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| CPTS > SEC Filings for CPTS > Form 10-K on 13-Mar-2009 | All Recent SEC Filings |
13-Mar-2009
Annual Report
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto located elsewhere in this report.
Overview
We develop, manufacture and market the Essure® permanent birth control system, an innovative and proprietary medical device for women that was approved for marketing in the United States in November 2002 by the U.S. Food and Drug Administration, or FDA. The Essure system uses a soft and flexible micro-insert that is delivered into a woman's fallopian tubes to provide permanent birth control by causing a benign tissue in-growth that blocks the fallopian tubes. A successfully placed Essure micro-insert and the subsequent tissue growth prohibits the egg from traveling through the fallopian tubes and therefore prevents fertilization. The effectiveness rate of the Essure system is 99.80% after four years of follow-up.
On January 7, 2008, we acquired all of the outstanding shares of Conceptus SAS. As a result of this transaction, Conceptus SAS became our wholly-owned subsidiary, which sells Essure directly in France and utilizes distributors to sell Essure throughout the rest of Europe. We believe the acquisition of Conceptus SAS expands our presence in international markets and will increase our revenues as we will recognize sales at end user pricing as compared to the price at which we previously sold the Essure product directly to Conceptus SAS. Our consolidated financial statements for the year ended December 31, 2008 include the financial results of Conceptus SAS beginning from the acquisition date of January 7, 2008. Consolidated net sales for the year ended December 31, 2008 were $102.0 million of which 79% were generated in the United States. For financial information about geographic areas and for segment information with respect to net sales, refer to the information set forth in Note 2 of our consolidated financial statements.
The Essure Procedure
The Essure procedure is typically performed in the office setting and is intended to be a less invasive and a less costly solution to tubal ligation, the leading form of permanent birth control in the United States and worldwide. Laparoscopic tubal ligation and tubal ligation by laparotomy typically involve abdominal incisions and/or punctures, general or regional anesthesia, four to ten days of normal recovery time and the risks associated with an incisional procedure. The Essure procedure does not require cutting or penetrating the abdomen, which lowers the likelihood of post-operative pain due to the incisions/punctures, and it can be performed in an outpatient setting. Currently, the majority of the Essure procedures are performed using conscious sedation, such as IV sedation with a local anesthesia. 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. In the Pivotal trial of the Essure system, the average hysteroscopic procedure time was 13 minutes. A patient is typically discharged approximately 45 minutes after the Essure procedure. No overnight hospital stay is required. Furthermore, the Essure system is effective without drugs or hormones. There is a three-month waiting period after the procedure during which the woman must use another form of birth control while tissue in-growth occurs. At 90 days following the procedure, U.S. patients complete a confirmation test called a hysterosalpingogram, or HSG, which can determine whether the device was placed successfully and whether the fallopian tubes are occluded. Outside of the United States, patients are required to return for a pelvic X-ray at three months post-procedure with a subsequent HSG if device location on the initial radiographic image appears suspicious.
We believe that the Essure system is a better alternative to tubal ligation for physicians, hospitals and payers. The Essure system is a less invasive permanent birth control option for physicians to offer to their patients; hospitals are able to utilize their facilities more cost effectively with the Essure procedure compared with tubal ligation; and payers are able to experience cost reductions resulting from the elimination of overhead and procedural costs related to anesthesia and post-operative hospital
stays associated with tubal ligations. In addition, we believe the Essure procedure is superior to other non-tubal ligation permanent contraception alternatives because, unlike other device designs, the Essure procedure does not involve the use of radio frequency (RF) energy, which subjects the patient to risks of thermal injury, bowel injury and dilutional hyponatremia. Published reports estimate that approximately 700,000 tubal ligation procedures are performed each year in the United States. We intend to capture the majority share of this market and establish the Essure procedure as the gold standard for permanent birth control. We also believe the Essure system is a solution for women whose family is complete but are using temporary methods of birth control. In addition, payers may also benefit from the reduction of unplanned pregnancies associated with non-permanent birth control methods used by patients who have chosen to avoid the drawbacks of traditional permanent birth control methods but who may otherwise elect to use the Essure system.
Critical Accounting Estimates and Policies
We follow accounting principles generally accepted in the United States of America, or GAAP, in preparing our financial statements. As part of this work, we must make many estimates and judgments about future events. These affect the value of the assets and liabilities, contingent assets and liabilities and revenues and expenses reported in our financial statements. We believe these estimates and judgments are reasonable and we make them in accordance with policies based on information available at the time. However, actual results could differ from our estimates and could require us to record adjustments to expenses or revenues material to our financial position and results of operations in future periods. We believe our most critical accounting policies, estimates and judgments include the following:
º •
º Revenue Recognition;
º •
º Stock-Based Compensation Expense;
º •
º Excess and Obsolete Inventory;
º •
º Allowance for Doubtful Accounts;
º •
º Cash Equivalents and Marketable Securities;
º •
º Warranty Obligation;
º •
º Impairment of Long-Lived Assets;
º •
º Debt;
º •
º Contingent Liabilities; and
º •
º Income Taxes.
Revenue Recognition
Our revenue is primarily comprised of the sale of our Essure system. We recognize revenue in accordance with the Securities and Exchange Commission, or SEC, Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements or SAB 104. Under this standard, the following four criteria must be met in order to recognize revenue:
º 1.
º Persuasive evidence of an arrangement exists;
º 2.
º Delivery has occurred;
º 3.
º Our selling price is fixed or determinable; and
º 4.
º Collectibility is reasonably assured.
The four revenue recognition criteria and other revenue related pronouncements are applied to our sales as described in the following paragraphs.
We recognize revenues from our Essure system when we ship the device. We recognize revenue upon shipment of the system as we have no continuing obligations subsequent to shipment. We do not accept returns of the Essure system. We obtain written authorizations from our customers for a specified amount of product at a specified price and the price is not dependent on actual Essure procedures performed.
For sales through distributors we recognize revenues upon shipment as we have no continuing obligations subsequent to shipment. Our distributors are responsible for all marketing, sales, training and warranty of the Essure device in their respective territories. Our standard terms and conditions do not provide price protection or stock rotation rights to any of our distributors. In addition, our distributor agreements do not allow the distributor to return or exchange the Essure system and the distributor is obligated to pay us for the sale regardless of their ability to resell the product.
Additionally, we require physicians to be preceptored between 3 and 5 cases by a certified trainer before being able to perform the procedure independently. 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. Physician training is provided upfront and we have no obligation subsequent to the initial training. Training costs have not been significant from inception to-date.
We assess the credit worthiness of all customers in connection with their purchases. We only recognize revenue when collectability is reasonably assured.
Certain sales of our Essure system require delivery of additional items. These obligations are fulfilled after shipment of the Essure system, and in these cases, we recognize revenue in accordance with the multiple element accounting guidance set forth in Emerging Issues Task Force No. 00-21, Revenue Arrangements with Multiple Deliverables or EITF 00-21. When we have objective and reliable evidence of fair value of the undelivered elements we defer revenue attributable to the post-shipment obligations and recognize such revenue when the obligation is fulfilled. Otherwise we defer all revenue until all elements are delivered.
Stock-Based Compensation Expense
Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards, or SFAS, No. 123(R), Share-Based Payment, or SFAS 123(R), which establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award which is computed using the Black-Scholes option valuation model, and is recognized as expense over the employee requisite service period. We previously applied Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations and provided the required pro forma disclosures of SFAS No. 123, Accounting for Stock-Based Compensation.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model with the weighted average assumptions shown in Note 2-Summary of Significant Accounting Policies of our Notes to Consolidated Financial Statements. The Black-Scholes option valuation model requires the input of highly subjective assumptions, including the expected life of the stock-based award and the stock-price volatility. The assumptions used in calculating the fair value of share-based compensation represent management's best estimates, but these estimates involve inherent uncertainties and the application of management's judgment. As a result, if other assumptions had been used, our stock-based compensation expense could have been materially different. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the share-based compensation expense could be materially different.
The expected term of the options granted is derived from historical data on employee exercise and post-vesting employment termination behavior. The risk-free interest rate for periods equal to the estimated life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on historical volatility of our stock.
As stock-based compensation expense recognized in the Consolidated Statement of Operations is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience.
Excess and Obsolete Inventory
Inventories are stated at the lower of cost or market, cost being determined on the first-in, first-out method. Inventory reserves are recorded when conditions indicate that the selling price may be less than the cost. Reserves for potentially excess and obsolete inventories are provided based on historical experience and current product demand. Once established, the original cost of the inventory less the related inventory reserve represents the new cost basis. Reversal of these reserves is recognized only when the related inventory has been scrapped or sold.
As of December 31, 2008 and 2007, our reserves were approximately $0.1 million and $0.2 million, respectively.
Allowance for Doubtful Accounts
We assess the credit worthiness of our customers on an ongoing basis in order to mitigate the risk of loss from customers not paying us. However, we account for the possibility that certain customers may not pay us by maintaining an allowance for doubtful accounts. We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We monitor collections and payments from our customers and maintain our allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. Our exposure to credit losses may change as we increase our receivables. Changes in customer type and mix, as well as domestic and international economic climate, will also impact potential credit losses. Despite the significant amount of analysis used to compute the required allowance, if the financial condition of our customers were to deteriorate, resulting in an impairment of our ability to make payments, additional allowances may be required. In addition, our increase in sales may result in a higher accounts receivable balance, which may require a higher balance in the allowance. As of December 31, 2008 and 2007, our allowance for doubtful accounts totaled approximately $0.5 million and $0.4 million, respectively.
Cash Equivalents and Marketable Securities
We consider all highly liquid investments with maturity from date of purchase of three months or less to be cash equivalents. We maintain deposits with three financial institutions and invest our excess cash primarily in money market funds, commercial paper, corporate notes, municipal bonds and government securities, which bear minimal risk. Our cash and cash equivalents in our operating accounts are with third party financial institutions. At times, these balances exceed the Federal Deposit Insurance Corporation insurance limits. While we monitor the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date we have experienced no loss or lack of access to cash in our operating accounts. At December 31, 2008 long-term investments consist of auction rate securities ("ARS").
As of December 31, 2008, we held $48.5 million (par value) in ARS backed by federal and state student loans which are variable rate debt instruments and bear interest rates that reset approximately every 20-30 days. These ARS have a contractual maturity ranging from 2028 through 2047.
Our ARS are long-term debt instruments backed by student loans, a substantial portion of which are guaranteed by the United States government. Prior to 2008, our ARS were highly liquid, using a Dutch auction process that resets the applicable interest rate at predetermined intervals, typically every 20-30 days, to provide liquidity at par. We have experienced failed auction in 2008 on all of our ARS. The failures of these auctions do not affect the value of the collateral underlying the ARS, and we continue to earn and receive interest on our ARS at a pre-determined formula with spreads tied to particular interest rate indexes.
In November 2008, we accepted an offer from UBS AG ("UBS"), providing us with rights related to our auction rate security rights (the "Rights"). The Rights permit us to require UBS to purchase our ARS at par value, which is defined as the price equal to the liquidation preference of the ARS plus
accrued but unpaid dividends or interest, at any time during the period of June 30, 2010 through July 2, 2012. Conversely, UBS has the right, at its discretion, to purchase or sell our ARS at any time until July 2, 2012, so long as we receive payment at par value upon any sale or disposition. We expect to sell our ARS under the Rights at par value. However, if the Rights are not exercised before July 2, 2012 they will expire and UBS will have no further rights or obligation to buy our ARS. So long as we hold our ARS, they will continue to accrue interest as determined by the auction process or the terms of the ARS if the auction process fails.
UBS's obligations under the Rights are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations under the Rights. UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Rights.
We have accounted for the Rights as a freestanding financial instrument and elected to record the value of the Rights under the fair value option of SFAS No. 159, Establishing the Fair Value Option for Financial Assets and Liabilities. As a result, upon acceptance of the offer from UBS, we recorded approximately $5.1 million as the fair value of the Rights with a corresponding credit to other income. As a result of our elections to record the Rights at fair value, unrealized gains and losses will be included in earnings in future periods. We estimated the fair value of the Rights using the expected value that we will receive from UBS which was calculated as the difference between the anticipated recognized loss and par value of the ARS as of the option exercise date. This value was discounted by using a UBS credit default rate to account for the consideration of UBS credit risk.
Although the Rights represent the right to sell the securities back to UBS at par, we will be required to periodically assess the economic ability of UBS to meet that obligation in assessing the fair value of the Rights. We will continue to classify the ARS as long-term investments until June 30, 2009, one year prior to the expected settlement.
Prior to accepting the UBS offer, we recorded our ARS as available-for-sale investments. We recorded unrealized gains and losses on our available-for-sale securities, in accumulated other comprehensive income (loss) in the stockholders' equity section of our balance sheets. Such an unrealized loss did not change net income (loss) for the applicable accounting period.
In connection with our acceptance of the UBS offer in November 2008, resulting in our right to require UBS to purchase our ARS at par value beginning on June 30, 2010, we transferred our ARS from available-for-sale to trading securities in accordance with SFAS 115. The transfer to trading securities reflects our intent to exercise our put option during the period June 30, 2010 to July 3, 2012. Prior to our agreement with UBS, our intent was to hold our ARS until we realized the par value.
We recorded a temporary reduction in carrying value of $2.8 million for the nine months ended September 30, 2008, which was recorded as an unrealized loss in accumulated other comprehensive loss. Upon transfer to trading securities, we transferred the $2.8 million recorded as unrealized loss in accumulated other comprehensive loss and recorded an unrealized loss of $5.3 million in other expense, net in the fourth quarter of 2008, representing the difference between the par and fair value of the ARS at the date of transfer. We determined that use of a valuation model was the best available technique for measuring the fair value of our ARS. We used a trinomial discount model weighting estimated future cash flows, quality of collateral and the probability of future successful auctions occurring. In determining a discount factor for each ARS, the model weights various factors, including assessments of credit quality, duration, insurance wraps, portfolio composition, discount rates, overall capital market liquidity and comparable securities, if any.
In the future we expect any changes in the fair value of our ARS to be materially offset in part by changes in the fair value of our put option with UBS.
We continue to monitor the market for ARS and consider its impact (if any) on the fair market value of our investments. If the market conditions deteriorate further, we may be required to record additional unrealized losses in earnings, offset partially by corresponding increases in the put option. We believe that, based on our current cash and cash equivalents balance, the current lack of liquidity in the credit and capital markets will not have a material impact on our liquidity, cash flows or ability to fund our operations.
In November 2008 we entered into a demand revolving credit line agreement with UBS, payable on demand, in an amount equal to a specified percentage of fair value of our auction rate securities at a net no cost, meaning that the interest we pay on the credit line will not exceed the interest that we receive on the auction rate securities that we have pledged as security for the credit line. Additionally, under the terms of the settlement agreement, if UBS is able to sell our auction rate securities at par, proceeds would be utilized to first repay any outstanding balance under the demand revolving credit line. We are still able to sell the auction rate securities, but in such a circumstance, if we sold at less than par, we would not be entitled to recover the par value support from UBS. See Note 11-Credit Line, for more information about this line of credit, Note 3-Long-term Investment and Note 4-Fair Value Measurements of our Notes to Consolidated Financial Statements for information about the accounting treatment of our ARS.
Warranty Obligation
We provide for the estimated cost of our product warranties at the time revenue is recognized. We record a liability for the estimated future costs associated with warranty claims, which is based upon historical experiences and our estimate of the level of future costs. Warranty costs are reflected in the statement of operations as a cost of goods sold. We expect that warranty expense will increase as and if we increase our net sales. Warranty reserve rates may change if we change manufacturing process or change our third-party manufacturing contractor. Should actual costs differ from historical experience, increases in warranty expense may be required. Warranty reserves as of December 31, 2008 and 2007 were approximately $0.3 million and $0.2 million, respectively.
Impairment of Long-Lived Assets
We account for the impairment of long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We evaluate the carrying value of our long-lived assets, consisting primarily of our property and equipment, the Essure license acquired from a patent litigation settlement in 2003 and intangible assets acquired in connection with our acquisition of Conceptus SAS in 2008, whenever certain events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. 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. Our net long-lived assets as of December 31, 2008 and 2007 included property and equipment of $8.6 million and $5.3 million, respectively, and other identifiable intangible assets of $5.3 million and $1.2 million, respectively.
Goodwill
Goodwill is the excess of the purchase price over the fair value of the other net assets, including customer relationship and covenant not to compete, of acquired businesses in connection with our acquisition of Conceptus SAS in 2008. Under SFAS 142, Goodwill and Other Intangible Assets, goodwill is not amortized, but is assigned to reporting units and tested for impairment annually during the fourth quarter, or whenever there is an impairment indicator. We assess goodwill impairment indicators
quarterly, or more frequently, if a change in circumstances or the occurrence of events suggests the remaining value may not be recoverable.
The first step of the impairment test for goodwill compares the fair value of a reporting unit with its carrying amount, including goodwill and other indefinite lived intangible assets. If the fair value is less than the carrying amount, the second step determines the amount of the impairment by comparing the implied fair value of the goodwill with the carrying amount of that goodwill. An impairment charge is recognized only when the calculated fair value of a reporting unit, including goodwill and indefinite lived intangible assets, is less than its carrying amount. We performed an annual assessment during the fourth quarter of 2008 of our goodwill at the reporting unit level. No impairment charges have been recorded through December 31, 2008.
Debt
We account for our convertible senior notes in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In this regard, our convertible debt and net share settlement feature does not fall under the category of a derivative, and consequently, we classify our long term debt as a liability in our consolidated balance sheet. Our convertible hedge and our outstanding warrants are accounted as set forth by Emerging Issues Task Force 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock, through which we record the convertible hedge transaction and the warrants in additional paid in capital. Subsequent changes in fair value of the agreement are not recognized.
In addition, we account for the cost issuance of debt in accordance with Accounting Principles Board 21, Interest on Receivables and Payables, or APB 21. Consequently, these costs were recognized as an asset and are amortized by periodic charges to income. We apply the straight-line method, which is not . . .
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