of this year?

Mark Foley

I think right now we just don’t have enough visibility. The consumable percent is somewhat impacted by how strong our utilization is, but also by how strong our system placements are. We could end up having a great consumable quarter, but a really strong system quarter as well that might mute a little bit of the contribution from the consumable side. So we continue to feel that right now 50% is still a good number.

Patrick Williams

And just to add on to that, I think the CoolSmooth as well, which you just talked about, we’re not exactly sure what the buying pattern is going to be out there. I mean, these are all good problems, right? At the end of the day, we believe everything we’re doing is going to drive consumable revenue, but the fact of the matter is, we had almost 30% growth on our system revenue globally. International’s a bit of a wildcard.

And when I say wildcard, I mean from a good standpoint. It’s continuing to be very very successful for us, even in light of the strong success we’re seeing in North America. And I think that’s just really a testament to the people that we’ve hired in there, and really just sort of reinvigorating the brand out there.

Jeremy Feffer - Cantor Fitzgerald

And bigger picture, I wanted to get some color from you on the competitive landscape. Obviously there’s a new market entrant, but probably not really have much of a presence for much of this year. But your other sort of existing competitor that was acquired, are you seeing any impact from them under new ownership? Or are you guys still just keeping your heads down and focused on your own business?

Mark Foley

I think it’s really the latter part. I don’t think we’ve seen any meaningful change in the competitive landscape. So it’s pretty much steady state. There are a number of different competitors that are out there, and depending on whether it’s an international situation or domestically, we are competing with certain players.

But we continue to feel really good about our ability to execute on our plan. As new competitors come into the market, we’ll adapt our strategy, but I think that as we continue to demonstrate consistency and efficacy in outcome, implement our treatment transformation, launch new applicators that treat more areas on the body.

And you know, as we mentioned on our scripted remarks, we’re continuing to look at ways to tighten skin, treat cellulite, go after other areas like the cementum. And so I think as we continue to realize those development initiatives, we’ll further differentiate ourselves from competitors in terms of how broadly we can be used.

Patrick Williams

It’s been two and a half weeks since we announced the FDA clearance on the thigh, and that’s a big deal. The ability for our entire set of applicators to be used on those inner and outer thighs now is, we think, going to be very powerful for us as we move forward, to drive utilization, not only with new customers, but think about all the existing customers that are in the channel that got CoolSculpting done. They now could come back and get another body part. So very powerful, we believe.

Operator

The next question is from David Roman with Goldman Sachs.

David Roman - Goldman Sachs

Wanted to just come back to something that you started referencing in your last remarks there, which is I know that you don’t have all the data yet from your marketing efforts, but could you give us some sense for what percentage of your growth is coming from patients coming back to get additional body areas treated versus new patient growth?

Patrick Williams

You know, I think it’s still early. I will tell you this, though. What’s interesting is when we look at some early CoolConnect data over just a handful, maybe like 20 or so, sites, we found that there’s a lot of times that they’re clicking that the person is new to CoolSculpting, as well as new to the practice.

And so it seems that this product has still the ability to bring new people into the practice. I think it is a little early for us, because we did think that there’s low hanging fruit for the practices, just to treat their existing customer base. I mean, time and time again, we hear how they feel like they’ve already gone through their existing patient list, and we go back and reengage them and do Cool Night Outs, which is really focused on the existing patient list, and we see very strong success with that.

So I think I’ll hold off on our comments for that, but I think there’s no doubt that this is a product that can bring new people into the practice. You know, 20% to 25% of our system sales are with existing customers, and 75% to 80% are with new customers. So it’s still going to be, generally speaking, new customers that are coming on board.

David Roman - Goldman Sachs

And maybe just to follow up on that, I think the metrics that you provided on utilization percent make a lot of sense, and are appropriate, given where you are in your development, but averages can sometimes be somewhat misleading. So can you maybe give us some sense just on the standard deviation around that mean and maybe what characterizes a higher user versus a lower user? Is it time from adoption? Is it geography? Is it number of physicians? Maybe just help us understand the range that’s out there and then what forms that range?

Patrick Williams

That’s a great question. So I think consistent with what we’ve said in the past, that utilization, once again, it’s selling utilization, that’s pretty similar to the $10,000 of consumable revenue that we see on what we used to call a per account basis, on a quarterly basis. Our top 5% of our customers would do 5 to 6 times that. You know, the top 1% are doing 10 times that. We also have at any given point, in any quarter, 25% of our customers are not doing any purchasing from us.

It doesn’t mean they’re not using the product. In fact, that’s one of the things CoolConnect has really sort of put some light on for us. It’s that we see a very low percentage of people that actually do not use the system anymore. What happens is they buy first quarter, then they use those cards for maybe two or three quarters, and then they repurchase again. But as I said, any given quarter, our bottom 25% of our accounts are doing zero revenue with us from a purchasing standpoint.

So I think there’s a very large deviation, kind of getting to your point to your question there. I don’t have the numbers off the top of my head. Obviously, I could calculate them. We’re very happy with the utilization trends we saw in the first quarter, and I think you heard some of the investments we’re making that we believe things like CoolSculpting University are a great flagship product and program that we have to drive that utilization going forward.

Operator

The next question is from Anthony Vendetti of Maxim Group.

Anthony Vendetti - Maxim Group

Just on the CoolSmooth, I know that there was obviously a backlog and you started shipping on the 14th of April. Is that backlog all met in terms of being able to meet the demand from a manufacturing standpoint? And then I’ve just got some questions on some future applications.

Mark Foley

We’re still shipping right now, since we just received the approval on it. We’re still working our way through our backlog, and it’s going to take us a little while to get through that. We did make some investments in inventory to get all the component parts, and now we’re wrapping up the corresponding manufacturing efforts to meet that. So it’s going to take us a little while to satisfy that demand.

Patrick Williams

And we’re trying to time the PDMs, the 50 that we have out in North America, there’s a timing component as well that we want to do with them being able to touch the practices as we ship out these products. So it’s important to us that this product has a very good launch, and that we’ve got PDMs in the office helping train the customers, if they’re not able to get into CSU. Obviously that’s another way that we’re doing that. So it’s a little bit, I would say, of maybe a metered type approach, but we’re definitely shipping through all that, and continue to take orders.

Anthony Vendetti - Maxim Group

And then just on some of the new applications you’re talking about, cellulite, cementum, skin tightening, down the road acne, can you sort of prioritize or give us just a little bit of a timeline and which one of these should we be expecting first, or approximately when we should be looking for additional approvals, just in general?

Mark Foley

First off is that we’ll probably do something in the summer, like we did last year, an investor day when we will address in more detail kind of product pipeline and timing. But I’ll try and break them into different buckets. The skin tightening and the cellulite are really kind of coming to light, because of what we’re hearing from our physician users. They’re already using some of our existing applicators and are observing some of these improvements.

And so for us it’s really a function of what sort of data do we need to be able to have more confidence that this is something that’s reproducible and reliable. And part of this is we’re going back out to our physician base to try and get a better understanding of how they’re delivering the therapy, how they’re choosing their patients. But we have seen improvement in both skin appearance and tightening with some patients, and in cellulite, with some of the early CoolSmooth work.

And then on the acne side of it, we’ve talked in the past, we’re doing some research with NGH on that. Some of the data was recently presented at [unintelligible]. Very encouraging early results, but it’s early, and we have to see how durable that is. So that’s a program that still is in the formative stages and working its way through.

And then on cementum, that’s going to come in conjunction with a different form applicator, and we’re working our way through that one as well. We’re just not ready to give kind of hard timelines on that one yet.

Anthony Vendetti - Maxim Group

And then Patrick, just on the stock based compensation for this quarter, can you break it out by expense line?

Patrick Williams

It’s all in the supplemental, actually.

Operator

And the next question is from Jon Block of Stifel.

Jon Block - Stifel

Maybe you could just talk a little bit about the clinical results from the CoolSmooth applicator. In other words, in your work, do you see the same 20% reduction from the non-suction based applicator, that being CoolSmooth? And then was there anything specific to outer thigh? Because you guys brought up earlier the incremental versus cannibalizing question. And was there anything specific to outer thigh? Because I believe CoolFit was being used by some of your guys for inner thigh.

Mark Foley

First off, on the clinical trial that we did, the results were very consistent with what we saw in our original flank studies, where we did randomization there. If anything, actually, the patient satisfaction and the blinded reviewer identification was better in our CoolSmooth set, which is frankly really encouraging, because it’s frankly a little bit more difficult to appreciate the improvement in saddlebags, just due to the way that those photograph and the dimensional nature of it. And so again, I would just say that they were as good if not better than our early trail results, with our suction based applicators.

In terms of looking at what was being treated previously, yes, we are aware that some of our physicians were using CoolFit for inner thigh, but certainly the outer thigh, that’s sort of brand new ground for us. And I do think that since we were not able to teacher train to inner thigh, there were a lot of accounts that were reluctant to do anything off label. And frankly, our field organization wasn’t able to really help drive that market. So we would expect that with this approval, with CoolSmooth, that we’ll see a much more meaningful number of both inner and outer thighs that are done.

And again, the one thing we’ve got to balance here is CoolSmooth is going to take two hours per treatment. We get $125 for a two hour cycle. So it could be that with increasing CoolSmooth volumes, it could offset a little bit of the number of cycles or the number of treatments they can do in a given day.

Jon Block - Stifel

It’s early, but have you seen, or at least anecdotally from your sales guys, any pushback on the elimination of the rebates? I think that’s new in 2014. You talked earlier about how a lot of these guys are making on average $200,000 a year on the system. But anything that you’re hearing from your sales guys on guys that are upset that they’re no longer getting the check cut from you guys at the end of the quarter?

Patrick Williams

Absolutely. Nobody’s happy when you sort of pull money back from them. We did pull back on the rebate, but what we told them is, listen, all along, the whole goal of our [unintelligible] awards program is really to drive greater consumer awareness and more patients into your practice. And as we’ve started to evaluate what’s working, we’re trying to make these dollars go further and have more of an impact.

And so what we’ve ended up doing is we didn’t just pull back on the rebate, we took those dollars from the rebate and we put them into our microsite and paper clip program, with the realization that as you start attracting a broader group of consumers, that doesn’t have a relationship with a physician, they’re going to search out and find information online to make their decision.

And therefore, having a broad based microsite network and populating that with information and making these sites mobile compatible is going to do a lot to drive their business and new patients in. And so we’ve traded out some of the investments on the rebate and put it into marketing initiatives. And I think when we walk them through that, we walk them through what we’re doing on CoolConnect, they get it.

But yeah, I would say it’s definitely required our field organization to walk people through it, to get people comfortable. People aren’t really pleased with it until they understand what they’re getting in exchange for it. And frankly, I think we’re delivering more value on a dollar basis under the new program than we were on the rebate side of it.

Operator

And last one, you talked earlier about the good results that you see from guys, and I guess you’re now able to track this through CoolConnect. And the guys who come to Cool School University, you’re increasing the number of classes this year. So sort of two questions. One, what’s your bandwidth there? How many CSU classes could you arguably hold in a given year or quarter? And then the second part is, if you’re seeing a 20% increase or so in utilization, is there anything that you can do to incentivize these guys? You know, hey, here’s two $5,000 off your system price if we get you to come to class. And arguably, you’d see it on the higher margin consumable going forward.

Mark Foley

I’ll take the second one first. Absolutely, we’re going to continue to look at ways that we can create a win-win. And so if there are ways where we can incent them to get a second system, because we know what that translates into in terms of growing utilization and a more profitable CoolSculpting business for their practice, we will look at those things.

You know, on CSU, we initially had forecasted and budgeted 20 classes for this year. So a little less than 2 a month. Based on the demand in the data, we’ve run that to almost 3 classes a month. We could arguably do probably one class a week here, but then it starts to really strain the resources and facility. So we are looking at ways that we can increase the throughput there, either by expanding our footprint and figuring out different ways to sequence these classes, or by expanding the footprint as to where we do these trainings. And so we’re looking at all those things.

Operator

There are no further questions at this time. I’ll turn the call back over for closing remarks.

Mark Foley

Again, thank you, everyone, for taking the time to join us on our Q1 earnings call, and we look forward to speaking with you on our Q2 earnings call.

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