Attached files
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 |
June 30, 2011 For the quarterly period ended June 30, 2011
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
(Registrants 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 x 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 31,237,842 shares of Registrants Common Stock issued and outstanding as of August 1, 2011.
CONCEPTUS, INC.
Form 10-Q for the Quarter Ended June 30, 2011
Page | ||||||||
Part I. |
Financial Information | |||||||
Item 1. |
Condensed Consolidated Financial Statements (Unaudited) | |||||||
a) Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010 |
3 | |||||||
4 | ||||||||
c) Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 |
5 | |||||||
6 | ||||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 20 | ||||||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 30 | ||||||
Item 4. |
Controls and Procedures | 31 | ||||||
Part II. |
Other Information | |||||||
Item 1. |
Legal Proceedings | 32 | ||||||
Item 1A. |
Risk Factors | 33 | ||||||
Item 6. |
Exhibits | 34 |
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands)
June
30, 2011 |
December
31, 2010 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
$ | 25,828 | $ | 18,383 | ||||
Short-term investments |
52,887 | 59,398 | ||||||
Accounts receivable, net |
19,602 | 20,451 | ||||||
Inventories, net |
3,552 | 2,915 | ||||||
Short-term deferred tax assets |
7,908 | 5,058 | ||||||
Other current assets |
5,646 | 7,003 | ||||||
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Total current assets |
115,423 | 113,208 | ||||||
Property and equipment, net |
10,430 | 10,062 | ||||||
Intangible assets, net |
22,767 | 24,145 | ||||||
Long-term investments |
16,941 | 13,104 | ||||||
Restricted cash |
367 | 367 | ||||||
Goodwill |
17,386 | 16,013 | ||||||
Long-term deferred tax assets |
73,736 | 73,696 | ||||||
Other assets |
211 | 151 | ||||||
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Total assets |
$ | 257,261 | $ | 250,746 | ||||
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Liabilities and stockholders equity |
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Current liabilities: |
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Accounts payable |
$ | 4,690 | $ | 5,921 | ||||
Accrued compensation |
6,920 | 6,170 | ||||||
Notes payable |
83,270 | 80,960 | ||||||
Other accrued liabilities |
5,360 | 3,736 | ||||||
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Total current liabilities |
100,240 | 96,787 | ||||||
Deferred tax liabilities |
1,002 | 1,007 | ||||||
Other accrued liabilities |
1,479 | 1,366 | ||||||
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Total liabilities |
102,721 | 99,160 | ||||||
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Contingencies (Note 14) |
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Stockholders equity: |
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Common stock and additional paid-in capital: $0.003 par value, 53,000,000 shares authorized, 31,315,372 and 31,201,645 shares issued and 31,237,509 and 31,123,782 shares outstanding at June 30, 2011 and December 31, 2010 |
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310,131 |
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306,276 |
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Accumulated other comprehensive loss |
(768 | ) | (2,341 | ) | ||||
Accumulated deficit |
(154,823 | ) | (152,349 | ) | ||||
Treasury stock, 77,863 shares, at cost |
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Total stockholders equity |
154,540 | 151,586 | ||||||
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Total liabilities and stockholders equity |
$ | 257,261 | $ | 250,746 | ||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
Three months
ended June 30, |
Six months
ended June 30, |
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2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales |
$ | 33,805 | $ | 36,847 | $ | 60,375 | $ | 70,205 | ||||||||
Cost of goods sold |
6,114 | 7,285 | 11,315 | 13,676 | ||||||||||||
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Gross profit |
27,691 | 29,562 | 49,060 | 56,529 | ||||||||||||
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Operating expenses: |
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Research and development |
1,669 | 1,815 | 3,430 | 3,561 | ||||||||||||
Selling, general and administrative |
24,107 | 26,330 | 47,399 | 52,309 | ||||||||||||
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Total operating expenses |
25,776 | 28,145 | 50,829 | 55,870 | ||||||||||||
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Operating income (loss) |
1,915 | 1,417 | (1,769 | ) | 659 | |||||||||||
Interest income |
176 | 198 | 350 | 472 | ||||||||||||
Interest expense |
(1,767 | ) | (1,770 | ) | (3,508 | ) | (3,526 | ) | ||||||||
Other income, net |
(35 | ) | (13 | ) | (15 | ) | 10 | |||||||||
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Total interest and other income (expense), net |
(1,626 | ) | (1,585 | ) | (3,173 | ) | (3,044 | ) | ||||||||
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Income (loss) before provision (benefit) for income taxes |
289 | (168 | ) | (4,942 | ) | (2,385 | ) | |||||||||
Provision (benefit) for income taxes |
(165 | ) | 123 | (2,468 | ) | 257 | ||||||||||
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Net income (loss) |
$ | 454 | $ | (291 | ) | $ | (2,474 | ) | $ | (2,642 | ) | |||||
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Basic income (loss) per share: |
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Net income (loss) |
$ | 0.01 | $ | (0.01 | ) | $ | (0.08 | ) | $ | (0.09 | ) | |||||
Shares used in per share amounts |
31,190 | 31,032 | 31,167 | 30,981 | ||||||||||||
Diluted income (loss) per share: |
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Net income (loss) |
$ | 0.01 | $ | (0.01 | ) | $ | (0.08 | ) | $ | (0.09 | ) | |||||
Shares used in per share amounts |
31,487 | 31,032 | 31,167 | 30,981 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six months
ended June 30, |
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2011 | 2010 | |||||||
Cash flows from operating activities |
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Net loss |
$ | (2,474 | ) | $ | (2,642 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization of property plant and equipment |
2,631 | 2,241 | ||||||
Amortization of debt issuance costs |
232 | 232 | ||||||
Accretion of notes payable |
2,310 | 2,183 | ||||||
Amortization of intangibles |
1,632 | 1,627 | ||||||
Amortization and accretion of discount and premium on investments |
850 | 354 | ||||||
Loss on put option |
| 949 | ||||||
Gain on trading securities |
| (962 | ) | |||||
Stock-based compensation expense |
3,422 | 3,531 | ||||||
Loss on disposal of property and equipment |
125 | 11 | ||||||
Changes in operating assets and liabilities: |
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Accounts receivable, net |
1,299 | (2,922 | ) | |||||
Inventories |
(552 | ) | 393 | |||||
Prepaids and other assets |
1,397 | (1,460 | ) | |||||
Deferred tax asset |
(2,883 | ) | | |||||
Accounts payable |
(1,577 | ) | 826 | |||||
Accrued compensation |
638 | (1,833 | ) | |||||
Deferred tax liabilities |
(90 | ) | | |||||
Other accrued and long term liabilities |
1,601 | (237 | ) | |||||
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Net cash provided by operating activities |
8,561 | 2,292 | ||||||
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Cash flows from investing activities |
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Sales and maturities of investments |
61,845 | 29,935 | ||||||
Purchase of investments |
(60,278 | ) | (56,510 | ) | ||||
Restricted cash |
| (5 | ) | |||||
Purchase of property and equipment |
(3,305 | ) | (2,817 | ) | ||||
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Net cash used in investing activities |
(1,738 | ) | (29,397 | ) | ||||
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Cash flows from financing activities |
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Proceeds from line of credit |
| 6,615 | ||||||
Repayment of line of credit |
| (21,679 | ) | |||||
Proceeds from stock options and awards exercises |
433 | 2,323 | ||||||
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Net cash provided by (used in) provided by financing activities |
433 | (12,741 | ) | |||||
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Effect of exchange rate changes on cash and cash equivalents |
189 | (354 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
7,445 | (40,200 | ) | |||||
Cash and cash equivalents at beginning of the period |
18,383 | 61,658 | ||||||
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Cash and cash equivalents at end of the period |
$ | 25,828 | $ | 21,458 | ||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
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, 2010 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, 2010. The results of operations for the three and six months ended June 30, 2011 may not necessarily be indicative of the operating results for the full 2011 fiscal year or any other future interim periods.
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 womans fallopian tubes, causing a benign tissue in-growth which blocks the fallopian tubes. Successfully placed Essure micro-inserts and the subsequent tissue growth around and through the micro-inserts prohibits the egg from traveling through the fallopian tube, 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 550,000 women worldwide have undergone the Essure procedure and we sell the Essure system in over 30 countries worldwide.
In February 2007, we issued an aggregate principal amount of $86,250,000 of our 2.25% convertible senior notes due 2027. If the notes are converted, then upon conversion, 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 notes conversion value in excess of such principal amount (net shares settlement). 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. The convertible senior notes are classified as current liabilities at June 30, 2011 and December 31, 2010 as the notes are convertible at the option of the holder during the period beginning December 15, 2011 and ending February 15, 2012. See Note 9 Convertible Senior Notes. If the holders of the notes exercise this repurchase right, or put, we may need to raise additional funds through bank facilities, debt or equity offerings or other sources of capital in order to repurchase the notes. 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 October 2009, the Financial Accounting Standards Board (FASB) amended the accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the products essential functionality from the scope of the FASBs software revenue recognition guidance. The FASBs software revenue recognition guidance was issued to address factors that entities should consider when determining whether the software and non-software components of a product function together to deliver the products essential functionality. This amended guidance will allow revenue arrangements in which software and non-software components deliver together a products essential functionality to follow multiple-deliverable revenue recognition criteria as opposed to the criteria applicable to software revenue recognition.
6
In addition, the FASB also amended the accounting standards for multiple deliverable revenue arrangements to:
| provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated; |
| require an entity to allocate revenue in an arrangement using estimated selling price (ESP) of deliverables if a vendor does not first have vendor-specific objective evidence (VSOE) of selling price or secondly does not have third-party evidence (TPE) of selling price; and |
| eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. |
A multiple-element arrangement includes the sale of one or more tangible product offerings with one or more associated services offerings, each of which are individually considered separate units of accounting. The determination of our units of accounting did not change with the adoption of the new revenue recognition guidance; we allocate revenue to each element in a multiple-element arrangement based upon the relative selling price of each deliverable. When applying the relative selling price method, we determine the selling price for each deliverable using VSOE of selling price, if it exists, or TPE of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, we use our best estimate of selling price for that deliverable. Revenue allocated to each element is then recognized when the other revenue recognition criteria are met for each element.
Both the above mentioned updates were effective for us from January 1, 2011 and we have elected to apply them prospectively to new or materially modified revenue arrangements after its effective date. The adoption of this guidance did not have a material impact on our Consolidated Financial Statements and Results of Operations.
In May 2011, the FASB issued ASU No. 2011-04 Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and IFRS. This ASU represents the converged guidance of the FASB and the International Accounting Standards Board, or IASB, on fair value measurement and is intended to result in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term fair value. The amendments are to be applied prospectively and are effective for public entities during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The guidance is limited to enhanced disclosures, we do not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements and Results of Operations.
In June 2011, the FASB issued ASU No. 2011-05 Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU increases the prominence of other comprehensive income (OCI) in the financial statements and provides companies two options for presenting OCI, which until now has typically been placed within the statement of equity. One option allows an OCI statement to be included with the net income statement, and together the two will make a statement of total comprehensive income. Alternately, companies may present an OCI statement separate from the net income statement; however, the two statements will have to appear consecutively within a financial report. This ASU does not affect the types of items that are reported in OCI, nor does it affect the calculation or presentation of earnings per share. For public companies, this ASU is effective for periods beginning after December 15, 2011. We will adopt the OCI presentation requirements required by ASU No. 2011-05 beginning with our first quarter in 2012.
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 the 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.
7
Functional Currency
On January 7, 2008, we acquired Conceptus SAS (SAS), which sells to customers throughout Europe. Sales by SAS are denominated in Euros. In December 2008, we incorporated Conceptus Medical Limited (CML) as our United Kingdom subsidiary. In preparing our consolidated financial statements, we are required to translate the financial statements of SAS and CML from the currency in which they keep their accounting records into U.S. Dollars. SAS and CML both maintain their accounting records in the functional currency which is also their local currency. The functional currency of SAS is the Euro and the functional currency of CML is the British Pound. The functional currency is determined based on managements 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 subsidiarys operations must also be considered. Since the functional currency of SAS and CML has been determined to be their local currency, any gain or loss associated with the translation of SASs and CMLs financial statements into U.S. Dollars is included as a component of stockholders equity, in accumulated other comprehensive loss. If in the future we determine that there has been a change in the functional currency of 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 perform an assessment of our goodwill at the reporting unit level annually, 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 six months ended June 30, 2011.
Other intangible assets include patents, customer relationships, and license agreements. The patents include the patents acquired in 2009 in connection with our purchase of intellectual property assets from Ovion Inc. (Ovion). 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, and intangible assets acquired in connection with our acquisition of 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.
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
As of June 30, 2011 we had short and long-term investments of $69.8 million recorded at fair value. Our investments consist of corporate bonds, U.S. and international government bonds, commercial paper, U.S. treasury bills and time deposits. We will sell certain or all investments as needed to meet the cash flow needs of our business. Our investments in corporate bonds, U.S. and international government bonds, commercial paper, U.S. treasury bills and time deposits 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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The following table summarizes our amortized cost, unrealized gains and loss, and the fair value of our available-for-sales investments, as of June 30, 2011 (in thousands):
Amortized Cost |
Unrealized Gain |
Unrealized Loss |
Fair Value | |||||||||||||
Investments: |
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Corporate bonds |
$ | 38,150 | $ | 91 | $ | (39 | ) | $ | 38,202 | |||||||
U.S. & International government bonds |
9,883 | 8 | (10 | ) | 9,881 | |||||||||||
Commercial paper |
8,990 | | | 8,990 | ||||||||||||
U.S. treasury bills |
7,985 | 8 | | 7,993 | ||||||||||||
Time deposits |
4,769 | | (7 | ) | 4,762 | |||||||||||
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Total |
$ | 69,777 | $ | 107 | $ | (56 | ) | $ | 69,828 | |||||||
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Reported as: |
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Short-term investments |
$ | 52,825 | $ | 86 | $ | (24 | ) | $ | 52,887 | |||||||
Long-term investments |
16,952 | 21 | (32 | ) | 16,941 | |||||||||||
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Total |
$ | 69,777 | $ | 107 | $ | (56 | ) | $ | 69,828 | |||||||
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The following table summarizes our amortized cost, unrealized gains and loss and the fair value of our available-for-sales investments as of December 31, 2010 (in thousands):
Amortized Cost |
Unrealized Gain |
Unrealized Loss |
Fair Value | |||||||||||||
Investments: |
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Corporate bonds |
$ | 38,642 | $ | 96 | $ | (39 | ) | $ | 38,699 | |||||||
U.S. treasury bills |
13,989 | 6 | | 13,995 | ||||||||||||
Commercial paper |
11,989 | | | 11,989 | ||||||||||||
U.S. & International government bonds |
4,549 | 20 | (1 | ) | 4,568 | |||||||||||
Time deposits |
3,273 | | (22 | ) | 3,251 | |||||||||||
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Total |
$ | 72,442 | $ | 122 | $ | (62 | ) | $ | 72,502 | |||||||
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Reported as: |
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Short-term investments |
$ | 59,366 | $ | 58 | $ | (26 | ) | $ | 59,398 | |||||||
Long-term investments |
13,076 | 64 | (36 | ) | 13,104 | |||||||||||
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Total |
$ | 72,442 | $ | 122 | $ | (62 | ) | $ | 72,502 | |||||||
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We had several investments that were in an unrealized loss position as of June 30, 2011. 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 June 30, 2011, 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 six months ended June 30, 2011.
As of June 30, 2011 weighted average days to maturity for our available for sales securities was 214 days, with the longest maturity date being March 2013.
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The following table presents our available-for-sale investments that are in an unrealized loss position as of June 30, 2011 (in thousands):
Less than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
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Corporate bonds |
$ | 14,018 | $ | (13 | ) | $ | 7,386 | $ | (26 | ) | $ | 21,404 | $ | (39 | ) | |||||||||
U.S. & International government bond |
4,928 | (10 | ) | | | $ | 4,928 | $ | (10 | ) | ||||||||||||||
Time deposits |
1,498 | (1 | ) | 2,015 | (6 | ) | $ | 3,513 | $ | (7 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 20,444 | $ | (24 | ) | $ | 9,401 | $ | (32 | ) | $ | 29,845 | $ | (56 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
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.
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 June 30, 2011, our Level 1 instruments were investments in corporate bonds, U.S. treasury bills, U.S. and international government bonds, time deposits and cash equivalent commercial paper and money market funds.
We hold available-for-sale short-term commercial paper with highly rated financial institutions. There is no active market for such commercial paper; it is traded directly from the issuer or on an over-the-counter market. As of June 30, 2011, the carrying amount of the available-for-sale commercial paper is a reasonable estimate of fair value and these investments have been classified within Level 2 of the fair value hierarchy.
Periodically, we enter into forward contracts to buy U.S. Dollars at fixed intervals in the retail market in an over-the-counter environment. As of June 30, 2011, we had foreign currency forward contracts to sell 4.2 million Euros in exchange for $6.0 million maturing in July 2011 through September 2011. As of June 30, 2011, these forward contracts are recorded at their fair value of approximately $0.1 million in other current liabilities on our condensed consolidated balance sheet. We have outstanding short-term intercompany receivables of $6.0 million as of June 30, 2011. 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 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 June 30, 2011.
10
Assets measured at fair value on a recurring basis at June 30, 2011 are as follows (in thousands):
Fair Value Measurements at Reporting Data | ||||||||||||||||
June
30 2011 |
Quoted Price in Active Markets for Identical Instruments Level 1 |
Significant Other Observable Inputs Level 2 |
Significant Unobservable Inputs Level 3 |
|||||||||||||
Assets: |
||||||||||||||||
Cash equivalents: |
||||||||||||||||
Commercial paper |
$ | 14,999 | $ | 14,999 | $ | | $ | | ||||||||
Money market funds |
369 | 369 | | | ||||||||||||
Available-for-sale investments: |
||||||||||||||||
Corporate bonds |
38,202 | 38,202 | | | ||||||||||||
U.S. & International government bonds |
9,881 | 9,881 | | | ||||||||||||
Commercial paper |
8,990 | | 8,990 | | ||||||||||||
U.S. treasury bills |
7,993 | 7,993 | | | ||||||||||||
Time deposits |
4,762 | 4,762 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 85,196 | $ | 76,206 | $ | 8,990 | $ | | ||||||||
|
|
|
|
|
|
|
|
Assets measured at fair value on a recurring basis at December 31, 2010 are as follows (in thousands):
Fair Value Measurements at Reporting Data | ||||||||||||||||
December
31 2010 |
Quoted Price in Active Markets for Identical Instruments Level 1 |
Significant Other Observable Inputs Level 2 |
Significant Unobservable Inputs Level 3 |
|||||||||||||
Assets: |
||||||||||||||||
Cash equivalents: |
||||||||||||||||
U.S. government bonds |
$ | 2,000 | $ | 2,000 | $ | | $ | | ||||||||
Commercial paper |
2,000 | 2,000 | | | ||||||||||||
Money market funds |
1,368 | 1,368 | | | ||||||||||||
Available-for-sale investments: |
||||||||||||||||
Corporate bonds |
38,699 | 38,699 | | | ||||||||||||
U.S. treasury bills |
13,995 | 13,995 | | | ||||||||||||
Commercial paper |
11,989 | | 11,989 | | ||||||||||||
U.S. & International government bonds |
4,568 | 4,568 | | | ||||||||||||
Time deposits |
3,251 | 3,251 | | | ||||||||||||
Foreign currency forward contract |
182 | | 182 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 78,052 | $ | 65,881 | $ | 12,171 | $ | | ||||||||
|
|
|
|
|
|
|
|
11
Fair value of Liabilities
Liabilities measured at fair value on a recurring basis at June 30, 2011 are as follows (in thousands):
Fair Value Measurements at Reporting Data | ||||||||||||||||
June 30 2011 |
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 |
$ | 78 | $ | | $ | 78 | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
$ | 78 | $ | | $ | 78 | $ | | ||||||||
|
|
|
|
|
|
|
|
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 current liabilities on our condensed consolidated balance sheet as of June 30, 2011 and December 31, 2010 because the holders have the ability to require us to repurchase the notes in whole or part at a repurchase price of 100% of par.
The following table summarizes the principal outstanding and estimated fair values of our debt (in thousands):
June 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
|||||||||||||
Convertible senior notes |
$ | 83,270 | $ | 85,750 | $ | 80,960 | $ | 85,086 |
5. Goodwill and Intangible Assets
Goodwill is tested for impairment, at the reporting unit level on an annual basis or more frequently upon the occurrence of circumstances that indicate that goodwill might be impaired. We did not record any impairment of goodwill during the three or six months ended June 30, 2011.
The change in the carrying amount of goodwill for the six months ended June 30, 2011 is as follows (in thousands):
Six Months Ended June 30, 2011 |
||||
Goodwill, beginning of period |
$ | 16,013 | ||
Effect of currency translation |
1,373 | |||
|
|
|||
Goodwill, end of period |
$ | 17,386 | ||
|
|
12
The following table provides additional information concerning intangible assets, which are being amortized over straight-line periods ranging from 3 to 9 years (in thousands):
June 30, 2011 | December 31, 2010 |
|||||||||||||||||||||||
Weighted average remaining life (years) |
Gross carrying amount |
Accumulated amortization |
Cumulative effect of currency translation |
Net book value |
Net book value | |||||||||||||||||||
Patent and Licenses |
7.2 | $ | 25,750 | $ | (5,990 | ) | $ | | $ | 19,760 | $ | 21,125 | ||||||||||||
Customer relationships |
5.5 | 5,024 | (1,845 | ) | (172 | ) | 3,007 | 3,020 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total intangibles |
|
$ | 30,774 | $ | (7,835 | ) | $ | (172 | ) | $ | 22,767 | $ | 24,145 | |||||||||||
|
|
|
|
|
|
|
|
|
|
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):
June 30, 2011 |
December 31, 2010 |
|||||||
Raw materials |
$ | 12 | $ | 5 | ||||
Work-in-progress |
766 | 795 | ||||||
Finished goods |
2,774 | 2,115 | ||||||
|
|
|
|
|||||
Total |
$ | 3,552 | $ | 2,915 | ||||
|
|
|
|
7. Warranty
We offer warranties on our product and record a liability at the time of the sale 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 six months ended June 30, 2011 and 2010 are as follows (in thousands):
Six months ended June 30, | ||||||||
2011 | 2010 | |||||||
Balance at the beginning of the period |
$ | 333 | $ | 277 | ||||
Accruals for warranties issued during the period |
96 | 364 | ||||||
Settlements made in kind during the period |
(209 | ) | (323 | ) | ||||
|
|
|
|
|||||
Balance at the end of the period |
$ | 220 | $ | 318 | ||||
|
|
|
|
8. Stock-Based Compensation
Net income (loss) for the three and six months ended June 30, 2011 included approximately $1.7 million and $3.4 million, respectively, of stock-based compensation expense. Net loss for the three and six months ended June 30, 2010 included approximately $1.8 million and $3.5 million, respectively, of stock-based compensation expense.
Stock-based compensation expense under ASC 718, Compensation Stock Compensation (ASC 718) relating to employee stock options, employee stock purchase plan and stock appreciation rights, is approximately $1.3 million and $1.5 million for the three months ended June 30, 2011 and 2010, respectively, and approximately $2.6 million and $3.0 million for the six months ended June 30, 2011 and 2010, respectively. In addition, stock-based compensation expense of approximately $0.4 million and $0.3 million for the three months ended June 30, 2011 and 2010, respectively, and approximately $0.8 million and $0.5 million for the six months ended June 30, 2011 and 2010, respectively, relates to employee restricted stock
13
units. Stock-based compensation expense is measured at grant date, based on the fair value of the award, and is recognized on a straight line basis as expense over the employee requisite service period, which is generally the vesting period. In addition we recorded stock-based compensation expense for awards to non-employees as described in the following paragraph.
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 $11,000 and $5,000 for the three months ended June 30, 2011 and 2010, respectively, and $38,000 and $37,000 for the six months ended June 30, 2011 and 2010, respectively.
For the three and six months ended June 30, 2011 and 2010, we calculated the fair value of each 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 June 30, | ||||||||
2011 | 2010 | |||||||
Expected term (in years) |
4.50 | | ||||||
Average risk-free interest rate |
1.26 | % | | |||||
Average volatility factor |
53.3 | % | | |||||
Dividend yield |
| |
During the three months ended June 30, 2010 we granted no stock appreciation rights or stock options.
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Expected term (in years) |
4.50 | 4.15 | ||||||
Average risk-free interest rate |
1.75 | % | 1.97 | % | ||||
Average volatility factor |
53.4 | % | 51.4 | % | ||||
Dividend yield |
| |
Stock Options and Stock Appreciation Rights: During the three and six months ended June 30, 2011, we granted stock appreciation rights for 125,000 and 578,000 shares of common stock, respectively, with an estimated total grant date fair value of approximately $0.6 million and $3.4 million, respectively, and a grant date weighted-average per share fair value of $4.94 and $5.86, respectively. During the three months ended June 30, 2010, we granted no stock appreciation rights. During the six months ended June 30, 2010, we granted stock appreciation rights for 457,500 shares of common stock 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.
Restricted Stock Units: In connection with restricted stock units granted, we recorded stock-based compensation expense representing the fair market value of our common shares on the dates the awards were granted. Stock-based compensation expense is being recorded on a straight-line basis over the vesting periods of the underlying stock awards. During the three and six months ended June 30, 2011, we granted 54,138 and 184,838 restricted stock units, respectively, with a grant-date fair value of approximately $0.7 million and $2.4 million, respectively, and a grant-date weighted-average per share fair value of $12.19 and $12.83, respectively. During the three and six months ended June 30, 2010, we granted 111,750 and 170,187 restricted stock units, respectively, with a grant-date fair value of approximately $1.9 million and $3.0 million, respectively, and a grant-date weighted-average per share fair value of $16.97 and $17.84, 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 interest at a rate of 2.25% 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
14
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 notes 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.
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. The convertible senior notes are classified as current liabilities at June 30, 2011 and December 31, 2010 as the notes are convertible at the option of the holder during the period beginning December 15, 2011 and ending February 15, 2012.
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.
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 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 issuers non-convertible debt borrowing rate which interest costs are recognized in subsequent periods. ASC 470-20 became effective for fiscal years beginning after December 15, 2008, and retrospective application was 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, due to the holders put right, is the expected term of our notes payable. We reclassified $0.8 million of debt issuance costs to additional paid in capital, attributable to the equity component of the debt. 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.
15
Interest expense associated with the notes consisted of the following (in thousands):
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Contractual coupon rate of interest |
$ | 488 | $ | 488 | $ | 966 | $ | 966 | ||||||||
Accretion of notes payable |
1,163 | 1,099 | 2,310 | 2,183 | ||||||||||||
Amortization of debt issuance costs |
116 | 116 | 232 | 232 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Interest expense - convertible senior notes |
$ | 1,767 | $ | 1,703 | $ | 3,508 | $ | 3,381 | ||||||||
|
|
|
|
|
|
|
|
The carrying amounts of the notes are as follows (in thousands):
June 30, 2011 |
December 31, 2010 |
|||||||
Carrying amount at beginning of the period |
$ | 80,960 | $ | 76,531 | ||||
Accretion of note payable |
2,310 | 4,429 | ||||||
|
|
|
|
|||||
Carrying amount at end of the period |
$ | 83,270 | $ | 80,960 | ||||
|
|
|
|
10. Income Taxes
For the three and six months ended June 30, 2011, we recorded approximately $0.2 million and $2.5 million, respectively of income tax benefit. For the three and six months ended June 30, 2010, we recorded income tax provision of approximately $0.1 million and $0.3 million, respectively. Our effective rate benefit for the six months ended June 30, 2011 of 50% primarily differs from the statutory tax rate as a result of taxes on our foreign operations and state income tax liabilities.
In the United States, there was a full valuation allowance against our deferred tax assets for the period ended June 30, 2010. We released the valuation allowance on our U.S. federal and certain State deferred tax assets on December 31, 2010. As a result of the valuation allowance release, our effective tax rate for the six months ended June 30, 2011 also includes Federal and state tax impact of the U.S. operations. We evaluate the likelihood of the realization of our deferred tax assets on a quarterly basis, and reduce the carrying amount of these deferred tax assets by a valuation allowance to the extent we believe they will not more likely than not be realized. We consider many factors when assessing the likelihood of future realization of deferred tax assets, including our recent cumulative earnings by jurisdiction, expectations of future taxable income, the carryforward periods available to utilize tax attributes and other relevant factors. We believe that the U.S. Federal and State tax attributes that have been recognized will be more likely than not realized within their available carry forward periods.
As of June 30, 2011, our federal returns for the years ended 2008 through the current period and most state returns for the years ended 2007 through the current period are open to examination. In addition, all of the net operating losses and research and development credit carry forwards 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 our French subsidiary for the years ended 2005 to 2007 were examined and closed by the French tax authorities in 2008. The tax returns for our French subsidiary for the years ended 2008 through the current period are open to examination.
The amount of unrecognized tax benefits at June 30, 2011 was approximately $3.4 million, of which, if ultimately recognized, approximately $3.0 million would decrease the effective tax rate in the period in which the benefit is recognized.
We do not expect our unrecognized tax benefits to change significantly over the next 12 months. In connection with the adoption of ASC 740-10 Income Taxes, we recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.
16
11. Computation of Net Income (Loss) Per Share
Basic net income (loss) per share excludes any potential dilutive effects of stock 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 because the inclusion of the above noted items would be anti-dilutive.
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 June 30, |
Six months
ended June 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Numerator: |
||||||||||||||||
Income (loss) available to common stockholders |
$ | 454 | $ | (291 | ) | $ | (2,474 | ) | $ | (2,642 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||
Denominator: |
||||||||||||||||
Denominator for basic earning per shareWeighted-average number common shares outstanding used in computing basic net income (loss) per common share |
31,190 | 31,032 | 31,167 | 30,981 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Effective of dilutive securities: |
||||||||||||||||
Diluted options & stock appreciation rights |
269 | | | | ||||||||||||
Diluted stock awards |
28 | | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted-average number common shares outstanding used in computing diluted net income (loss) per common share |
31,487 | 31,032 | 31,167 | 30,981 | ||||||||||||
|
|
|
|
|
|
|
|
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 loss per share, as their effect would have been antidilutive (in thousands):
At June 30, | ||||||||
2011 | 2010 | |||||||
Outstanding options and stock appreciation rights |
5,577 | 5,186 | ||||||
Restricted stock units |
366 | 265 | ||||||
Warrants issued in connection with our convertible notes |
3,093 | 3,093 | ||||||
|
|
|
|
|||||
Total |
9,036 | 8,544 | ||||||
|
|
|
|
In February 2007, we issued an aggregate principal amount of $86.3 million of our 2.25% convertible senior notes due 2027. The effects of conversion of the convertible senior notes are not included in the calculation of basic net income (loss) per share because their effect is anti-dilutive. In addition, our convertible senior notes were excluded from the diluted net income (loss) per share calculation because the conversion price was greater than the average market price of our stock during the period.
17
12. 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 June 30, |
Six Months Ended June 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income (loss) |
$ | 454 | $ | (291 | ) | $ | (2,474 | ) | $ | (2,642 | ) | |||||
Other comprehensive income (loss) |
||||||||||||||||
Foreign currency translation adjustment, net of tax |
311 | (1,722 | ) | 1,582 | (2,791 | ) | ||||||||||
Changes to unrealized gain (loss) on available-for-sale securities |
(33 | ) | (49 | ) | (9 | ) | (93 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive income (loss) |
$ | 732 | $ | (2,062 | ) | $ | (901 | ) | $ | (5,526 | ) | |||||
|
|
|
|
|
|
|
|
The balance of each component of accumulated other comprehensive income (loss), net of taxes, as of December 31, 2010 and June 30, 2011 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, 2010 |
$ | (2,401 | ) | $ | 60 | $ | (2,341 | ) | ||||
Net change during the six month period |
1,582 | (9 | ) | 1,573 | ||||||||
|
|
|
|
|
|
|||||||
Balance as of June 30, 2011 |
$ | (819 | ) | $ | 51 | $ | (768 | ) | ||||
|
|
|
|
|
|
13. 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 June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales (in thousands) |
$ | 33,805 | $ | 36,847 | $ | 60,375 | $ | 70,205 | ||||||||
United States of America |
73 | % | 76 | % | 72 | % | 76 | % | ||||||||
France |
17 | % | 15 | % | 18 | % | 15 | % | ||||||||
Rest of Europe |
9 | % | 7 | % | 9 | % | 7 | % | ||||||||
Other |
1 | % | 2 | % | 1 | % | 2 | % |
No customer accounted for more than 10% of total net sales for the three and six months ended June 30, 2011 and 2010. No customer accounted for more than 10% of our total gross accounts receivable at June 30, 2011 and December 31, 2010.
14. Contingencies
From time to time, we may have certain contingent liabilities that arise in the ordinary course of our business activities. We account for contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonable estimated. At June 30, 2011 we had no material outstanding contingent liabilities.
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15. Legal Proceedings
On May 22, 2009, we filed a lawsuit in the United States District Court, Northern District of California against Hologic, Inc. seeking declaratory judgment by the Court that Hologics 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 Hologics 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. The parties filed cross motions for summary judgment on October 28, 2010, which were heard on December 9, 2010. On December 16, 2010, the Court issued an order denying Hologics motions for summary judgment of non-infringement and invalidity of the asserted claims, granting our motion for summary judgment as to non-infringing substitutes and the hypothetical negotiation date, and denying our motion for summary judgment of infringement. A trial on the two remaining patent claims is scheduled to begin on October 3, 2011.
On August 10, 2010, Hologic filed a lawsuit in the United States District Court for the District of Massachusetts alleging that two of the twelve U.S. patents marked on our packaging, instructions for use, and marketing materials for our Essure® product do not 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. On December 13, 2010, the Court denied the Motion to Transfer without prejudice to reconsideration upon submission of additional information about likely witnesses. The court heard our argument for our Motion to Dismiss on May 9, 2011 but has not yet ruled on the Motion. After the argument, we filed a Motion to Stay the litigation until the later of a ruling on the Motion to Dismiss and the trial in the infringement action described above. The Court granted that motion in orders entered July 5 and July 7, 2011, and the case is currently stayed.
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Item 2. Managements 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 2011 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, 2010 filed with the Securities and Exchange Commission on March 15, 2011 and those included elsewhere in this Form 10-Q.
Overview
We are a leader in the design, development, marketing and promotion of innovative solutions in womens healthcare. Our flagship product is the proprietary Essure® permanent birth control system, which is the most effective non-surgical permanent birth control system available. The Essure system delivers a soft and flexible insert into a womans fallopian tubes, causing a benign tissue in-growth which blocks the fallopian tubes. Successfully placed Essure micro-inserts and the subsequent tissue growth around and through the micro-inserts prohibits the egg from traveling through the fallopian tube, 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 550,000 women worldwide have undergone the Essure procedure and we sell the Essure system in over 30 countries worldwide.
We sell Essure directly in France through our wholly owned subsidiary, Conceptus SAS (SAS), as well as indirectly through a network of distributors throughout the rest of Europe. Our wholly owned subsidiary in the United Kingdom, Conceptus Medical Limited (CML), serves as our direct sales office in the United Kingdom.
In 2009 we received a positive review from the National Institute for Health and Clinical Excellence (NICE) in the United Kingdom and a regulatory approval for the Essure procedure from the Brazilian National Health Surveillance Agency (ANVISA).
During the first quarter of 2011 we began to promote GYNECARE THERMACHOICE® III Uterine Balloon Therapy System in U.S. OB/GYN physician offices. GYNECARE THERMACHOICE® III is a global endometrial ablation product that is used to treat excessive uterine bleeding (menorrhagia). This product is manufactured for and marketed by ETHICON Womens Health & Urology, a division of Ethicon, Inc.
Net sales information based on segments and geographic regions is provided in Note 13 Segment Information 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 consists of a disposable plastic handle connected to our proprietary guidewire and catheter system. The
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micro-insert is constructed of a stainless steel inner coil, a dynamic outer coil made from a nickel titanium alloy called Nitinol, which is commonly used in many medical devices and permanent implants, 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.
Currently, local anesthesia is used as the predominant 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 physicians 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 both the placement of the inserts and the occlusion of the fallopian tubes. Outside of the United States, the confirmation test entails 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 appears suspicious. In February 2011, we received CE (Conformité Européenne) Mark approval to use Transvaginal Ultrasound, or TVU, to confirm proper placement of Essure micro-inserts three months following the Essure procedure. TVU is an alternative confirmation test to the standard flat plate pelvic X-ray, and both tests will be included in the European Physicians Instruction for Use.
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 permanent birth control solution for women whose families are complete. The Essure procedure is typically performed in a physician 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 or vasectomy, are done in a hospital setting, entail general anesthesia and require additional recovery time. These and other benefits of the Essure procedure compared to other traditional permanent birth control procedures are highlighted below.
Benefits for the patients:
| Proven four-year effectiveness rate of 99.8%; |
| Procedures performed in the comfort of the doctors office in less than 10 minutes; |
| No risks associated with incisions, general anesthesia or radiofrequency energy (common in other permanent birth control procedures); |
| No hormones; |
| Short recovery time most women are discharged within 45 minutes and they return to normal activities within 24 hours; |
| Confirmation a three month follow-up test provides visible confirmation for women with reassurance that they are protected against unplanned pregnancy; and |
| Convenience no recurring management of contraception usage after the confirmation test, which is performed three months after the initial procedure. |
Benefits to the physician and healthcare system:
| More efficient and productive solution due to savings related to cost and time such as the elimination of overhead, indirect and procedural costs related to anesthesia and post-operative care and hospital stays associated with tubal ligations; |
| Ability to visually confirm proper placement of radiopaque micro-insert during the procedure; |
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| Short procedure time and relative ease of performing the procedure; |
| No risks associated with incisions, general anesthesia, thermal injuries, bowel injuries or dilutional hyponatremia, induced by hypotonic solutions such as glycine; and |
| 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 take place in physicians offices. |
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 costs no operating room expenses because the procedure can be performed in the physicians office; |
| Cost savings resulting from the potential reduction of unplanned pregnancies; and |
| Most effective form of permanent birth control available, based on four years of clinical studies. |
Physician Penetration
We require physicians to be preceptored for between three and five cases by a certified trainer before being able to perform 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 a proportional increase in revenue. Furthermore, there are no revenues associated with the training activities. We do not charge a fee for the activity and no commitment arises for the physician from the preceptorship.
We partnered with VirtaMed AG in 2009 to develop a highly-realistic simulator called EssureSim that provides virtual reality training of the hysteroscopic procedure that deploys Essure. The training helps refine physicians skills to enhance patient outcomes. In September 2010, we entered into a mutually exclusive agreement with VirtaMed AG for EssureSim, which enables us to be the only company in the field of hysteroscopic permanent birth control with a photorealistic, high fidelity VirtaMed training simulator.
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. In the United States, as of August 9, 2011, we have received positive coverage decisions for the Essure procedure from most private insurers and from all of the 51 Medicaid programs and favorable Medicaid office reimbursement (defined as $1,700 or more) in 35 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 to navigate reimbursement issues. As with all healthcare plans, coverage will vary and is dependent upon the individuals specific benefit plan.
Effective January 1, 2011, national average payment for hysteroscopic sterilization per the Centers for Medicare and Medicaid Services (CMS) Medicare Physician Fee Schedule is $428 when performed in a hospital (facility) and $1,925 when performed in a physicians office (non-facility). The Current Procedural Terminology (CPT) code for hysteroscopic sterilization is 58565. The 2011 Medicare national average payment for hospital outpatient reimbursement amounts for CPT 58565 is $3,126, which also includes the cost of the implant. In 2011, the Medicare national average payment for CPT 58565 in the ambulatory surgery center is $1,758 which also includes the cost of the implant.
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.
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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 recommendation from Haute Autorité de Santé for the Essure procedure. Until, October 2010, the Essure procedure was 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 would remain at the then current levels of 663 Euros, net of value added tax, for the next five years. However, the French authorities have began to implement cost cutting measures that are effecting reimbursement for medical devices and procedures, and specifically have changed the reimbursement of hysteroscopic occlusion for women aged 40 and under.
Our Market
Birth control use in the United States is prevalent among a majority of women of reproductive age, defined as 15-44 years of age. The National Survey of Family Growth, or NSFG, is a periodic survey that provides statistics on reproductive health in the United States and is conducted by the Centers for Disease Control and Prevention, National Center for Health Statistics. In 2010 NSFG published its most recent study entitled Use of Contraception in the United States: 19822008, which includes new data for 2006-2008. According to the NSFG for 2006-2008, of the 61.9 million women of reproductive age in the United States, 38.2 million use some form of birth control and 9.3 million women who use temporary contraception do not intend to have more children. We view this as our primary market.
The 2006-2008 NSFG estimated that 37% of U.S. women who use contraception rely on sterilization for birth control, including tubal ligation and vasectomy, making permanent birth control the most common method of contraception in the United States. Data published in 2010 estimated that approximately 643,000 tubal ligation procedures are performed each year in the United States, and the prevalence increases with age and number of children. According to the 2006-2008 NSFG, approximately 90% of women in the United States who have chosen female sterilization, which includes tubal ligation, have birthed two or more children. According to the same source, among the women in the United States who have chosen female sterilization, which includes tubal ligation, approximately 89% are between the ages of 30 and 44, which is Essures primary target market.
The 2006-2008 NSFG estimated that approximately 24.1 million women in the United States use temporary methods of birth control, such as oral contraceptives, condoms, implants and injectables. Of the women using temporary birth control, 28% choose oral contraceptives and 16% choose the male condom. Included in the group using temporary birth control, according to the same source, are approximately 7.8 million women who have two or more children. It is our belief that by making these women aware of the benefits a minimally invasive procedure offers, they will consider Essure in their continuum of family planning and opt for permanent birth control rather than their current temporary method.
Worldwide, there is a larger market for permanent birth control. According to the United Nations World Contraceptive Use 2011, a report on birth control methods used by reproductive couples worldwide, 63% of women aged 15-49 years were using a form of contraception. The report indicated that female sterilization which includes tubal ligation and is the leading birth control method worldwide, was used by 19% of those women, followed by intrauterine devices, or IUDs, at 14%, and oral contraceptives at 9%.
Additional Products
During the first quarter of 2011, we began to promote GYNECARE THERMACHOICE® III Uterine Balloon Therapy System in OB/GYN physician offices in the United States.
Essure and GYNECARE THERMACHOICE® III are compatible technologies that we believe are well-suited for the OB/GYN physician in-office setting. We believe this strategic partnership will ultimately drive Essure sales because patients who have had an endometrial ablation procedure are strongly advised to avoid pregnancy; thus it becomes a medical and practical necessity for a woman to obtain permanent birth control before having a GEA procedure. To date, GYNECARE THERMACHOICE® III has been sold primarily in the hospital setting. We intend to leverage our U.S. sales channel to sell GYNECARE THERMACHOICE® III to OB/GYN physician offices, and ultimately increase physician utilization of the Essure procedure.
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Results of Operations - Three and Six Months Ended June 30, 2011 and 2010
(in thousands, except percentages)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2011-2010 % Change |
2011 | 2010 | 2011-2010 % Change |
|||||||||||||||||||||||||||||||||||
Amount | % (a) | Amount | % (a) | Amount | % (a) | Amount | % (a) | |||||||||||||||||||||||||||||||||
Net sales |
$ | 33,805 | 100 | % | $ | 36,847 | 100 | % | -8 | % | $ | 60,375 | 100 | % | $ | 70,205 | 100 | % | -14 | % | ||||||||||||||||||||
Gross profit |
$ | 27,691 | 82 | % | 29,562 | 80 | % | -6 | % | 49,060 | 81 | % | 56,529 | 81 | % | -13 | % | |||||||||||||||||||||||
Research and development expenses |
$ | 1,669 | 5 | % | 1,815 | 5 | % | -8 | % | 3,430 | 6 | % | 3,561 | 5 | % | -4 | % | |||||||||||||||||||||||
Selling, general and administrative expenses |
$ | 24,107 | 71 | % | 26,330 | 71 | % | -8 | % | 47,399 | 79 | % | 52,309 | 75 | % | -9 | % | |||||||||||||||||||||||
Net income (loss) |
$ | 454 | 1 | % | (291 | ) | -1 | % | 256 | % | (2,474 | ) | -4 | % | (2,642 | ) | -4 | % | 6 | % |
(a) | Expressed as a percentage of total net sales. |
Net Sales
Net sales were $33.8 million for the three months ended June 30, 2011 as compared to $36.8 million for the three months ended June 30, 2010, representing a decrease of approximately $3.0 million, or 8%. Net sales were $60.4 million for the six months ended June 30, 2011 as compared to $70.2 million for the six months ended June 30, 2010, representing a decrease of approximately $9.8 million, or 14%. The decrease is primarily the result of continued macroeconomic pressures that have contributed to a reduction in patient visits to OB/GYN physician offices, as well as ongoing competitive product trialing. In addition, we experienced incremental sales in the second quarter of 2010 from a short-term multiple city consumer-awareness campaign that was launched in early 2010, that was not repeated in the second quarter of 2011.
International sales were $9.0 million for the three months ended June 30, 2011 as compared to $8.9 million for the three months ended June 30, 2010, representing an increase of approximately $0.1 million, or 2%. International sales comprised 27% and 24% of our total net sales in the three months ended June 30, 2011 and 2010, respectively. International sales were $16.7 million for the six months ended June 30, 2011 as compared to $16.9 million for the six months ended June 30, 2010, representing a decrease of approximately $0.2 million, or 1%. International sales comprised 28% and 24% of our total net sales in the six months ended June 30, 2011 and 2010, respectively. The change in international sales levels for the periods presented were primarily due to higher average selling price due to channel mix and a favorable currency exchange, offset by lower unit volume.
Net sales by geographic region, based on shipping location of our customers, are as follows (in thousands, except percentages):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales (in thousands) |
$ | 33,805 | $ | 36,847 | $ | 60,375 | $ | 70,205 | ||||||||
United States of America |
73 | % | 76 | % | 72 | % | 76 | % | ||||||||
France |
17 | % | 15 | % | 18 | % | 15 | % | ||||||||
Rest of Europe |
9 | % | 7 | % | 9 | % | 7 | % | ||||||||
Other |
1 | % | 2 | % | 1 | % | 2 | % |
No customer accounted for more than 10% of total net sales for the three and six months ended June 30, 2011 and 2010. No customer accounted for more than 10% of our total gross accounts receivable at June 30, 2011 and December 31, 2010.
We expect our net sales for 2011 to be in the range of approximately $135.0 million to $140.0 million, which would represent a decline of approximately -4% to -1% from net sales in 2010. We believe our net sales in 2011 and beyond may continue to be significantly influenced by trends in macroeconomic conditions both in the United States and abroad, and will be impacted by the number of physicians entering and completing training, physician utilization rates of the Essure procedure, the extent of additional favorable insurance coverage and reimbursement decisions, our ability to promote the GYNECARE THERMACHOICE® III in U.S. physician offices and our success in achieving patient awareness objectives. As we have noted elsewhere in this report and risk factors from our Form 10-K, our revenue projections involve many risk factors, some of which are not entirely within our control.
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Gross Profit
Cost of goods sold for the three months ended June 30, 2011 was $6.1 million as compared to $7.3 million for the three months ended June 30, 2010, which represents a decrease of $1.2 million, or 16%. Cost of goods sold for the six months ended June 30, 2011 was $11.3 million as compared to $13.7 million for the six months ended June 30, 2010, which represents a decrease of $2.4 million, or 17%. Gross margin for the three months ended June 30, 2011 was 82%, which is higher than the gross margin of 80% for the three months ended June 30, 2010. The gross margin increase was primarily due to lower product material costs. For the six months ended June 30, 2011 and June 30, 2010, gross margin was 81%.
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 were $1.7 million and $1.8 million for the three months ended June 30, 2011 and 2010, respectively, which represents a decrease of $0.1 million, or 8%. As a percentage of net sales, research and development expenses for the three months ended June 30, 2011 and 2010 represented 5%. The dollar decrease was the result of approximately $0.3 million in expensed materials related to prototypes, offset by an increase of approximately $0.2 million related to payroll and recruiting expenses due to the expansion of our research and development team.
Research and development expenses were $3.4 million and $3.6 million for the six months ended June 30, 2011 and 2010, respectively, which represents a decrease of $0.2 million, or 4%. As a percentage of net sales, research and development expenses for the six months ended June 30, 2011 and 2010 represented 6% and 5%, respectively. The dollar decrease was the result of approximately $0.5 million in expensed materials related to prototypes, offset by increases of approximately $0.2 million related to payroll and recruiting expenses due to the expansion of our research and development team and approximately $0.1 million related to clinical trials.
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. Our goal is to continue our product enhancements over the coming years, which are intended to result in improved ease of use and clinical performance. We expect that these expenses will increase as we seek to maintain our leading position in the market for non-surgical permanent female birth control, seek additional regulatory approvals, and work on introducing new products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended June 30, 2011 was $24.1 million as compared to $26.3 million for the three months ended June 30, 2010, which represents a decrease of $2.2 million, or 8%. As a percentage of net sales, selling, general and administrative expenses for the three months ended June 30, 2011 and 2010 represented 71%.
The dollar decrease was the result of the following: (i) a decrease of approximately $4.8 million in expenditures primarily related to the suspension of the short-term multiple-city consumer awareness campaign that was launched in early 2010, which was not repeated in the second quarter of 2011, (ii) a decrease of approximately $0.9 million in legal fees, primarily due to the lower legal expenses related to our legal proceedings against Hologic. These decreases were partially offset by (i) increased payroll expense of approximately $2.5 million primarily due to the expansion of the U.S. field sales force and marketing team, (ii) an increase of approximately $0.4 million related to marketing and licensing activities, and (iii) an increase of approximately $0.6 million in insurance expense, business taxes, tax consulting fees, depreciation, travel and bad debt expense.
Selling, general and administrative expenses for the six months ended June 30, 2011 were $47.4 million as compared to $52.3 million for the six months ended June 30, 2010, which represents a decrease of $4.9 million, or 9%. As a percentage of net sales, selling, general and administrative expenses for the six months ended June 30, 2011 and 2010 represented 79% and 75%, respectively.
The dollar decrease was the result of the following: (i) a decrease of approximately $9.7 million in expenditures primarily related to the suspension of the short-term multiple-city consumer awareness campaign that was launched in early 2010, which was not repeated in the second half of 2011, (ii) a decrease of approximately $0.9 million in legal fees, primarily due to lower legal expenses related to our legal proceedings with Hologic. These decreases were partially offset by (i) increased payroll expense of approximately $4.2 million primarily due to the expansion of the U.S. field sales force and marketing team, (ii) an increase of approximately $0.8 million related to travel, and (iii) an increase of approximately $0.7 million in tax consulting fees and depreciation expense.
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We expect selling, general and administrative expenses in 2011 to be comparable to 2010 due to lower marketing spend primarily due to lower consumer-awareness campaign expenses in the current year as compared to prior year, offset by increased spending for hiring additional sales professionals to grow our expanded sales territories and increase utilization of the Essure procedures.
Operating Income (Loss)
Operating income for the three months ended June 30, 2011 was $1.9 million as compared to $1.4 million for the three months ended June 30, 2010, which represents an increase of $0.5 million. This increase is primarily due to lower cost of goods sold due to lower product material cost and operating expenses for the three months ended June 30, 2011 as compared to the comparable period last year. Operating loss for the six months ended June 30, 2011 was $1.8 million as compared to operating income of $0.7 million for the comparable period last year, which represents a decrease of $2.5 million. This decrease is primarily due to the lower sales, offset by lower cost of goods sold due to lower product material cost and lower operating expenses for the six months ended June 30, 2011 as compared to the comparable period last year.
Total interest and other income (expense), net
Total interest and other income (expense), net was $1.6 million for both the three months ended June 30, 2011 and June 30, 2010. Total interest and other income (expense), net for the six months ended June 30, 2011 and 2010 was a net expense of $3.2 million and $3.0 million, respectively, representing an increase of $0.2 million, or 4%, primarily due to lower yields on invested cash.
Provision for income taxes
For the three and six months ended June 30, 2011, we recorded approximately $0.2 million and $2.5 million, respectively of income tax benefit. For the three and six months ended June 30, 2010, we recorded income tax provision of approximately $0.1 million and $0.3 million, respectively. Our effective rate benefit for the six months ended June 30, 2011 of 50% primarily differs from the statutory tax rate as a result of taxes on our foreign operations and state income tax liabilities.
In the United States, there was a full valuation allowance against our deferred tax assets for the period ended June 30, 2010. We released the valuation allowance on our U.S. federal and certain State deferred tax assets on December 31, 2010. As a result of the valuation allowance release, our effective tax rate for the six months ended June 30, 2011 also includes Federal and state tax impact of the U.S. operations. We evaluate the likelihood of the realization of our deferred tax assets on a quarterly basis, and reduce the carrying amount of these deferred tax assets by a valuation allowance to the extent we believe they will not more likely than not be realized. We consider many factors when assessing the likelihood of future realization of deferred tax assets, including our recent cumulative earnings by jurisdiction, expectations of future taxable income, the carryforward periods available to utilize tax attributes and other relevant factors. We believe that the U.S. Federal and State tax attributes that have been recognized will be more likely than not realized within their available carry forward periods.
As of June 30, 2011, our federal returns for the years ended 2008 through the current period and most state returns for the years ended 2007 through the current period are open to examination. In addition, all of the net operating losses and research and development credit carry forwards 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 our French subsidiary for the years ended 2005 to 2007 were examined and closed by the French tax authorities in 2008. The tax returns for our French subsidiary for the years ended 2008 through the current period are open to examination.
The amount of unrecognized tax benefits at June 30, 2011 was approximately $3.4 million, of which, if ultimately recognized, approximately $3.0 million would decrease the effective tax rate in the period in which the benefit is recognized.
We do not expect our unrecognized tax benefits to change significantly over the next 12 months. In connection with the adoption of ASC 740-10 Income Taxes, we recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.
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Liquidity and Capital Resources
We have experienced significant cumulative operating losses since inception and, as of June 30, 2011, had an accumulated deficit of $154.8 million. Although we were profitable in 2010, we experienced a net loss in the first half of 2011 and there is a risk that we may not 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.
During the six months ended June 30, 2011, we had invested $60.3 million in corporate bonds, U.S. and international government bonds, commercial paper, U.S. treasury bills and time deposits. We will sell certain or all investments as needed to meet the cash flow needs of our business. Our investments in corporate bonds, U.S. and international government bonds, commercial paper, U.S. treasury bills, and time deposits 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 June 30, 2011 we had $52.9 million classified as short-term investments and $16.9 million classified as long-term investments. See Note 3 Investments, 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 and research and development 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 ability to successfully promote GYNECARE THERMACHOICE® III to U.S. physician offices and increase utilization of the Essure procedure as an adjunct to the global endometrial ablation procedure; |
| our ability to defend our existing physician accounts against competitive trialing and potential reduced market share of the hysteroscopic sterilization market; |
| our ability 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 communitys acceptance of and reimbursement for the Essure system; and |
| the effect on our business due to competition. |
As of June 30, 2011, we had cash and cash equivalents of $25.8 million, compared to $18.4 million at December 31, 2010. The increase of approximately $7.4 million of cash and cash equivalents is primarily due to cash provided by operating activities, with an offset from cash used in investing activities to purchase and sell investments and purchase of hysteroscopy and training equipment. In addition we had short-term and long-term investments of $69.8 million as of June 30, 2011, compared to $72.5 million of short-term and long-term investments at December 31, 2010.
Our convertible senior notes are classified as current liabilities at June 30, 2011 and December 31, 2010 as the notes are convertible at the option of the holder during the period beginning December 15, 2011 and ending February 15, 2012.
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We believe that we have sufficient resources to meet our cash requirements and current liabilities for the next twelve months. We may seek to refinance our existing debt prior to the February 15, 2011 repurchase date.
Sources and Uses of Cash
Our cash flows for the six months ended June 30, 2011 and 2010 are summarized as follows:
Six months ended June 30, | ||||||||
2011 | 2010 | |||||||
Net cash provided by operating activities |
$ | 8,561 | $ | 2,292 | ||||
Net cash used in investing activities |
(1,738 | ) | (29,397 | ) | ||||
Net cash provided by (used in) provided by financing activities |
433 | (12,741 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
189 | (354 | ) | |||||
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Net increase (decrease) in cash and cash equivalents |
$ | 7,445 | $ | (40,200 | ) | |||
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Operating Activities
Net cash provided by operating activities was $8.6 million for the six months ended June 30, 2011, as compared to $2.3 million provided for the six months ended June 30, 2010. Net cash provided by operating activities in the six months ended June 30, 2011 was primarily related to:
| Net loss of $2.5 million; |
| Non-cash related items of $11.2 million 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; |
| Decrease in accounts receivable of $1.3 million as a result of increased cash collections; |
| Increase in inventories of $0.6 million; |
| Decrease in prepaid assets of $1.4 million primarily due to timing; |
| Increase in tax assets of $2.9 million primarily due to quarterly tax provision benefit related to the year to date book loss which is expected to offset taxable income in future quarters. |
| Decrease in accounts payable of $1.6 million primarily related to timing of payments; |
| Increase in accrued compensation of $0.7 million primarily due to the accrual for incentive payments as compared to prior year; and |
| Increase in other accrued and long-term liabilities of $1.6 million due primarily to the increase in deferred revenue. |
Net cash provided by operating activities for the six months ended June 30, 2010 was primarily related to:
| Net loss of $2.6 million; |
| Non-cash related items of $10.1 million 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; |
| Increase in accounts receivable of $2.9 million as a result of our increase in sales; |
| Decrease in inventories of $0.4 million; |
| Increase of other current assets of $1.5 million primarily due to interest receivable from available-for-sale investments, a rebate received from our contract manufacturer, lower deposit balances and a higher prepaid balance due to timing; |
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| Increase in accounts payable of $0.8 million primarily related to timing of payments; and |
| Decrease in other accrued compensation of $2.0 million primarily for the payment of the 2009 incentive plans. |
Investing Activities
Net cash used in investing activities for the six months ended June 30, 2011 was $1.7 million, primarily due to investments purchases of $60.3 million and capital expenditures primarily related to purchases of additional hysteroscopy and training equipment of $3.3 million. These were offset by additional sales of short-term and long-term investments of an additional $61.8 million during the six months ended June 30, 2011.
Net cash used in investing activities for the six months ended June 30, 2010 was $29.4 million, primarily due to investments purchases of $56.5 million and capital expenditures primarily related to purchases of additional hysteroscopy equipment of $2.8 million. These were offset by the settlements of our ARS for $21.4 million at full par value and additional sales of short-term and long-term investments for additional $8.5 million during the six months ended June 30, 2010.
Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2011 was $0.4 million primarily from the proceeds from stock options and awards exercises from our stock plans.
Net cash used in financing activities for the six months ended June 30, 2010 was $12.7 million. This was due to $2.3 million from proceeds from stock options and awards exercises from our stock plans, $6.6 million from proceeds from our UBS line of credit, offset by repayment of our UBS line of credit of $21.7 million. 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.
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, 2010. 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, 2010. 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 October 2009, the Financial Accounting Standards Board (FASB) amended the accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the products essential functionality from the scope of the FASBs software revenue recognition guidance. The FASBs software revenue recognition guidance was issued to address factors that entities should consider when determining whether the software and non-software components of a product function together to deliver the products essential functionality. This amended guidance will allow revenue arrangements in which software and non-software components deliver together a products essential functionality to follow multiple-deliverable revenue recognition criteria as opposed to the criteria applicable to software revenue recognition.
In addition, the FASB also amended the accounting standards for multiple deliverable revenue arrangements to:
| provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated; |
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| require an entity to allocate revenue in an arrangement using estimated selling price (ESP) of deliverables if a vendor does not first have vendor-specific objective evidence (VSOE) of selling price or secondly does not have third-party evidence (TPE) of selling price; and |
| eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. |
A multiple-element arrangement includes the sale of one or more tangible product offerings with one or more associated services offerings, each of which are individually considered separate units of accounting. The determination of our units of accounting did not change with the adoption of the new revenue recognition guidance; we allocate revenue to each element in a multiple-element arrangement based upon the relative selling price of each deliverable. When applying the relative selling price method, we determine the selling price for each deliverable using VSOE of selling price, if it exists, or TPE of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, we use our best estimate of selling price for that deliverable. Revenue allocated to each element is then recognized when the other revenue recognition criteria are met for each element.
Both the above mentioned updates were effective for us from January 1, 2011 and we have elected to apply them prospectively to new or materially modified revenue arrangements after its effective date. The adoption of this guidance did not have a material impact on our Consolidated Financial Statements and Results of Operations.
In May 2011, the FASB issued ASU No. 2011-04 Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and IFRS. This ASU represents the converged guidance of the FASB and the International Accounting Standards Board, or IASB, on fair value measurement and is intended to result in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term fair value. The amendments are to be applied prospectively and are effective for public entities during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The guidance is limited to enhanced disclosures, we do not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements and Results of Operations.
In June 2011, the FASB issued ASU No. 2011-05 Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU increases the prominence of other comprehensive income (OCI) in the financial statements and provides companies two options for presenting OCI, which until now has typically been placed within the statement of equity. One option allows an OCI statement to be included with the net income statement, and together the two will make a statement of total comprehensive income. Alternately, companies may present an OCI statement separate from the net income statement; however, the two statements will have to appear consecutively within a financial report. This ASU does not affect the types of items that are reported in OCI, nor does it affect the calculation or presentation of earnings per share. For public companies, this ASU is effective for periods beginning after December 15, 2011. We will adopt the OCI presentation requirements required by ASU No. 2011-05 beginning with our first quarter in 2012.
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 June 30, 2011 we had short and long-term available-for-sale investments of $69.8 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. and international government bonds. We had no outstanding hedging instruments for our investments as of June 30, 2011. 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 six months ended June 30, 2011. As of June 30, 2011, a hypothetical 100 basis point change in interest rates would 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 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 2011 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 June 30, 2011, we had foreign currency forward contracts to sell 4.2 million Euros in exchange for $6.0 million maturing in July 2011 through September 2011. As of June 30, 2011 these forward contracts are recorded at their fair value of approximately $0.1 million in other current liabilities on our condensed consolidated balance sheet. We have outstanding short-term intercompany receivables of $6.0 million as of June 30, 2011. 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 $0.6 million.
We have developed a foreign exchange policy to govern our forward contracts. The purpose of these forward contracts is to minimize the risk associated with foreign exchange rate fluctuations. These foreign currency 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 Commissions 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 June 30, 2011, 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
On May 22, 2009, we filed a lawsuit in the United States District Court, Northern District of California against Hologic, Inc. seeking declaratory judgment by the Court that Hologics 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 Hologics 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. The parties filed cross motions for summary judgment on October 28, 2010, which were heard on December 9, 2010. On December 16, 2010, the Court issued an order denying Hologics motions for summary judgment of non-infringement and invalidity of the asserted claims, granting our motion for summary judgment as to non-infringing substitutes and the hypothetical negotiation date, and denying our motion for summary judgment of infringement. A trial on the two remaining patent claims is scheduled to begin on October 3, 2011.
On August 10, 2010, Hologic filed a lawsuit in the United States District Court for the District of Massachusetts alleging that two of the twelve U.S. patents marked on our packaging, instructions for use, and marketing materials for our Essure® product do not 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. On December 13, 2010, the Court denied the Motion to Transfer without prejudice to reconsideration upon submission of additional information about likely witnesses. The court heard our argument for our Motion to Dismiss on May 9, 2011 but has not yet ruled on the Motion. After the argument, we filed a Motion to Stay the litigation until the later of a ruling on the Motion to Dismiss and the trial in the infringement action described above. The Court granted that motion in orders entered July 5 and July 7, 2011, and the case is currently stayed.
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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The risk factors included in our Annual Report as of December 31, 2010 on Form 10-K filed with the Securities and Exchange Commission on March 15, 2011 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 June 30, 2011 should be considered carefully while evaluating the Company and our business.
We are a party to patent litigation, which is expensive and diverts our managements attention.
On May 22, 2009, we filed a lawsuit in the United States District Court, Northern District of California against Hologic, Inc. seeking declaratory judgment by the Court that Hologics 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 Hologics 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. The parties filed cross motions for summary judgment on October 28, 2010, which were heard on December 9, 2010. On December 16, 2010, the Court issued an order denying Hologics motions for summary judgment of non-infringement and invalidity of the asserted claims, granting our motion for summary judgment as to non-infringing substitutes and the hypothetical negotiation date, and denying our motion for summary judgment of infringement. A trial on the two remaining patent claims is scheduled to begin on October 3, 2011.
On August 10, 2010, Hologic filed a lawsuit in the United States District Court for the District of Massachusetts alleging that two of the twelve U.S. patents marked on our packaging, instructions for use, and marketing materials for our Essure® product do not 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. On December 13, 2010, the Court denied the Motion to Transfer without prejudice to reconsideration upon submission of additional information about likely witnesses. The court heard our argument for our Motion to Dismiss on May 9, 2011 but has not yet ruled on the Motion. After the argument, we filed a Motion to Stay the litigation until the later of a ruling on the Motion to Dismiss and the trial in the infringement action described above. The Court granted that motion in orders entered July 5 and July 7, 2011, and the case is currently stayed.
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Number |
Description | |
10.1 | Employment Agreement, dated June 2, 2011 between Dr. Feridun Ozdil PHD and Concpetus Incorporated. (incorporated by reference to Exhibit 10.1 to Companys Current Report on Form 8-K filed with the SEC on June 29, 2011) | |
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. | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Labels Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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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: August 9, 2011
Conceptus, Inc.
/s/ Gregory E. Lichtwardt |
Gregory E. Lichtwardt |
Executive Vice President, Treasurer and Chief Financial Officer |
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