Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             .

Commission File Number: 0-27596

 

 

CONCEPTUS, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   94-3170244

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

331 East Evelyn

Mountain View, CA 94041

(Address of Principal Executive Offices) (Zip Code)

(650) 962-4000

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

 

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of Exchange Act).    Yes  ¨    No  x

There were 31,078,021 shares of Registrant’s Common Stock issued and outstanding as of November 1, 2010.

 

 

 


Table of Contents

 

CONCEPTUS, INC.

Form 10-Q for the Quarter Ended September 30, 2010

 

          Page  
Part I. Financial Information   
Item 1.    Condensed Consolidated Financial Statements (Unaudited)   
  

a) Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009

     3   
  

b) Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009

     4   
  

c) Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009

     5   
  

d) Notes to Condensed Consolidated Financial Statements

     6   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      20   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      28   
Item 4.    Controls and Procedures      29   
Part II. Other Information   
Item 1.    Legal Proceedings      30   
Item 1A.    Risk Factors      30   
Item 6.    Exhibits      34   

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements.

Conceptus, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands)

 

     September 30,
2010
    December 31,
2009
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 19,265      $ 61,658   

Short-term investments

     46,938        40,626   

Put option

     —          2,933   

Accounts receivable, net

     19,076        17,315   

Inventories

     4,540        4,908   

Prepaids

     2,811        1,897   

Other current assets

     1,740        1,540   
                

Total current assets

     94,370        130,877   

Property and equipment, net

     10,390        9,782   

Debt issuance costs, net

     639        987   

Intangible assets, net

     25,044        27,687   

Long-term investments

     17,088        —     

Restricted cash

     366        360   

Goodwill

     16,446        17,318   

Other assets

     156        128   
                

Total assets

   $ 164,499      $ 187,139   
                

Liabilities and stockholders’ equity

    

Current liabilities:

    

Accounts payable

   $ 5,992      $ 5,878   

Accrued compensation

     5,759        8,208   

Line of credit

     —          29,240   

Other accrued liabilities

     4,302        4,012   
                

Total current liabilities

     16,053        47,338   

Deferred tax liability

     1,079        1,277   

Notes payable

     79,829        76,531   

Other accrued liabilities

     1,186        1,135   
                

Total liabilities

     98,147        126,281   
                

Stockholders’ equity:

    

Common stock and additional paid-in capital

     303,992        296,191   

Accumulated other comprehensive loss

     (1,635     (993

Accumulated deficit

     (236,005     (234,340

Treasury stock, 77,863 shares, at cost

     —          —     
                

Total stockholders’ equity

     66,352        60,858   
                

Total liabilities and stockholders’ equity

   $ 164,499      $ 187,139   
                

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Conceptus, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share amounts)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2010     2009     2010     2009  

Net sales

   $ 33,882      $ 34,247      $ 104,087      $ 94,447   

Cost of goods sold

     6,562        5,044        20,238        17,470   
                                

Gross profit

     27,320        29,203        83,849        76,977   
                                

Operating expenses:

        

Research and development

     1,610        1,734        5,171        5,149   

Selling, general and administrative

     22,968        19,472        75,277        65,380   
                                

Total operating expenses

     24,578        21,206        80,448        70,529   
                                

Operating income

     2,742        7,997        3,401        6,448   

Interest income

     165        125        637        661   

Interest expense

     (1,725     (1,768     (5,251     (5,240

Other income (expense), net

     (1     28        9        (155
                                

Total interest and other income (expense), net

     (1,561     (1,615     (4,605     (4,734
                                

Income (loss) before provision for income taxes

     1,181        6,382        (1,204     1,714   

Provision for income taxes

     205        150        461        373   
                                

Net income (loss)

   $ 976      $ 6,232      $ (1,665   $ 1,341   
                                

Basic income (loss) per share:

        

Net income (loss)

   $ 0.03      $ 0.20      $ (0.05   $ 0.04   

Shares used in per share amounts

     31,072        30,599        31,012        30,519   

Diluted income (loss) per share:

        

Net income (loss)

   $ 0.03      $ 0.20      $ (0.05   $ 0.04   

Shares used in per share amounts

     31,413        31,503        31,012        31,116   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Conceptus, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

     Nine months ended
September 30,
 
     2010     2009  

Cash flows from operating activities

    

Net income (loss)

   $ (1,665   $ 1,341   

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation and amortization of property and equipment

     3,418        2,977   

Amortization of debt issuance costs

     349        349   

Accretion of notes payable

     3,298        3,118   

Amortization of intangible assets

     2,437        557   

Amortization and accretion of discount and premium on investments

     714        —     

Loss on put option

     2,933        1,838   

Gain on trading securities

     (2,949     (1,933

Stock-based compensation expense

     5,412        4,556   

Loss on disposal of property and equipment

     18        4   

Changes in operating assets and liabilities:

    

Accounts receivable

     (2,046     (1,746

Inventories

     703        (231

Other current and long term assets

     (987     5,658   

Accounts payable

     413        1,025   

Accrued compensation

     (2,331     698   

Other accrued and long term liabilities

     235        203   
                

Net cash provided by operating activities

     9,952        18,414   
                

Cash flows from investing activities

    

Sales and maturities of investments

     68,644        4,575   

Purchase of investments

     (89,848     —     

Restricted cash

     (6     (6

Purchase of intellectual property assets from Ovion, Inc.

     —          (23,729

Capital expenditures

     (4,136     (3,487
                

Net cash used in investing activities

     (25,346     (22,647
                

Cash flows from financing activities

    

Proceeds from line of credit

     6,615        4,357   

Repayment of line of credit

     (35,855     (5,043

Proceeds from issuance of common stock

     2,318        2,296   
                

Net cash (used in) provided by financing activities

     (26,922     1,610   
                

Effect of exchange rate changes on cash and cash equivalents

     (77     89   

Net decrease in cash and cash equivalents

     (42,393     (2,534

Cash and cash equivalents at beginning of the period

     61,658        54,720   
                

Cash and cash equivalents at end of the period

   $ 19,265      $ 52,186   
                

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Conceptus, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair statement have been included.

The condensed consolidated balance sheet as of December 31, 2009 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. This financial data should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2009. The results of operations for the three and nine months ended September 30, 2010 may not necessarily be indicative of the operating results for the full 2010 fiscal year or any other future interim periods.

We have a limited history of operations with the Essure® system and since our inception in 1992, we have incurred cumulative operating losses until we experienced our first operating profit in fiscal 2009. In February 2007, we issued an aggregate principal amount of $86,250,000 of our 2.25% convertible senior notes due 2027. The notes can be convertible into shares within certain time periods, without having to meet the other contingent convertibility conditions as outlined in Note 9 – Convertible Senior Notes. The first period is the window between December 15, 2011 and February 15, 2012. The second period is anytime after February 15, 2025 up until maturity at February 15, 2027. If the notes are converted, then upon conversion (“net share settlement”), holders will receive cash and in certain circumstances, shares of our common stock based on an initial conversion rate, subject to adjustment, of 35.8616 shares per $1,000 principal amount of notes (which represents an initial conversion price of $27.89 per share). Upon conversion, a holder would receive cash up to the principal amount of the note and our common stock in respect of such note’s conversion value in excess of such principal amount. This net share settlement feature of the notes would reduce our liquidity, and we may not have sufficient funds to pay in full the cash obligation upon such conversion. In the future, depending upon a variety of factors, we may need to raise additional funds through bank facilities, debt or equity offerings or other sources of capital. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve covenants that restrict us. Additional funding may not be available when needed or on terms acceptable to us. If we are unable to obtain additional capital, we may be required to delay, reduce the scope of or eliminate our research and development programs or reduce our sales and marketing activities.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-06 Fair Value Measurements and Disclosure Requirements, which updated guidance related to fair value measurements and disclosures, and requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In addition, in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than one net number). The updated guidance also requires that and entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The updated guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. We adopted this guidance in the first quarter of 2010. See Note 4 – Fair Value Measurement.

During the first nine months of 2010, the FASB issued several ASUs – ASU No. 2010-01 through ASU No. 2010-25. Except for ASU No. 2010-06 discussed above and ASU No. 2010-09 Amendments to Certain Recognition and Disclosure Requirements issued in February 2010, and Codification Topic ASC 855 – Subsequent Events, in each case as presented in the Quarterly Report on Form 10Q for the quarter ended March 31, 2010, the ASUs entail technical corrections to existing guidance or affect guidance related to specialized industries or entities and therefore have minimal, if any, impact on us.

 

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Conceptus, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make 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 net sales and expenses during the reporting period. The primary estimates underlying our financial statements include allowance for doubtful accounts receivable, product warranty, the fair value of our investment portfolio, assumptions regarding variables used in calculating the fair value of our equity awards, impairment of goodwill, intangibles and other long-lived assets, income taxes and contingent liabilities. Actual results could differ from those estimates.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Functional Currency

On January 7, 2008, we acquired Conceptus SAS, which sells to customers throughout Europe. Sales by Conceptus SAS are denominated in Euros. On December 15, 2008, we incorporated our subsidiary Conceptus Medical Limited (“CML”) to serve as our direct sales office in the United Kingdom. In preparing our condensed consolidated financial statements, we are required to translate the financial statements of Conceptus SAS and CML from the currency in which they keep their accounting records into U.S. Dollars. Conceptus SAS and CML both maintain their accounting records in the functional currency which is also their local currency. The functional currency of CML is the British Pound and the functional currency of Conceptus SAS is the Euro. The functional currency is determined based on management’s judgment and involves consideration of all relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billing, financing, payroll and other expenditures would be considered the functional currency, but any dependency upon the parent and the nature of the subsidiary’s operations must also be considered. Since the functional currency of Conceptus SAS and CML has been determined to be their local currency, any gain or loss associated with the translation of Conceptus SAS’s and CML’s financial statements into U.S. Dollars is included as a component of stockholders’ equity, in accumulated other comprehensive income (loss). If in the future we determine that there has been a change in the functional currency of Conceptus SAS or CML from its local currency to the U.S. Dollar, any translation gains or losses arising after the date of change would be included within our statement of operations.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price paid over the fair value of tangible and identifiable intangible net assets acquired in business combinations. We will perform an annual assessment during the fourth quarter of 2010 of our goodwill at the reporting unit level or earlier if an event occurs or circumstances change that would reduce the fair value of the reporting unit below its carrying amount. No impairment charges have been recorded for the nine months ended September 30, 2010.

Other intangible assets include patents, customer relationships, license agreements and non-compete agreements. They are amortized using the straight-line method over their respective estimated useful lives.

Impairment of Long-Lived Assets

We account for the impairment of long-lived assets in accordance with ASC 350 Goodwill and Other. We evaluate the carrying value of our long-lived assets, consisting primarily of our property and equipment, the patents acquired in connection with our purchase of the intellectual property assets from Ovion Inc, and intangible assets acquired in connection with our acquisition of Conceptus SAS, whenever certain events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable (see Note 5 – Goodwill and Intangible Assets). Such events or circumstances include a prolonged industry downturn, a significant decline in our market value or significant reductions in projected future cash flows.

 

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Conceptus, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

Significant judgments and assumptions are required in the forecast of future operating results used in the preparation of the estimated future cash flows, including profit margins, long-term forecasts of the amounts and timing of overall market growth and our percentage of that market, groupings of assets, discount rates and terminal growth rates. In addition, significant estimates and assumptions are required in the determination of the fair value of our tangible long-lived assets, including replacement cost, economic obsolescence, and the value that could be realized in orderly liquidation. Changes in these estimates could have a material adverse effect on the assessment of our long-lived assets, thereby requiring us to write down the assets.

3. Investments and Put Option

Prior to September 30, 2010, our investments including Auction Rate Securities (ARS) which were short-term debt instruments backed by student loans, a substantial portion of which were guaranteed by the United States government. Prior to 2008, our ARS were highly liquid, using a Dutch auction process that resets the applicable interest rate at predetermined intervals, typically every 20-30 days, to provide liquidity at par. We had experienced failed auctions since 2008 on most of our ARS. The failures of these auctions did not affect the value of the collateral underlying the ARS, and we continued to earn and receive interest on our ARS at a pre-determined formula with spreads tied to particular interest rate indexes.

In November 2008, we accepted an offer from UBS AG, providing us with rights related to our ARS (the “Rights”). The Rights permitted us to require UBS to purchase our ARS at par value, which is defined as the price equal to the liquidation preference of the ARS plus accrued but unpaid dividends or interest, at any time during the period of July 2010 through July 2012. Conversely, UBS had the right, in its discretion, to purchase or sell our ARS at any time until July 2012, so long as we received payment at par value upon any sale or disposition. So long as we held our ARS, they continued to accrue interest as determined by the auction process or the terms of the ARS if the auction process failed.

Prior to accepting the UBS offer, we recorded our ARS as available-for-sale investments. We recorded unrealized gains and losses on our available-for-sale securities in accumulated other comprehensive income (loss) in the stockholders’ equity section of our balance sheets. Such unrealized gains and losses did not change net income (loss) for the applicable accounting period. In connection with obtaining the put option, we transferred our ARS from available-for-sale to trading securities in accordance with ASC 320 Investments – Debt and Equity Securities. The transfer to trading securities reflected our intent to exercise our put option during the third quarter of 2010. Prior to our agreement with UBS, our intent was to hold our ARS until we realized the par value.

In July 2010, we exercised our put option to require UBS to repurchase our outstanding ARS at full par value. Accordingly, we had redemptions of our ARS in the three and nine months ended September 30, 2010 of $22.2 million and $43.6 million. In addition, we recorded a gain in the three and nine months ended September 30, 2010 of $2.0 million and $2.9 million, respectively, which represents the increase in the fair value of the ARS. As of September 30, 2010, we no longer hold these types of investments.

We have accounted for the Rights as a freestanding financial instrument and elected to record the value of the Rights under the fair value option of ASC 825 Financial Instruments. As a result of our election to record the Rights at fair value, unrealized gains and losses have been included in earnings. We estimated the fair value of the Rights using the expected value that we receive from UBS which was calculated as the difference between the anticipated recognized loss and par value of the ARS as of the option exercise date. This value was discounted by using a UBS credit default rate to account for the consideration of UBS credit risk. For the three and nine months ended September 30, 2010, we recorded an additional loss of $2.0 million and $2.9 million, respectively which represent the decrease in the fair value of the put option. Due to the exercise of the put option in July 2010 and the resulting redemption of the ARS the balance of Rights as of September 30, 2010 is zero.

As of September 30, 2010 we had short and long-term investments of $64.0 million recorded at fair value. Our investments consist of time deposits, U.S. treasury bills, U.S. government bonds and corporate bonds. We will sell certain or all investments as needed to meet the cash flow needs of our business. Hence our investments are classified as available-for-sale securities in accordance with ASC 320 Investments – Debt and Equity Securities. Investments are classified as short-term or long-term based on the underlying investments maturity date.

 

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Conceptus, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

The following table summarizes our amortized cost, unrealized gains and loss, and the fair value of our available-for-sale investments, as of September 30, 2010 (in thousands):

 

     Amortized
Cost
     Unrealized
Gain
     Unrealized
Loss
    Fair Value  

Investments:

          

Corporate bonds

   $ 45,631       $ 114       $ (5   $ 45,740   

U.S. treasury bills

     9,981         9         —          9,990   

U.S. government bonds

     5,999         1         (1     5,999   

Time deposits

     2,282         15         —          2,297   
                                  

Total

   $ 63,893       $ 139       $ (6   $ 64,026   
                                  

Reported as:

          

Short-term investments

   $ 46,907       $ 36       $ (5   $ 46,938   

Long-term investments

     16,986         103         (1     17,088   
                                  

Total

   $ 63,893       $ 139       $ (6   $ 64,026   
                                  

We had no available-for-sale investments as of December 31, 2009.

We had investments that were in an unrealized loss position as of September 30, 2010. We have determined that (i) we do not have the intent to sell any of these investments, and (ii) it is more likely than not that we will not be required to sell any of these investments before recovery of the entire amortized cost basis. We review our investments to identify and evaluate investments that have an indication of possible impairment. As of September 30, 2010, we anticipate that we will recover the entire carrying value of such investments and have determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the three and nine months ended September 30, 2010.

As of September 30, 2010 the weighted average number of days to maturity for our available for sales securities was 267 days, with the longest maturity date being December 2012.

The following table presents our available-for-sale investments that are in an unrealized loss position as of September 30, 2010 (in thousands):

 

     Less than 12 Months     12 Months or Greater     Total  
     Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 

Corporate bonds

   $ 3,437       $ (4   $ 1,019       $ (1   $ 4,456       $ (5

U.S. government bonds

     1,999         (1     —           —          1,999         (1
                                                   
   $ 5,436       $ (5   $ 1,019       $ (1   $ 6,455       $ (6
                                                   

4. Fair Value Measurements

On January 1, 2008, we adopted the methods of fair value as described in ASC 820 Fair Value Measurement and Disclosure (“ASC 820”) to value our financial assets and liabilities. As defined in ASC 820, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

Level 1: Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

 

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Conceptus, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

Fair Value of Assets

Our cash and cash equivalents and investments are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with a reasonable level of price transparency. As of September 30, 2010, our Level 1 instruments were investments in time deposits, money market funds, U.S. treasury bills, U.S. government bonds and corporate bonds.

Periodically, during the nine months ended September 30, 2010 we entered into forward contracts to buy U.S dollars at fixed intervals in the retail market in an over-the-counter environment. As of September 30, 2010, we had foreign currency forward contracts to sell 5.1 million Euros in exchange for $6.5 million maturing in October 2010 through January 2011. As of September 30, 2010, these forward contracts are recorded at their fair value of $0.5 million in other current liabilities on our condensed consolidated balance sheet. We have outstanding short-term intercompany receivables of $6.5 million as of September 30, 2010. We expect the changes in the fair value of the intercompany receivables to be materially offset by the changes in the fair value of the forward contracts.

The purpose of these forward contracts is to minimize the risk associated with foreign exchange rate fluctuations. We have developed a foreign currency exchange policy to govern our forward contracts. These foreign currency forward contracts do not qualify as cash flow hedges and all changes in fair value are reported in earnings as part of other income and expenses. We have not entered into any other types of derivative financial instruments for trading or speculative purpose. Our foreign currency forward contracts valuation inputs are based on quoted prices and quoted pricing intervals from public data and do not involve management judgment. Accordingly, we have classified our outstanding foreign currency forward contracts within Level 2 of the fair value hierarchy and have recorded the fair value of the contracts in other current liabilities on our condensed consolidated balance sheet as of September 30, 2010.

Assets measured at fair value on a recurring basis at September 30, 2010 are as follows (in thousands):

 

     September 30
2010
     Fair Value Measurements at Reporting Data  
        Quoted Price in
Active Markets
for Identical
Instruments
Level 1
     Significant
Other
Observable
Inputs
Level 2
     Significant
Unobservable
Inputs

Level 3
 

Assets:

           

Corporate bonds

   $ 45,740       $ 45,740       $ —         $ —     

U.S. treasury bills

     9,990         9,990         —           —     

U.S. government bonds

     5,999         5,999         —           —     

Money market funds

     5,032         5,032         —           —     

Time deposits

     2,297         2,297         —           —     
                                   

Total assets

   $ 69,058       $ 69,058       $ —         $ —     
                                   

 

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Conceptus, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

Assets measured at fair value on a recurring basis at December 31, 2009 are as follows (in thousands):

 

            Fair Value Measurements at Reporting Data  
     December 31
2009
     Quoted Price in
Active Markets
for Identical
Instruments
Level 1
     Significant
Other
Observable
Inputs
Level 2
     Significant
Unobservable
Inputs

Level 3
 

Assets:

           

Money market funds

   $ 54,884       $ 54,884       $ —         $ —     

Auction rate securities

     40,626         —           —           40,626   

Put option

     2,933         —           —           2,933   

Foreign currency forward contract

     145         —           145         —     
                                   

Total assets

   $ 98,588       $ 54,884       $ 145       $ 43,559   
                                   

The following table presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis, using significant unobservable inputs (Level 3) as of September 30, 2010 (in thousands):

 

     Put Option     Auction Rate
Securities
    Total  

Balance at December 31, 2009

   $ 2,933      $ 40,626      $ 43,559   

Sales of auction rate securities

     —          (5,175     (5,175

Loss on auction rate securities

     —          (274     (274

Gain on put option

     270        —          270   
                        

Balance at March 31, 2010

   $ 3,203      $ 35,177      $ 38,380   

Sales of auction rate securities

     —          (16,250     (16,250

Gain on auction rate securities

     —          1,236        1,236   

Loss on put option

     (1,219     —          (1,219
                        

Balance at June 30, 2010

   $ 1,984      $ 20,163      $ 22,147   

Sales of auction rate securities

     —          (22,150     (22,150

Gain on auction rate securities

     —          1,987        1,987   

Loss on put option

     (1,984     —          (1,984
                        

Balance at September 30, 2010

   $ —        $ —        $ —     
                        

For more information regarding our auction rate securities, see Note 3 — Investments.

Fair Value of Liabilities

Liabilities measured at fair value on a recurring basis at September 30, 2010 are as follows (in thousands):

 

            Fair Value Measurements at Reporting Data  
     September 30
2010
     Quoted Price in
Active Markets
for Identical
Instruments
Level 1
     Significant
Other
Observable
Inputs
Level 2
     Significant
Unobservable
Inputs

Level 3
 

Liabilities:

           

Foreign currency forward contract

   $ 514       $ —         $ 514       $ —     
                                   

Total liabilities

   $ 514       $ —         $ 514       $ —     
                                   

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

The fair value of the Convertible Senior Notes (see Note 9 – Convertible Senior Notes) was estimated using quoted market prices. Accordingly, we have classified our convertible senior notes within Level 1 of the fair value hierarchy and have recorded the carrying value of the notes in long-term liabilities on our condensed consolidated balance sheet as of September 30, 2010 and December 31, 2009.

The following table summarizes the principal outstanding and estimated fair values of our debt (in thousands):

 

     September 30, 2010      December 31, 2009  
     Carrying Value      Fair Value      Carrying Value      Fair Value  

Convertible senior notes

   $ 79,829       $ 82,576       $ 76,531       $ 81,075   

5. Goodwill and Intangible Assets

Goodwill is tested for impairment on an annual basis or more frequently upon the occurrence of circumstances that indicate that fair market value is lower than book value. We did not record any impairment of goodwill during the three and nine months ended September 30, 2010.

The changes in carrying amount of goodwill for the nine months ended September 30, 2010 is as follows (in thousands):

 

     Nine Months Ended
September 30,

2010
 

Goodwill, beginning of period

   $ 17,318   

Effect of currency translation

     (872
        

Goodwill, end of period

   $ 16,446   
        

The following table provides additional information concerning intangible assets (in thousands):

 

            September 30, 2010      December 31,
2009
 
     Weighted
average
remaining life
(years)
     Gross
carrying
amount
     Accumulated
amortization
    Cumulative
effect of
currency
translation
    Net book
value
     Net book value  

Patent and Licenses

     8.0       $ 25,750       $ (3,943   $ —        $ 21,807       $ 23,854   

Customer relationships

     6.3         5,024         (1,451     (343     3,230         3,809   

Covenant not to compete

     0.3         71         (61     (3     7         24   
                                             

Total intangibles

  

   $ 30,845       $ (5,455   $ (346   $ 25,044       $ 27,687   
                                             

Intangible assets are being amortized over straight-line periods ranging from 3 to 9 years.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

6. Inventories

Inventories are stated at the lower of cost or market. Cost is based on actual costs computed on a first-in, first-out basis. The components of inventories consist of the following (in thousands):

 

     September 30,
2010
     December 31,
2009
 

Raw materials

   $ 5       $ 92   

Work-in-progress

     1,038         1,577   

Finished goods

     3,497         3,239   
                 

Total

   $ 4,540       $ 4,908   
                 

7. Warranty

We offer warranties on our product and record a liability for the estimated future costs associated with warranty claims, which is based upon our historical experience and our estimate of the level of future costs. Warranty costs are reflected in the statement of operations as a cost of goods sold. A reconciliation of the changes in warranty liability for the nine months ended September 30, 2010 and 2009 are as follows (in thousands):

 

     Nine months ended September 30,  
     2010     2009  

Balance at the beginning of the period

   $ 277      $ 272   

Accruals for warranties issued during the period

     523        324   

Settlements made in kind during the period

     (473     (323
                

Balance at the end of the period

   $ 327      $ 273   
                

8. Stock-Based Compensation

Net income for the three months ended September 30, 2010 and net loss for the nine months ended September 30, 2010 included stock-based compensation expense under ASC 718, Compensation – Stock Compensation (“ASC 718”), of approximately $1.9 million and $5.4 million, respectively. Of these amounts, approximately $1.5 million and $4.5 million respectively related to employee stock options, employee stock purchase plan and stock appreciation rights and approximately $0.4 million and $0.9 million respectively related to employee restricted stock and restricted stock units.

Net loss for the three and nine months ended September 30, 2009 included stock-based compensation expense under ASC 718 of approximately $1.6 million and $4.5 million respectively. Of these amounts, approximately $1.4 million and $3.9 million respectively related to employee stock options, employee stock purchase plan and stock appreciation rights and approximately $0.2 million and $0.6 million respectively related to employee restricted stock and restricted stock units.

Stock-based compensation arrangements to non-employees are accounted for in accordance with ASC 505-50 Equity Based Payments to Non-Employees, which requires that these equity instruments are recorded at their fair value on the measurement date. The measurement of stock-based compensation is subject to adjustment as the underlying equity instruments vest. Stock-based compensation expense relating to non-employees was approximately $8,000 and zero for the three months ended September 30, 2010 and 2009, respectively, and $45,000 and $44,000 for the nine months ended September 30, 2010 and 2009, respectively.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

For the three and nine months ended September 30, 2010 and 2009, we calculated the fair value of each stock option and stock appreciation right on the date of grant using the Black-Scholes model as prescribed by ASC 718. The assumptions used were as follows:

 

     Three Months Ended September 30,  
     2010      2009  

Expected term (in years)

     —           4.06   

Average risk-free interest rate

     —           2.01

Average volatility factor

     —           50.3

Dividend yield

     —           —     

 

During the three months ended September 30, 2010 we granted no stock appreciation rights or stock options.

 

     Nine Months Ended September 30,  
     2010     2009  

Expected term (in years)

     4.15        4.33   

Average risk-free interest rate

     1.97     1.68

Average volatility factor

     51.4     52.4

Dividend yield

     —          —     

Stock Options and Stock Appreciation Rights: During the three and nine months ended September 30, 2010, we granted stock appreciation rights for zero and 457,500 shares of common stock, respectively, with an estimated total grant date fair value of approximately $3.8 million and a grant date weighted-average fair value of $8.31 per share for the nine months ended September 30, 2010. During the three and nine months ended September 30, 2009, we granted stock appreciation rights for 89,500 and 1,013,653 shares of common stock, respectively, with an estimated total grant date fair value of approximately $0.6 million and $5.4 million, respectively, and a grant date weighted-average fair value of $7.19 and $5.34 per share, respectively.

Restricted Stock Units: In connection with restricted stock units granted, we recorded stock compensation expense representing the fair market value of our common shares on the dates the awards were granted. Compensation expense is being recorded on a straight-line basis over the vesting periods of the underlying stock awards. During the three and nine months ended September 30, 2010, we granted zero and 170,187 restricted stock units, respectively, with a grant-date fair value of approximately $3.0 million, and a grant-date weighted-average fair value of $17.84 per share for the nine months ended September 30, 2010. During the three and nine months ended September 30, 2009, we granted 212 and 82,701 restricted stock units, respectively, with a grant-date fair value of approximately $4,000 and $1.0 million, respectively, and a grant-date weighted-average fair value of $18.96 and $12.01, respectively.

9. Convertible Senior Notes

In February 2007, we issued an aggregate principal amount of $86.3 million of our 2.25% convertible senior notes due 2027. These notes bear a 2.25% interest per annum on the principal amount, payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2007.

The notes will mature on February 15, 2027, unless earlier redeemed, repurchased or purchased by us or converted, and are convertible into cash and, if applicable, shares of our common stock based on an initial conversion rate, subject to adjustment, of 35.8616 shares per $1,000 principal amount of notes (which represents an initial conversion price of approximately $27.89 per share), in certain circumstances. Upon conversion, a holder would receive cash up to the principal amount of the note and our common stock in respect of such note’s conversion value in excess of such principal amount. The notes are convertible only in the following circumstances: (1) if the closing sale price of our common stock exceeds 120% of the conversion price during a period as defined in the indenture; (2) if the average trading price per $1,000 principal amount of the notes is less than or equal to 97% of the average conversion value of the notes during a period as defined in the indenture; (3) upon the occurrence of specified corporate transactions; (4) if we call the notes for redemption and (5) at any time on or after December 15, 2011 up to and including February 15, 2012 and anytime on or after February 15, 2025. Upon a change in control or termination of trading, holders of the notes may require us to repurchase all or a portion of their notes for cash at a repurchase price equal to 100% of the principal amount, plus any accrued and unpaid interest. We may not have sufficient funds to pay the interest, purchase price, repurchase price or principal return when conversion is triggered or a note becomes payable under the above terms.

 

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Conceptus, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

On or after February 15, 2012 we may redeem the notes in whole or in part at a redemption price in cash equal to 100% of the principal amount of the notes we redeem, plus any accrued and unpaid interest. On each of February 15, 2012, February 15, 2017 and February 15, 2022 holders may require us to purchase all or a portion of their notes at a purchase price in cash equal to 100% of the principal amount of the notes to be purchased, plus any accrued and unpaid interest.

We concluded that the embedded stock conversion option is not considered a derivative under ASC 815 Derivative and Hedging (“ASC 815”), because the embedded stock conversion option would be recorded in stockholders’ equity if it were a freestanding instrument.

In connection with the offering, we entered into convertible note hedge transactions with affiliates of the initial purchasers. These transactions are intended to reduce the potential dilution to our Company’s stockholders upon any future conversion of the notes. The call options, which cost an aggregate $19.4 million, were recorded as a reduction of additional paid-in capital. We also entered into warrant transactions concurrently with the offering, pursuant to which we sold warrants to purchase approximately 3.1 million shares of our common stock to the same counterparties that entered into the convertible note hedge transactions. The convertible note hedge and warrant transactions effectively increased the conversion price of the convertible notes to approximately $36.47 per share of our common stock. Proceeds received from the issuance of the warrants totaled approximately $10.7 million and were recorded as an addition to additional paid-in capital.

ASC 815 provides that contracts are initially classified as equity if (1) the contract requires physical settlement or net-share settlement, or (2) the contract gives the company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The settlement terms of our purchased call options and sold warrant contracts require net-share settlement. Based on the guidance in ASC 815, the purchased call option contracts were recorded as a reduction of equity and the warrants were recorded as an addition to equity as of the trade date. ASC 815 states that a reporting entity shall not consider contracts to be derivative instruments if the contract issued or held by the reporting entity is both indexed to its own stock and classified in stockholders’ equity in its statement of financial position. We concluded the purchased call option contracts and the warrant contracts should be accounted for in stockholders’ equity.

Adoption of ASC 470-20

ASC 470-20 Debt with Conversion and Other Options (“ASC 470-20”) clarifies the accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement. ASC 470-20 specifies that an issuer of such instruments should separately account for the liability and equity components of the instruments in a manner that reflect the issuer’s non-convertible debt borrowing rate which interest costs are recognized in subsequent periods. ASC 470-20 is effective for fiscal years beginning after December 15, 2008, and retrospective application is required for all periods presented. We adopted ASC 470-20 in the first quarter of fiscal 2009.

The effect of the adoption of ASC 470-20 was to bifurcate the debt and equity components of our convertible notes. The note payable principal balance at the date of issuance of $86.3 million in February 2007 was bifurcated into the debt component of $65.1 million and the equity component of $21.2 million. The difference between the note payable principal balance of $86.3 million and the $65.1 million value of the debt component is being accreted to interest expense over a period of 5 years, which is the expected term of our notes payable. We reclassified $0.8 million of debt issuance costs to additional paid in capital. The debt component was recognized at the present value of its cash flows discounted using a 5.51% discount rate, our borrowing rate at the date of the issuance of the notes for a similar debt instrument without the conversion feature.

Interest expense associated with the Convertible Senior Notes consisted of the following (in thousands):

 

     Three months ended September 30,      Nine months ended September 30,  
     2010      2009      2010      2009  

Contractual coupon rate of interest

   $ 489       $ 489       $ 1,455       $ 1,455   

Accretion of notes payable

     1,115         1,054         3,298         3,118   

Amortization of debt issuance costs

     116         116         349         349   
                                   

Interest expense - convertible senior notes

   $ 1,720       $ 1,659       $ 5,102       $ 4,922   
                                   

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The carrying amounts of the notes payable are as follows (in thousands):

 

     September 30,
2010
     December 31,
2009
 

Beginning carrying amount

   $ 76,531       $ 72,344   

Accretion of note payable

     3,298         4,187   
                 

Carrying amount

   $ 79,829       $ 76,531   
                 

10. Credit Line

In November 2008, we entered into a revolving credit line agreement with UBS, payable on demand, in an amount equal to 75% of the fair value of our ARS at a net no cost, meaning that the interest we paid on the credit line did not exceed the interest that we received on the ARS that we pledged as security for the credit line (Note 3 - Investments and Put Option). In July 2010, we exercised our put option to require UBS to purchase the underlying ARS at full par value, used the proceeds to repay the remaining balance of $14.2 million and terminated the line of credit. During the nine months ended September 30, 2010 we borrowed an additional $6.6 million, and repaid $35.8 million under this line of credit. Our loan balance as of September 30, 2010 and 2009 was zero and $29.2 million, respectively. The line of credit was terminated during the three months ended September 30, 2010.

11. Income Taxes

We adopted the provisions of ASC 740 Income Taxes (“ASC 740”) on January 1, 2007. The adoption of the provisions did not have a material impact on our financial position and results of operations. We have not been audited by the Internal Revenue Service or any state income or franchise tax agency. As of September 30, 2010, our federal returns for the years ended 2007 through the current period and most state returns for the years ended 2006 through the current period are still open to examination. In addition, all of the net operating losses and research and development credit carryforwards that may be used in future years are still subject to inquiry given that the statute of limitation for these items would be from the year of the utilization. The tax returns for Conceptus SAS for the years ended 2005 to 2007 were examined and closed by the French tax authorities in 2008.

For the three and nine months ended September 30, 2010, we recorded approximately $0.2 million and $0.5 million of income tax expense, respectively. For the three and nine months ended September 30, 2009, we recorded approximately $0.2 million and $0.4 million of income tax expense, respectively.

The amount of unrecognized tax benefits at September 30, 2010 was approximately $2.5 million, of which, if ultimately recognized, approximately $0.8 million would decrease the effective tax rate in the period in which the benefit is recognized. The remaining amount would be offset by the reversal of related deferred tax assets on which a valuation allowance is placed.

We do not expect our unrecognized tax benefits to change significantly over the next 12 months. In connection with the adoption of ASC 740 we recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.

In preparing our condensed consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our condensed consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent to which we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. Due to experiencing only one year of fiscal profitability and an accumulated loss for the nine months ended September 30, 2010, management believes that there is sufficient uncertainty regarding the realization of deferred tax assets and a full valuation allowance is appropriate. Management reviews its assumptions regarding the realization of deferred tax assets on an ongoing basis. Future profitability and changes in management’s assumptions may result in a partial or full release of the deferred tax valuation allowance. A release of the valuation allowance would have a favorable impact on the tax provision within the statement of operations.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

12. Computation of Net Income (Loss) Per Share

Basic net income (loss) per share excludes any potential dilutive effects of options, unvested restricted shares and restricted stock units and common stock shares subject to repurchase. Diluted net income (loss) per share includes the impact of potentially dilutive securities. In net loss periods presented, basic and diluted net loss per share are both computed using the weighted average number of common shares outstanding.

The following table provides a reconciliation of weighted-average number of common shares outstanding to the weighted-average number common shares outstanding used in computing basic and diluted net income (loss) per common share (in thousands):

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2010      2009      2010     2009  

Numerator:

          

Numerator for diluted earning per share -

          

Income (loss) available to common stockholders

   $ 976       $ 6,232       $ (1,665   $ 1,341   
                                  

Denominator:

          

Denominator for basic earnings per share -

          

Weighted-average number of common shares outstanding

     31,072         30,599         31,012        30,521   

Less: Weighted-average unvested and restricted common shares

     —           —           —          (2
                                  

Weighted-average number common shares outstanding computing basic net income (loss) per common share

     31,072         30,599         31,012        30,519   

Effect of dilutive securities:

          

Diluted options & stock appreciation rights

     318         853         —          566   

Diluted stock awards

     23         51         —          31   
                                  

Weighted-average number common shares outstanding used in share computing dilutive net income (loss) per common share

     31,413         31,503         31,012        31,116   
                                  

The following outstanding options, potential employee stock purchase plan shares, warrants, stock appreciation rights, restricted stock units and shares were excluded from the computation of diluted net income (loss) per share, as their effect would have been antidilutive (in thousands):

 

     At September 30,  
     2010      2009  

Outstanding options and stock appreciation rights

     5,157         4,744   

Restricted stock units

     255         149   

Warrants issued in connection with our convertible notes

     3,093         3,093   
                 

Total

     8,505         7,986   
                 

In February 2007, we issued an aggregate principal amount of $86.3 million of our 2.25% convertible senior notes due 2027. The convertible senior notes are not included in the calculation of net income (loss) per share because their effect is anti-dilutive. In addition, our convertible senior notes were excluded from the diluted net income per share calculation because the conversion price was greater than the average market price of our stock during the period.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

13. Comprehensive Income (Loss)

Comprehensive income (loss) represents all changes in stockholders’ equity except those resulting from investments or contributions by stockholders. Our comprehensive income (loss) consists of cumulative translation adjustments and unrealized gain or loss on available-for-sale securities. A summary of the comprehensive income (loss) for the periods indicated is as follows (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2010      2009      2010     2009  

Net income (loss)

   $ 976       $ 6,232       $ (1,665   $ 1,341   

Other comprehensive income (loss)

          

Foreign currency translation adjustment, net of tax

     2,018         658         (775     326   

Changes to unrealized gain (loss) on available-for-sale securities

     225         —           133        —     
                                  

Comprehensive income (loss)

   $ 3,219       $ 6,890       $ (2,307   $ 1,667   
                                  

The balance of each component of accumulated other comprehensive income (loss), net of taxes, as of September 30, 2010 and December 31, 2009 consist of the following (in thousands):

 

     Foreign Currency
Translation
    Unrealized Gains
(Loss)  on

Available
-For-Sale Securities
     Accumulated
Other
Comprehensive
Loss
 

Balance as of December 31, 2009

   $ (993   $ —         $ (993

Net change during the nine month period

     (775     133         (642
                         

Balance as of September 30, 2010

   $ (1,768   $ 133       $ (1,635
                         

14. Segment Information

We operate in one business segment, which encompasses all geographical regions. We use one measurement of profitability and do not segregate our business for internal reporting.

Net sales by geographic region, based on shipping location of our customer, are as follows (in thousands, except percentages):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  

Net sales (in thousands)

   $ 33,882      $ 34,247      $ 104,087      $ 94,447   

United States of America

     81     82     77     80

France

     10     11     13     12

Rest of Europe

     7     7     8     7

Other

     2     0     2     1

No customer accounted for more than 10% of total net sales for the three and nine months ended September 30, 2010 and 2009. One customer accounted for 11% of our total gross accounts receivable at September 30, 2010 and December 31, 2009.

 

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Conceptus, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

15. Legal Proceedings

On May 22, 2009, we filed a lawsuit in the United States District Court, Northern District of California against Hologic, Inc., (“Hologic”) seeking declaratory judgment by the Court that Hologic’s planned importation, use, sale or offer to sell of its forthcoming Adiana Permanent Contraception system will infringe several U.S. patents owned by us including U.S. Patent Nos. 6,634,361, 6,709,667, 7,237,552, 7,428,904 and 7,506,650, and an injunction prohibiting Hologic from importing, using, selling or offering to sell its Adiana system in the United States. Upon FDA approval of the Adiana Permanent Contraception system, we filed an Amended Complaint in July 2009 seeking a judgment that Hologic’s importation, use, sale and/or offer to sell the system infringes the same patents mentioned above and requested an injunction against such activity. On August 13, 2009, we filed a motion for preliminary injunction, requesting the Court to enjoin the Adiana system in the United States pending final judgment in the action. On August 25, 2009, Hologic filed its answer and asserted counterclaims against us that we were violating the Lanham Act and the California Statutory Unfair Competition Law. On October 14, 2009, we answered with our own counterclaims asserting that Hologic was violating the Lanham Act and the California Statutory Unfair Competition Law through its selling practices. A hearing was held on that motion on November 4, 2009 and an order denying the motion was issued on November 6, 2009, upon stipulation of the parties, on January 19, 2010, all claims relating to three of the five asserted patents were dismissed with prejudice. A claim construction hearing was held on March 10, 2010. The Claim Construction Order was issued on March 24, 2010 with all but one of five terms favorably construed to us. On April 21, 2010 the court issued an order denying our Motion to Compel and granted our Motion to Amend our Complaint to assert counterclaims against Hologic that Hologic had engaged in unfair competition against us and had violated the Lanham Act. On August 10, 2010, the parties reached agreement to settle all the unfair competition claims of both parties with prejudice. The terms of the agreement are confidential. Motions for summary judgment are scheduled for December 9, 2010. A trial date on the patent claims is scheduled for February 28, 2011.

On August 10, 2010 Hologic filed a lawsuit in the United States District Court for the District of Massachusetts alleging that our packaging, instructions for use, and marketing materials for our Essure® product contain two patents of the twelve listed containing no claims that cover the Essure® product. On October 12, 2010 we made a Motion to Transfer to the United States District Court, Northern District of California and a Motion to Dismiss the action. Oral argument is scheduled on December 13, 2010 in the United States District Court, District of Massachusetts.

From time to time, we are involved in legal proceedings arising in the ordinary course of business. We believe there is no litigation pending that could have, individually or in the aggregate, a material adverse effect on our financial position, result of operations or cash flows.

 

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

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto. This discussion contains forward-looking statements, including references to 2010 net sales and gross margins, increased product adoption, product improvements, expanded sales force and other forecasted items that involve risks and uncertainties such as our limited operating and sales history; the uncertainty of market acceptance of our product; dependence on obtaining and maintaining reimbursement; effectiveness and safety of our product over the long-term; our ability to obtain and maintain the necessary governmental clearances or approvals to market our product; our ability to develop and maintain proprietary aspects of our technology; our ability to manage our expansion; our limited history of manufacturing our product; our dependence on single source suppliers, third party manufacturers and co-marketers; intense competition in the medical device industry and in the contraception market; the inherent risk of exposure to product liability claims and product recalls; litigation risks and other factors referenced in this Form 10-Q. Our actual results could differ materially from those expressed or implied in these forward-looking statements as a result of various factors, including those discussed in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission on March 15, 2010 and those included elsewhere in this Form 10-Q.

Overview

We develop, manufacture and market the Essure® permanent birth control system, an innovative and proprietary medical device for women. The Essure system delivers a soft and flexible insert into a woman’s fallopian tubes, causing benign tissue in-growth which blocks the fallopian tubes. A successfully placed Essure micro-insert and the subsequent tissue growth prohibits the egg from traveling through the fallopian tubes, preventing conception. The effectiveness rate of the Essure procedure determined in our clinical study is 99.8% after four years of follow-up. We obtained approval to market Essure in the European Union in February 2001 and obtained the U.S. Food and Drug Administration, or FDA, approval for Essure in November 2002. Approximately 465,000 women worldwide have undergone the Essure procedure.

On January 7, 2008, we acquired all of the outstanding shares of Conceptus SAS, based in Versailles, France. As a result of this transaction, Conceptus SAS became a wholly-owned subsidiary, and through it we sell Essure directly in France and through a network of distributors throughout the rest of Europe. This acquisition expanded our presence in international markets and has increased our net sales as we now recognize sales at end-user pricing.

On December 15, 2008, we incorporated Conceptus Medical Limited (“CML”) as a wholly owned subsidiary in the United Kingdom to serve as our direct sales office in the United Kingdom after terminating our distributor relationship with our previous distributor during the fourth quarter of 2008. This incorporation further expanded our presence in the United Kingdom markets and has increased our net sales as we now recognize sales at end-user pricing in United Kingdom.

During 2009 we received a National Institute for Health and Clinical Excellence (“NICE”) positive recommendation in the United Kingdom and an approval for the Essure procedure from the Brazilian National Health Service. For financial information about geographic areas and segment information with respect to net sales, refer to the information set forth in Note 14 – Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements.

We were incorporated in the state of Delaware on September 18, 1992. We maintain three websites located at www.conceptus.com, www.essuremd.com and www.essure.com. We make available free of charge on or through our www.conceptus.com website, our annual report on Form 10-K, our 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 or furnish such material to the Securities and Exchange Commission (SEC).

The Essure® Procedure

The Essure micro-insert is designed to be placed into each fallopian tube during a single procedure using a hysteroscope, an instrument that allows visual examination of the cervix and uterine cavity, and our minimally invasive delivery system. The delivery system is a disposable plastic handle that is connected to our proprietary guidewire and catheter system. The micro-insert is constructed of a stainless steel inner coil, a dynamic outer coil made from a nickel titanium alloy, called Nitinol, and a layer of polyethylene terephthalate, or polyester fibers, wound between the inner coils. Using the hysteroscope for guidance, the delivery catheter is guided through the uterus and into the opening of the fallopian tube. Once the physician has properly positioned the delivery system in the fallopian tube, the physician releases the micro-insert. When released, the micro-insert automatically expands to the contours of the fallopian tube and anchors itself in place. Over a three-month time frame, the polyester fibers within the micro-insert elicit a localized, benign tissue in-growth that occludes, or blocks, the fallopian tubes, thereby preventing conception.

 

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Currently, local anesthesia is used as the predominate method of controlling discomfort during the Essure procedure. General anesthesia is not typically used unless required by hospital protocol, if requested by the patient, or based on the experience and comfort level of the physician. The Essure procedure can be performed in the comfort of a physician’s office in less than ten minutes (average hysteroscopic time) without hormones, cutting, burning or the risks associated with general anesthesia or tubal ligation. A patient is typically discharged approximately 45 minutes after the Essure procedure. No overnight hospital stay is required. Furthermore, the Essure procedure is effective without drugs or hormones. There is a three-month waiting period after the Essure procedure is completed during which the patient must continue to use her current form of birth control or an alternative form while tissue in-growth occurs. After three months, U.S. patients complete a confirmation test called a hysterosalpingogram, or HSG, which provides confirmation to both the doctor and the patient of the placement of the inserts and the occlusion of the fallopian tubes. Outside of the United States, the confirmation test is a standard flat plate pelvic X-ray conducted three months after completion of the procedure, with a subsequent HSG if device location on the initial radiographic image is in question.

The Essure® Procedure Benefits

With 99.8% effectiveness based on four years of follow up, the Essure procedure is the most effective form of permanent contraception on the market based on a comparison of four-year clinical trial data. We developed the Essure procedure in response to the market need for a less invasive and more cost effective solution for women whose families are complete. The Essure procedure is typically performed in an office setting without general anesthesia and women typically can return to their daily activities within one day. Other permanent birth control procedures, such as tubal ligation, are done in a hospital setting, entail general anesthesia and require additional recovery time.

Benefits for the patients:

 

   

Proven: four-year effectiveness rate of 99.8%;

 

   

Performed in the comfort of the doctor’s office in less than 10 minutes;

 

   

No risks associated with incisions, general anesthesia, glycine or RF energy (common in other permanent birth control procedures);

 

   

No hormones;

 

   

Short recovery time: Most women are discharged within 45 minutes after the Essure procedure is completed and they return to normal activities within 24 hours;

 

   

Confirmation: A confirmation test provides women with certainty that they are protected against unplanned pregnancy because the Essure micro-insert is radio opaque and its placement can be seen when the confirmation test is performed; and

 

   

Convenience: No recurring management of contraception usage after the confirmation test, which is performed 90 days after the initial procedure.

Benefits to the physician and healthcare system:

 

   

Cost and time savings result in a more effective and efficient solutions:

 

   

Elimination of overhead costs,

 

   

Indirect and procedural costs related to anesthesia,

 

   

Post-operative care and hospital stays associated with tubal ligations;

 

   

Short procedure time and relative ease of performing the procedure;

 

   

Ability to visually confirm proper placement of micro-insert during the procedure;

 

   

No risks associated with incisions, thermal injuries, bowel injuries or dilutional hyponatremia, glycine, or general anesthesia;

 

   

Less resource-intensive environment: While Essure procedures may be performed in various settings including the physician office, hospital operating room and an ambulatory surgery center, the majority of Essure procedures now take place in physicians’ offices; and

 

   

Confirmation test verifies procedure success and efficacy.

Benefits to the payers:

 

   

Lower cost procedure due to reduced use of general or regional anesthesia and reduced number of post-operative hospital stays;

 

   

Elimination of operating room expenses because the procedure can be performed in the physician’s office;

 

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Cost savings resulting from the potential reduction of unplanned pregnancies and;

 

   

Most effective form of permanent birth control based on four years of clinical studies.

Physician Penetration

We require physicians to be preceptored for between 3 and 5 cases by a certified trainer before performing the procedure independently. We continue to see an increase in the number of physicians becoming trained or who are in the process of training to perform the Essure procedure. The level of sales for the Essure system is highly dependent on the number of physicians trained to perform the procedure. However, we understand that a strong base of trained physicians does not necessarily correlate to an increase in net sales proportionately. Furthermore, there are no net sales associated with the training activities. We do not charge a fee for the activity and no commitment arises for the physician from the preceptorship.

Reimbursement of the Essure® Procedure

Market acceptance of the Essure system depends in part upon the availability of reimbursement within prevailing healthcare payment systems. We believe that physician advocacy of our product will be required to continue to obtain reimbursement. As of September 30, 2010 we have received positive coverage decisions for the Essure procedure from most private insurers and from all of the 51 Medicaid programs and favorable office reimbursements in 26 states (defined as $1,800 or more) within the United States. We continue to receive positive responses relating to reimbursement, which we believe will help increase the adoption of the Essure device by doctors and patients. We intend to continue our effort to educate payers of the cost-effectiveness of our product and to establish further programs to help physicians navigate reimbursement issues. As with all healthcare plans, coverage will vary and is dependent upon the individual’s specific benefit plan.

Effective January 1, 2010, the Centers for Medicare and Medicaid Service (“CMS”), the Medicare Physician Fee Schedule national average payment for hysteroscopic sterilization (“CPT code”) is $423 when performed in a hospital (facility) and $1,822 (non-facility) when performed in a physician’s office. In addition, in the CMS Final Rule for the 2010 Outpatient Prospective Payment System, or OPPS, which assigns hospital outpatient reimbursement amounts, CPT 58565 maps to APC 202 which is assigned a Medicare National Average of $3,033, which under Medicare includes the cost of the implant. In 2010, the Medicare national average payment for hysteroscopic sterilization in the Ambulatory Surgery Center (“ASC”) is $1,672, which includes the cost of the implant. We believe these values are favorable for the Essure procedure and will help establish increased utilization of the device amongst doctors.

Reimbursement systems vary significantly by country and sometimes by region, and reimbursement approvals must be obtained on a country-by-country basis. Many international markets have government-managed healthcare systems that determine reimbursement for new devices and procedures. In most markets, there are private insurance systems as well as government-managed systems.

During the last several years, we received several positive responses from government and private agencies relating to reimbursement, which we believe will help us to speed up the acceptance of the Essure procedure by doctors and patients. In Europe, we are developing a strategic plan to obtain reimbursement in a number of European countries. In France, we have obtained official reimbursement with the Haute Autorité de Santé (“HAS”). The Essure procedure is covered in France for all age-appropriate women, regardless of their medical status. The Economic Committee for Healthcare Devices in France ruled in November 2007 that the reimbursement for the Essure device will remain at the then current levels of 663 Euros, net of value added tax, for the next five years. The French authorities are implementing cost-cutting measures that may affect reimbursement for medical devices and procedures. The French authorities have changed the reimbursement of hysteroscopic occlusion for women aged 40 and older, which could have a significant impact on our business in France, at least in the near term. We are working to get this change overturned, but are unable to predict whether our efforts will be successful.

We have experienced significant cumulative operating losses since inception and, as of September 30, 2010, had an accumulated deficit of $236.0 million. Although we were profitable in 2009 and during the third quarter of 2010, we experienced a cumulative loss for the nine months ended September 30, 2010, as such we cannot assure you that we will sustain profitability. We will continue to expend substantial resources in the selling and marketing of the Essure system in the United States and abroad. We will be in a cumulative net loss position unless sufficient net sales can be generated to offset expenses.

 

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Results of Operations - Three and Nine Months Ended September 30, 2010 and 2009

(in thousands, except percentages)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2010     2009     2010-
2009

%
Change
    2010     2009     2010-
2009

%
Change
 
     Amount     % (a)     Amount     % (a)       Amount     % (a)     Amount     % (a)    

Net sales

   $ 33,882        100   $ 34,247        100     -1   $ 104,087        100   $ 94,447        100     10

Gross profit

   $ 27,320        81     29,203        85     -6     83,849        81     76,977        82     9

Research and development expenses

   $ 1,610        5     1,734        5     -7     5,171        5     5,149        5     0

Selling, general and administrative expenses

   $ 22,968        68     19,472        57     18     75,277        72     65,380        69     15

Total interest and other income (expense), net

   $ (1,561     -5     (1,615     -5     -3     (4,605     -4     (4,734     -5     -3

Provision for income taxes

   $ 205        1     150        0     37     461        0     373        0     24

Net income (loss)

   $ 976        3     6,232        18     -84     (1,665     -2     1,341        1     -224

 

(a) Expressed as a percentage of total net sales.

Net Sales

Net sales were $33.9 million for the three months ended September 30, 2010 as compared to $34.2 million for the three months ended September 30, 2009, representing a decrease of approximately $0.3 million or 1%. Net sales were $104.1 million for the nine months ended September 30, 2010 as compared to $94.4 million for the nine months ended September 30, 2009, representing an increase of approximately $9.7 million or 10%. The decrease in net sales for the three months ended September 30, 2010 reflects continuing macroeconomic pressures that have contributed to reductions in patient visits to OB/GYN physician offices, as well as ongoing competitive product trialing. The increase in net sales for the nine months ended September 30, 2010 is the result of continued commercialization and marketing of the Essure system worldwide and reflects the increasing numbers of physicians entering and completing training in the use of the procedure. The increase also reflects the continuation of our programs aimed at raising consumer and physician awareness of the Essure procedure.

International sales comprised 19% and 23% of our net sales in the three and nine months ended September 30, 2010, representing an increase of 6% and 22%, respectively, as compared to the three and nine months ended September 30, 2009. The increases in international sales reflect our continued focus on growing our current markets such as France and the expansion into new markets. International sales were negatively impacted by a stronger U.S. Dollar in the three and nine months ended September 30, 2010 as compared to similar periods in 2009.

Net sales by geographic region, based on shipping location of our customers, are as follows (in thousands, except percentages):

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2010     2009     2010     2009  

Net sales (in thousands)

   $ 33,882      $ 34,247      $ 104,087      $ 94,447   

United States of America

     81     82     77     80

France

     10     11     13     12

Rest of Europe

     7     7     8     7

Other

     2     0     2     1

No customer accounted for more than 10% of total net sales for the three and nine months ended September 30, 2010 and 2009. One customer accounted for 11% of our total gross accounts receivable at September 30, 2010 and December 31, 2009.

We expect our net sales for 2010 to be in the range of approximately $143.0 million to $145.0 million, which would represent 9% to 10% growth from net sales in 2009 as we continue to increase the number of physicians performing the Essure procedure. Additionally, we will continue to increase our direct sales force domestically. We believe our net sales growth in 2010 and beyond will be significantly influenced by how successful we are in achieving our patient awareness objectives and physicians entering and completing training. However, as we have noted elsewhere in this Form 10-Q and risk factors from our Form 10-K, our expected net sales growth involves many risk factors, many of which are not entirely within our control.

 

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Gross Profit

Cost of goods sold for the three months ended September 30, 2010 was $6.6 million as compared to $5.0 million for the three months ended September 30, 2009, which represents an increase of $1.6 million, or 30%. Cost of goods sold for the nine months ended September 30, 2010 was $20.2 million as compared to $17.5 million for the nine months ended September 30, 2009, which represents an increase of $2.7 million, or 16%. Gross margin for the three months ended September 30, 2010 was 81% which represents a decrease from a gross margin of 85% for the three months ended September 30, 2009. For the nine months ended September 30, 2010, gross margin was 81%, which represents a decrease from a gross margin of 82% for the nine months ended September 30, 2009.

The decrease in gross margin was caused by channel mix and lower international average selling prices. The decrease in gross margin was further impacted due to the acquisition of intellectual property assets, including patents and licenses from Ovion Inc. (“Ovion”), a wholly owned subsidiary of American Medical Systems, Inc. (“AMS”) during the third quarter of 2009. In connection with the purchase agreement, AMS and Ovion released us from any and all current and future domestic and international royalty obligations under such licenses. We released approximately $1.5 million related to international royalty obligations, which we had accrued to date. This resulted in our gross margins benefitting approximately 400 basis points in the third quarter of 2009.

Our gross profit margin will vary as our geographic mix changes. Increases in sales of our devices through distributors in international markets will tend to reduce our overall gross profit margin.

Research and Development Expenses

Research and development expenses, which include expenditures related to product development, clinical research and regulatory affairs, are substantially related to the ongoing development and associated regulatory approvals of our technology.

Research and development expenses, were $1.6 million and $1.7 million for the three months ended September 30, 2010 and 2009, respectively, which represents a decrease of $0.1 million, or 7%. As a percentage of net sales research and development expenses for each of the three months ended September 30, 2010 and 2009 represented 5%.

Research and development expenses were $5.2 million and $5.1 million for the nine months ended September 30, 2010 and 2009, respectively, which represents an increase of $0.1 million. As a percentage of net sales, research and development expenses for each of the nine months ended September 30, 2010 and 2009 represented 5%.

We expect research and development expenses for the fourth quarter of 2010 to be comparable to our current quarter.

Selling, General and Administrative Expenses

Selling, general and administrative spending for the three months ended September 30, 2010 was $23.0 million as compared to $19.5 million for the three months ended September 30, 2009, which represents an increase of $3.5 million, or 18%.

The increase was primarily the result of (i) increased legal and personnel fees of approximately $3.3 million, (ii) an increase of approximately $0.4 million in payroll expenses primarily due to the expansion of the U.S. field sales force, offset by (iii) a decrease of approximately $0.2 million in insurance, rent and business taxes. As a percentage of net sales, selling, general and administrative expenses for the three months ended September 30, 2010 and 2009 represented 68% and 57%, respectively.

Selling, general and administrative spending for the nine months ended September 30, 2010 were $75.3 million as compared to $65.4 million for the nine months ended September 30, 2009, which represents an increase of $9.9 million, or 15%. The increase was the result of (i) payroll, stock compensation, training and recruiting related expenses of approximately $2.8 million, primarily due to the expansion of the U.S. field sales force, (ii) an increase of approximately $5.3 million due to increased personnel and legal fees, (iii) an increase of approximately $0.6 million in travel related expenses and (iv) an increase of approximately $1.2 million in advertising expenditures primarily for our consumer-awareness campaign. As a percentage of net sales, selling, general and administrative expenses for the nine months ended September 30, 2010 and 2009 represented 72% and 69%, respectively.

 

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We expect selling, general and administrative expenses to decrease in the fourth quarter of 2010 as compared to the third quarter due to lower legal fees offset by hiring additional sales professionals to focus on our sales efforts.

Total interest and other income (expense) net

Total interest and other income (expense) net for each of the three months ended September 30, 2010 and 2009 was a net expense of $1.6 million. Total interest and other income (expense) net for the nine months ended September 30, 2010 and 2009 was a net expense of $4.6 million and $4.7 million, respectively, which represents an increase of $0.1 million or 3% primarily due to foreign exchange losses in the nine months ended September 30, 2009.

Provision for income taxes

We adopted the provisions of ASC 740 Income Taxes (“ASC 740”) on January 1, 2007. The adoption of the provisions did not have a material impact on our financial position and results of operations. We have not been audited by the Internal Revenue Service or any state income or franchise tax agency. As of September 30, 2010, our federal returns for the years ended 2007 through the current period and most state returns for the years ended 2006 through the current period are still open to examination. In addition, all of the net operating losses and research and development credit carryforwards that may be used in future years are still subject to inquiry given that the statute of limitation for these items would be from the year of the utilization. The tax returns for Conceptus SAS for the years ended 2005 to 2007 were examined and closed by the French tax authorities in 2008.

For the three and nine months ended September 30, 2010, we recorded approximately $0.2 million and $0.5 million of income tax expense, respectively. For the three and nine months ended September 30, 2009, we recorded approximately $0.2 million and $0.4 million of income tax expense, respectively.

The amount of unrecognized tax benefits at September 30, 2010 was approximately $2.5 million, of which, if ultimately recognized, approximately $0.8 million would decrease the effective tax rate in the period in which the benefit is recognized. The remaining amount would be offset by the reversal of related deferred tax assets on which a valuation allowance is placed.

We do not expect our unrecognized tax benefits to change significantly over the next 12 months. In connection with the adoption of ASC 740 we recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.

In preparing our condensed consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our condensed consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent to which we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. Due to experiencing only one year of fiscal profitability and an accumulated loss for the nine months ended September 30, 2010, management believes that there is sufficient uncertainty regarding the realization of deferred tax assets and a full valuation allowance is appropriate. Management reviews its assumptions regarding the realization of deferred tax assets on an ongoing basis. Future profitability and changes in management’s assumptions may result in a partial or full release of the deferred tax valuation allowance. A release of the valuation allowance would have a favorable impact on the tax provision within the statement of operations.

Liquidity and Capital Resources

We have experienced significant cumulative operating losses since inception and, as of September 30, 2010, had an accumulated deficit of $236.0 million. Although we were profitable in 2009 and during the third quarter of 2010, we experienced a cumulative loss for the nine months ended September 30, 2010, as such we cannot assure you that we will sustain profitability. We will continue to expend substantial resources in the selling and marketing of the Essure system worldwide. We will remain in an accumulated deficit position unless sufficient net sales can be generated to offset expenses.

 

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In July 2010, we exercised our put option with UBS to purchase the underlying auction rate securities (“ARS”) of $22.2 million at full par value. Accordingly, we had redeemed our ARS in the nine months ended September 30, 2010 of $43.6 million at full par value and our balance as of September 30, 2010 is zero.

During the nine months ended September 30, 2010, we had invested $89.8 million in time deposits, U.S. treasury bills, U.S. government bonds and corporate bonds. We will sell certain or all investments as needed to meet the cash flow needs of our business. Hence our investments in time deposits, U.S. treasury bills, U.S. government bonds and corporate bonds are classified as available-for-sale securities in accordance with ASC 320 Investments – Debt and Equity Securities. Investments are classified as short-term or long-term based on the underlying investments maturity date. As of September 30, 2010 we had $46.9 million classified as short-term investments and $17.1 million classified as long-term investments. See Note 3 – Investments and Put Option, in the Notes to Condensed Consolidated Financial Statements.

The successful achievement of our business objectives may require additional financing and therefore, we may in the future seek to raise additional funds through bank facilities, debt or equity offerings or other sources of capital. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Additional funding may not be available when needed or on terms acceptable to us. If we are unable to obtain additional capital, we may be required to delay, reduce the scope of or eliminate our sales and marketing activities. Our future liquidity and capital requirements will depend upon many factors, including, among others:

 

   

resources devoted to establish sales, marketing and distribution capabilities;

 

   

the rate of product adoption by doctors and patients;

 

   

our determination to acquire or invest in other products, technologies and businesses;

 

   

the market price of our common stock as it affects the exercise of stock options and the conversion terms of our convertible debt;

 

   

the insurance payer community’s acceptance of and reimbursement for the Essure system; and

 

   

the effect on our business due to competition.

As of September 30, 2010, we had cash and cash equivalents of $19.3 million, compared to $61.7 million at December 31, 2009. The decrease of $42.4 million of cash and cash equivalents is primarily due to cash used in investing activities to purchase and sell investments and cash used in financing activities for the net repayment of the line of credit. We had short-term and long-term investments of $64.0 million as of September 30, 2010, compared to $40.6 million of short-term investments at December 31, 2009.

We believe that our existing cash and cash equivalents will be sufficient to meet our cash requirements for at least the next twelve months.

Sources and Uses of Cash

Our cash flows for the nine months ended September 30, 2010 and 2009 are summarized as follows:

 

     Nine months ended
September 30,
 
     2010     2009  

Net cash provided by operating activities

   $ 9,952      $ 18,414   

Net cash used in investing activities

     (25,346     (22,647

Net cash (used in) provided by financing activities

     (26,922     1,610   

Effect of exchange rate changes on cash and cash equivalents

     (77     89   
                

Net decrease in cash and cash equivalents

   $ (42,393   $ (2,534
                

 

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Operating Activities

Net cash provided by operating activities was $10.0 million in the nine months ended September 30, 2010, as compared to $18.4 million provided for the nine months ended September 30, 2009. Net cash provided by operating activities for the nine months ended September 30, 2010 was primarily related to:

 

   

net loss of $1.7 million;

 

   

a $15.6 million increase corresponding to the accretion of notes payable, stock based compensation, depreciation and amortization of fixed assets, debt issuance costs, intangible amortization and amortization and accretion of discount and premium on investments;

 

   

an increase in accounts receivable of $2.0 million as a result of our increase in sales;

 

   

a decrease in inventories of $0.7 million;

 

   

an increase of other current assets of $1.0 million primarily due to interest receivable from available-for-sale investments, lower deposit balances and higher prepaid balances due to timing;

 

   

an increase in accounts payable of $0.4 million primarily related to timing of payments; and

 

   

a decrease in other accrued and long term liabilities and accrued compensation of $2.0 million primarily for the 2010 incentive plans.

Net cash provided by operating activities in the nine months ended September 30, 2009 was primarily related to:

 

   

net income of $1.3 million;

 

   

a $11.6 million increase corresponding to the accretion of notes payable, stock based compensation, depreciation and amortization of fixed assets, debt issuance costs and intangible amortization;

 

   

an increase in accounts receivable of $1.7 million as a result of our increase in sales;

 

   

a net decrease of other assets and other current assets of $5.7 million primarily due to amortization of prepayments for our advertising, primarily in the United States;

 

   

an increase in inventories of $0.2 million;

 

   

an increase in accounts payable of $1.0 million primarily related to timing of payments; and

 

   

an increase in other accrued and long term liabilities and accrued compensation of $0.9 million primarily for 2009 incentive plans.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2010 was $25.3 million, primarily due to investments purchases of $89.8 million and capital expenditures primarily related to purchases of additional hysteroscopy equipment of $4.1 million. These were offset by the redemption of our ARS for $43.6 million at full par value and additional sales of short-term and long-term investments for additional $25.0 million during the nine months ended September 30, 2010.

Net cash used in investing activities for the nine months ended September 30, 2009 was $22.6 million, primarily due to the asset purchase agreement with AMS of $23.7 million and capital expenditures primarily related to purchases of additional hysteroscopy equipment of $3.5 million. In addition, we had redemptions of our ARS for $4.6 million at full par value during the nine months ended September 30, 2009.

Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2010 was $26.9 million. This was due to the $35.8 million repayment of our UBS line of credit, offset by $2.3 million from the issuance of common stock from our stock programs and $6.6 million from borrowings under our UBS line of credit. In July 2010, we exercised our put option requiring UBS to purchase the underlying ARS at full par value and used the proceeds to repay the remaining balance of $14.2 million and terminated the line of credit. See Note 10 – Credit Line, in the Notes to Condensed Consolidated Financial Statements.

Net cash provided by financing activities in the nine months ended September 30, 2009 was $1.6 million from the issuance of common stock for our stock option programs of $2.3 million, and borrowings of $4.4 million under our UBS line of credit, offset by repayment of $5.0 million towards UBS line of credit.

 

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CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying condensed consolidated financial statements and related footnotes. A description of our critical accounting estimates and policies is included in our Annual Report on Form 10-K for the year ended December 31, 2009. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The primary estimates underlying our financial statements include reserves for obsolete and slow moving inventory, allowance for doubtful accounts receivable, product warranty, impairment for long-lived assets, income taxes, stock-based compensation and contingent liabilities. Other accounting policies are described in section “Critical Accounting Estimates and Policies” in our Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2009. Application of these policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-06 Fair Value Measurements and Disclosure Requirements, which updated guidance related to fair value measurements and disclosures, and requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In addition, in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than one net number). The updated guidance also requires that and entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The updated guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. We have adopted this guidance in the first quarter of 2010. See Note 4 – Fair Value Measurement.

During the nine months ended September 30, 2010, the FASB has issued several ASUs – ASU No. 2010-01 through ASU No. 2010-25. Except for ASU No. 2010-06 discussed above and ASU No. 2010-09 Amendments to Certain Recognition and Disclosure Requirements issued in February 2010 and Codification Topic ASC 855 – Subsequent Events, in each case as presented in the Quarterly Report on Form 10Q for the quarter ended March 31, 2010, the ASUs entail technical corrections to existing guidance or affect guidance related to specialized industries or entities and therefore have minimal, if any, impact on us.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The following discusses our exposure to market risk related to changes in interest rates and foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results.

Interest Rate Risk: We maintain an investment portfolio of various holdings, types, and maturities. The values of our investments are subject to market price volatility. Our primary objective for holding investments is to achieve an appropriate investment return consistent with preserving principal and managing risk. As of September 30, 2010 we had short and long-term available-for-sale investments of $64.0 million recorded at fair value.

At any time, a sharp rise in interest rates could have a material adverse impact on the fair value of our investment portfolio, specifically investments in corporate bonds and U.S. government bonds. We had no outstanding hedging instruments for our investments as of September 30, 2010. We monitor our interest rate and credit risks, including our credit exposures to specific rating categories and to individual issuers. We monitor our investment portfolio to ensure it is compliant with our internal investments policy. We believe the overall credit quality of our portfolio is strong. There were no impairment charges on our investments for the nine months ended September 30, 2010. A hypothetical 100 based point change in interest rates will not have a material impact on the fair value of our available-for-sale investments. See Note 3 – Investments, in the Notes to Condensed Consolidated Financial Statements.

 

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Foreign Currency Exchange Risk: A portion of our net sales are denominated in the Euro and the British Pound. To date the foreign currency exchange risk related to British Pounds has been minimal due to the size of Conceptus Medical Limited.

We are exposed to foreign exchange rate fluctuations as we translate the financial statements of our foreign subsidiaries into U.S. Dollars in consolidation. If there is a change in foreign currency exchange rates, the translation of the foreign subsidiaries’ financial statements into U.S. Dollars will lead to translation gains or losses which are recorded net as a component of accumulated other comprehensive income (loss). We seek to manage our foreign exchange risk through operational means, including managing same currency revenues in relation to same currency expenses, and same currency assets in relation to same currency liabilities. Periodically, during 2010 we entered into forward contracts to buy U.S dollars at fixed intervals in the retail market in an over-the-counter environment. As of September 30, 2010, we had foreign currency forward contracts to sell 5.1 million Euros in exchange for $6.5 million maturing in October 2010 through January 2011. As of September 30, 2010 these forward contracts are recorded at their fair value of $0.5 million in other current liabilities on our condensed consolidated balance sheet. We have outstanding short-term intercompany receivables of $6.5 million as of September 30, 2010. We expect the changes in the fair value of the intercompany receivables to be materially offset by the changes in the fair value of the forward contracts. A potential loss in fair value resulting from a hypothetical 10 percent strengthening in the value of the U.S. dollar/local currency exchange rate would be approximately $0.7 million.

The purpose of these forward contracts is to minimize the risk associated with foreign exchange rate fluctuations. We have developed a foreign exchange policy to govern our forward contracts. These foreign currency forward contracts do not qualify as cash flow hedges and all changes in fair value are reported in earnings as part of other income and expenses. We have not entered into any other types of derivative financial instruments for trading or speculative purpose. Our foreign currency forward contract valuation inputs are based on quoted prices and quoted pricing intervals from public data and do not involve management judgment.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures:

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of September 30, 2010, the end of our most recent fiscal quarter, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting:

There was no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations of Internal Controls

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

On May 22, 2009, we filed a lawsuit in the United States District Court, Northern District of California against Hologic, Inc., (“Hologic”) seeking declaratory judgment by the Court that Hologic’s planned importation, use, sale or offer to sell of its forthcoming Adiana Permanent Contraception system will infringe several U.S. patents owned by us including U.S. Patent Nos. 6,634,361, 6,709,667, 7,237,552, 7,428,904 and 7,506,650, and an injunction prohibiting Hologic from importing, using, selling or offering to sell its Adiana system in the United States. Upon FDA approval of the Adiana Permanent Contraception system, we filed an Amended Complaint in July 2009 seeking a judgment that Hologic’s importation, use, sale and/or offer to sell the system infringes the same patents mentioned above and requested an injunction against such activity. On August 13, 2009, we filed a motion for preliminary injunction, requesting the Court to enjoin the Adiana system in the United States pending final judgment in the action. On August 25, 2009, Hologic filed its answer and asserted counterclaims against us that we were violating the Lanham Act and the California Statutory Unfair Competition Law. On October 14, 2009, we answered with our own counterclaims asserting that Hologic was violating the Lanham Act and the California Statutory Unfair Competition Law through its selling practices. A hearing was held on that motion on November 4, 2009 and an order denying the motion was issued on November 6, 2009, upon stipulation of the parties, on January 19, 2010, all claims relating to three of the five asserted patents were dismissed with prejudice. A claim construction hearing was held on March 10, 2010. The Claim Construction Order was issued on March 24, 2010 with all but one of five terms favorably construed to us. On April 21, 2010 the court issued an order denying our Motion to Compel and granted our Motion to Amend our Complaint to assert counterclaims against Hologic that Hologic had engaged in unfair competition against us and had violated the Lanham Act. On August 10, 2010, the parties reached agreement to settle all the unfair competition claims of both parties with prejudice. The terms of the agreement are confidential. Motions for summary judgment are scheduled for December 9, 2010. A trial date on the patent claims is scheduled for February 28, 2011.

On August 10, 2010 Hologic filed a lawsuit in the United States District Court for the District of Massachusetts alleging that our packaging, instructions for use, and marketing materials for our Essure® product contain two patents of the twelve listed containing no claims that cover the Essure® product. On October 12, 2010 we made a Motion to Transfer to the United States District Court, Northern District of California and a Motion to Dismiss the action. Oral argument is scheduled on December 13, 2010 in the United States District Court, District of Massachusetts.

From time to time, we are involved in legal proceedings arising in the ordinary course of business. We believe there is no litigation pending that could have, individually or in the aggregate, a material adverse effect on our financial position, result of operations or cash flows.

 

Item 1A. Risk Factors

The risk factors included in our Annual Report as of December 31, 2009 on Form 10-K filed with the Securities and Exchange Commission on March 15, 2010 should be considered while evaluating Conceptus and our business. In addition to those factors and to other information in this Form 10-Q, the following updates to the risk factors as of September 30, 2010 should be considered carefully while evaluating the Company and our business.

We face competition, and if we are unable to compete effectively, demand for the Essure system may be reduced.

The medical device industry is highly competitive and is characterized by rapid and significant technological change. To compete successfully, we will need to continue to demonstrate the advantages of our Essure procedures over new or current competitive procedures as well as well-established alternative procedures, products and technologies, and convince physicians and other healthcare decision makers of the advantages of our products and technology. As we market the Essure system, we compete with:

 

   

other methods of permanent contraception, in particular tubal ligation;

 

   

other companies that have developed or may be developing permanent contraception devices that are similar to or otherwise compete with the Essure system;

 

   

other methods of non-permanent contraception, including devices such as intrauterine devices, or IUDs, vaginal rings, condoms and prescription drugs such as the birth control pill, injectable and implantable contraceptives and patches; and

 

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We compete against other surgical procedures for permanent birth control, mechanical devices and other contraceptive methods, including existing methods of short-term and longer-term reversible birth control for both women and men.

The Essure procedure faces direct competition from Adiana, a hysteroscopic sterilization method that is manufactured and sold by Hologic, Inc. in Europe and the United States. We believe the Essure procedure has significant advantages over its competitor such as its higher effectiveness rate, no risks from the use of RF energy and the fact that the micro-inserts are radio-opaque, which enables the physician to visually confirm that the micro-inserts have been properly placed in the fallopian tubes.

Many of our competitors possess a larger women’s health focused sales force and have access to the greater resources required to develop and market a competitive product than we do. In addition, new competition and products may arise due to consolidation within the industry and other companies may develop products that could compete with the Essure system. Our competitive position also depends on:

 

   

widespread awareness, acceptance and adoption of our Essure product;

 

   

our ability to respond promptly to medical and technological changes through the development and commercialization of new products;

 

   

availability of coverage and reimbursement from third-party payers, insurance companies and others for the Essure procedure;

 

   

the manufacture and delivery of our products in sufficient volumes on time, and accurately predicting and controlling costs associated with manufacturing, installation, warranty and maintenance of the products;

 

   

our ability to attract and retain qualified personnel;

 

   

the extent of our patent protection or our ability to otherwise develop proprietary products and processes; and

 

   

securing sufficient capital resources to expand our sales and marketing efforts.

These and other competitive factors may render the Essure system obsolete or noncompetitive or reduce demand for the Essure system.

Our liquidity could be adversely impacted by adverse conditions in the financial markets.

At September 30, 2010, we had cash and cash equivalents of $19.3 million. This available cash and cash equivalents are held in accounts at financial institutions and consist of invested cash and cash in our operating accounts. The invested cash is invested in interest bearing money market funds managed by third party financial institutions. These funds invest in direct obligations of the government of the United States and traditional money market funds. We can provide no assurances that access to our invested cash and cash equivalents will not be impacted by adverse conditions in the financial markets.

We maintain an investment portfolio of various holdings, types, and maturities. These securities are classified as available-for-sale. As of September 30, 2010 we had short and long-term investments of $64.0 million recorded at fair value. Our portfolio includes time deposits, U.S. treasury bills, U.S. government bonds and corporate bonds, the values of which are subject to market price volatility to the extent unhedged. If such investments suffer market significant price declines, we may recognize in earnings the decline in the fair value of our investments below their cost basis when the decline is judged to be other than temporary. For information regarding the sensitivity of and risks associated with the market value of portfolio investments and interest rates refer to the section titled “Quantitative and Qualitative Disclosures About Market Risk.”

All of our cash and cash equivalents in our operating accounts are with third-party financial institutions. These balances exceed the Federal Deposit Insurance Corporation insurance limits. While we monitor the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date we have experienced no loss or lack of access to cash in our operating accounts.

 

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Our business, financial condition, results of operations and cash flows could be significantly and adversely affected if certain types of healthcare reform programs are adopted in our key markets and other administration and legislative proposals are enacted into law.

The Patient Protection and Affordable Care Act (“PPACA”) was signed into law on March 23, 2010 and, among its numerous provisions, enacts an excise tax on medical device manufacturers on sales beginning January 1, 2013. As a result, our effective tax rate and results of operations would be adversely affected and our ability to innovate and conduct necessary research and development to remain competitive with large, global companies could be negatively impacted. There are numerous other provisions in the new law that may have an adverse impact on our business. In addition, we cannot predict what other healthcare initiatives, if any, will be implemented at the Federal or State level, or the effect any future legislation or regulation will have on us. Additionally, some parts of PPACA may be overturned or changed as a result of litigation being brought in several states, which could have unknown impacts to our business. An expansion in government’s role in the U.S. healthcare industry may lower reimbursements for our products, reduce medical procedure volumes and adversely affect our business and results of operations, possibly materially.

We are a party to patent litigation, which is expensive and diverts our management’s attention.

The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights, and companies in the industry have used intellectual property litigation to gain a competitive advantage. We may become a party to patent infringement claims and litigation or interference proceedings declared by the U.S. Patent and Trademark Office, or PTO, to determine the priority of inventions. The defense and prosecution of these matters are both costly and time consuming. We have commenced and may need to commence proceedings against others to enforce our patents, to protect our trade secrets or know-how or to determine the enforceability, scope and validity of the proprietary rights of others. These proceedings have and would result in substantial expense to us and significant diversion of effort by our technical and management personnel.

An adverse determination in existing or new litigation or interference proceedings to which may become a party could subject us to significant liabilities to third parties or require us to seek licenses from third parties. Although patent and intellectual property disputes in the medical device area have often been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties. We may be unable to obtain necessary licenses on satisfactory terms, if at all. Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling the Essure system.

On May 22, 2009, we filed a lawsuit in the United States District Court, Northern District of California against Hologic, Inc., (“Hologic”) seeking declaratory judgment by the Court that Hologic’s planned importation, use, sale or offer to sell of its forthcoming Adiana Permanent Contraception system will infringe several U.S. patents owned by us including U.S. Patent Nos. 6,634,361, 6,709,667, 7,237,552, 7,428,904 and 7,506,650, and an injunction prohibiting Hologic from importing, using, selling or offering to sell its Adiana system in the United States. Upon FDA approval of the Adiana Permanent Contraception system, we filed an Amended Complaint in July 2009 seeking a judgment that Hologic’s importation, use, sale and/or offer to sell the system infringes the same patents mentioned above and requested an injunction against such activity. On August 13, 2009, we filed a motion for preliminary injunction, requesting the Court to enjoin the Adiana system in the United States pending final judgment in the action. On August 25, 2009, Hologic filed its answer and asserted counterclaims against us that we were violating the Lanham Act and the California Statutory Unfair Competition Law. On October 14, 2009, we answered with our own counterclaims asserting that Hologic was violating the Lanham Act and the California Statutory Unfair Competition Law through its selling practices. A hearing was held on that motion on November 4, 2009 and an order denying the motion was issued on November 6, 2009, upon stipulation of the parties, on January 19, 2010, all claims relating to three of the five asserted patents were dismissed with prejudice. A claim construction hearing was held on March 10, 2010. The Claim Construction Order was issued on March 24, 2010 with all but one of five terms favorably construed to us. On April 21, 2010 the court issued an order denying our Motion to Compel and granted our Motion to Amend our Complaint to assert counterclaims against Hologic that Hologic had engaged in unfair competition against us and had violated the Lanham Act. On August 10, 2010, the parties reached agreement to settle all the unfair competition claims of both parties with prejudice. The terms of the agreement are confidential. Motions for summary judgment are scheduled for December 9, 2010. A trial date on the patent claims is scheduled for February 28, 2011.

On August 10, 2010 Hologic filed a lawsuit in the United States District Court for the District of Massachusetts alleging that our packaging, instructions for use, and marketing materials for our Essure® product contain two patents of the twelve listed containing no claims that cover the Essure® product. On October 12, 2010 we made a Motion to Transfer to the United States District Court, Northern District of California and a Motion to Dismiss the action. Oral argument is scheduled on December 13, 2010 in the United States District Court, District of Massachusetts.

 

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Our International Business could be affected by Changes in Reimbursement Schemes in Various European Countries.

The Ministry of Health in France is implementing cost-cutting measures that may affect reimbursement for medical devices and procedures. The French government has changed the reimbursement of hysteroscopic occlusion for women aged 40 and older, which could have a significant impact on our business in France, at least in the near term. We are working to get this change overturned, but are unable to predict whether our efforts will be successful.

 

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Item 6. Exhibits

 

Number

 

Description

31.1   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2   Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 8, 2010

Conceptus, Inc.

 

/S/    GREGORY E. LICHTWARDT

Gregory E. Lichtwardt

Executive Vice President, Treasurer

and Chief Financial Officer

 

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