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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 
 FORM 10-Q [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Fiscal Quarter Ended March 31, 2004 [   ]
    
    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.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    94-3170244
(I.R.S. Employer
Identification No.)
 1021 Howard Avenue
San Carlos, CA 94070
(Address of principal executive offices) Registrants telephone number, including area code: (650) 628-4700    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 at least the past 90 days. Yes  [X]
    

No  [   ]
 Indicate by checkmark whether the registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2).
Yes  [X]  No  [   ] As of April 30, 2004, 25,500,988 shares of the registrants Common Stock
were outstanding.




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CONCEPTUS, INC. FORM 10-Q for the Quarter Ended March 31, 2004 INDEX  
 PagePart I. Financial InformationItem 1. Condensed Consolidated Financial Statements (unaudited)a) Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003
    
    
    3b) Condensed Consolidated Statements of Operations for the three month periods ended March 31, 2004 and 2003
    
    
    4c) Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2004 and 2003
    
    
    5d) Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    24Part II. Other Information
    
    
    25Item 1. Legal Proceedings
    
    
    25Item 2.
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    25Item 3. Defaults upon Senior Securities
    
    
    25Item 4. Submission of Matters to a Vote of Security Holders
    
    
    25Item 5. Other Information
    
    
    25Item 6. Exhibits and Reports on Form 8-K
    
    
    25Signature
    
    
    27CertificationsEXHIBIT 10.2EXHIBIT 31.1EXHIBIT 32.1
  2




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PART I: FINANCIAL INFORMATION 
 ITEM 1. Condensed Consolidated Financial Statements Conceptus, Inc. 
 Condensed Consolidated Balance Sheets (Unaudited)
  March 31, 2004
    
    December 31, 2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    30,716
    
    
    $
    30,794Short-term investments
    
    
    17,434
    
    
    
    Restricted cash
    
    
    69
    
    
    
    69Accounts receivable, net
    
    
    1,580
    
    
    
    1,582Inventories, net
    
    
    1,920
    
    
    
    2,682Other current assets
    
    
    1,219
    
    
    
    504Total current assets
    
    
    52,938
    
    
    
    35,631Property and equipment, net
    
    
    1,778
    
    
    
    2,031Intangible assets, net
    
    
    1,900
    
    
    
    1,950Other assets
    
    
    2,169
    
    
    
    2,238Total assets
    
    $
    58,785
    
    
    $
    41,850Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    1,913
    
    
    $
    2,698Clinical trial liabilities
    
    
    71
    
    
    
    48Accrued compensation
    
    
    2,184
    
    
    
    2,691Other accrued liabilities
    
    
    1,903
    
    
    
    2,443Total current liabilities
    
    
    6,071
    
    
    
    7,880Long-term clinical trial liabilities
    
    
    145
    
    
    
    193Other long-term liabilities
    
    
    20
    
    
    
    40Total liabilities
    
    
    6,236
    
    
    
    8,113Stockholders equity:Common stock and additional paid-in capital
    
    
    216,911
    
    
    
    190,971Accumulated other comprehensive income
    
    
    26
    
    
    
    26Accumulated deficit
    
    
    (164,388
    )
    
    
    (157,260
    )Total stockholders equity
    
    
    52,549
    
    
    
    33,737Total liabilities and stockholders equity
    
    $
    58,785
    
    
    $
    41,850
 The accompanying notes are an integral part of these condensed consolidated financial statements 3




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Conceptus, Inc. 
 Condensed Consolidated Statements of Operations (Unaudited)
  Three Months EndedMarch 31,2004
    
    2003Net sales
    
    $
    2,381
    
    
    $
    1,154Cost of goods sold
    
    
    2,070
    
    
    
    1,150Gross profit
    
    
    311
    
    
    
    4Operating expenses:Research and development
    
    
    1,299
    
    
    
    1,611Selling, general and administrative
    
    
    6,174
    
    
    
    9,618Total operating expenses
    
    
    7,473
    
    
    
    11,229Operating loss
    
    
    (7,162
    )
    
    
    (11,225
    )Interest and other income
    
    
    34
    
    
    
    200Net loss
    
    $
    (7,128
    )
    
    $
    (11,025
    )Basic and diluted net loss per share
    
    $
    (0.31
    )
    
    $
    (0.52
    )Weighted-average shares used in computing basic and diluted
net loss per share
    
    
    23,099
    
    
    
    21,383
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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Conceptus, Inc. 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
 (In thousands)
 Three Months EndedMarch 31,2004
    
    2003Cash flows from operating activitiesNet loss
    
    $
    (7,128
    )
    
    $
    (11,025
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    331
    
    
    
    284Stock compensation expense
    
    
    215
    
    
    
    1Allowance for doubtful accounts
    
    
    (6
    )
    
    
    105Provision for inventories
    
    
    742
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    7
    
    
    
    (348
    )Inventories
    
    
    21
    
    
    
    289Other current assets
    
    
    (716
    )
    
    
    (465
    )Other assets
    
    
    129
    
    
    
    23Accounts payable
    
    
    (783
    )
    
    
    (282
    )Other accrued liabilities
    
    
    (44
    )
    
    
    338Clinical trial liabilities
    
    
    (25
    )
    
    
    (54
    )Other long term liabilities
    
    
    (20
    )
    
    
    Net cash used in operating activities
    
    
    (7,277
    )
    
    
    (11,134
    )Cash flows from investing activitiesPurchase of investments
    
    
    (17,434
    )
    
    
    (5,979
    )Maturities of investments
    
    
    
    
    
    
    9,617Capital expenditures
    
    
    (108
    )
    
    
    (119
    )Net cash provided by (used in) investing activities
    
    
    (17,542
    )
    
    
    3,519Cash flows from financing activitiesProceeds from issuance of common stock, net
    
    
    24,724
    
    
    
    88Net cash provided by financing activities
    
    
    24,724
    
    
    
    88Effect of exchange rate changes on cash
    
    
    17
    
    
    
    25Net decrease in cash and cash equivalents
    
    
    (78
    )
    
    
    (7,502
    )Cash and cash equivalents at beginning of period
    
    
    30,794
    
    
    
    59,673Cash and cash equivalents at end of period
    
    $
    30,716
    
    
    $
    52,171
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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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 of America 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 of America for
complete financial statements. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, considered necessary for a
fair presentation have been included. The condensed consolidated balance sheet at December 31, 2003 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 of America for complete
financial statements. This financial data should be reviewed in conjunction
with the audited consolidated financial statements and related notes included
in the Companys Annual Report on Form 10-K for the year ended December 31,
2003. The results of operations for the three months ended March 31, 2004 may
not necessarily be indicative of the operating results for the full 2004 fiscal
year or any other future interim periods. 2. Organization, Ownership and Business In January 2004, the Company has completed the sale of its wholly owned
French subsidiary for a nominal amount to an investor group comprised of its
former French management team and signed a long-term exclusive distribution
agreement for Essure with the acquiring group for the European, Middle East and
African markets. The sale agreement includes a long-term call option that is
intended to enable the Company to repurchase the French company at
predetermined prices and time periods that are typical for a distribution
company. The transaction did not have any material financial impact to the
Companys condensed consolidated financial statements. 3. Summary of Significant Accounting Policies The Companys significant accounting policies are disclosed in the
Companys Annual Report on Form 10-K for the year ended December 31, 2003 that
was filed with the Securities and Exchange Commission on March 15, 2004. The
Companys significant accounting policies have not materially changed since
December 31, 2003. 4. Inventories, net 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)
    
    March 31, 2004
    
    December 31, 2003Raw materials
    
    $
    555
    
    
    $
    516Work-in-process
    
    
    629
    
    
    
    1,420Finished goods
    
    
    736
    
    
    
    746Total
    
    $
    1,920
    
    
    $
    2,682
 5. Intangible Assets Intangible assets as of March 31, 2004 comprise of a technology license
obtained as a result of the settlement of the patent litigation with Ovion,
Inc. The license was acquired at a cost of $2.0 million payable in the 6




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Companys common stock and has an expected useful life of ten years from the
date of settlement. The license fee is amortized based on the straight-line
method over the useful life of ten years. An amortization expense of $50,000
has been classified on the Companys condensed consolidated statement of
operations for the three months ended March 31, 2004 as cost of goods sold.
Estimated future amortization expenses for each of the years ended December 31,
2004 through 2012 are $200,000 per year and $150,000 for the year ended
December 31, 2013. 6. Other Assets Other assets as of March 31, 2004 are principally comprised of the
carrying value, of $1.9 million, of a $2.0 million payment that the Company
made to Ovion, Inc., as a result of the settlement of a patent litigation suit.
In accordance with the terms of the settlement agreement, the Companys
prepaid royalties will be fully amortized when its cumulative net sales reach
$136,500,000 thereby resulting in an effective royalty rate of 1.47%. The
Company is amortizing the prepayment to cost of goods sold over its net sales
using this effective rate. 7. Warranty The Company offers warranties on its product and records a liability for
the estimated future costs associated with warranty claims, which is based upon
historical experience and the Companys 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 the Companys warranty liability for
the three months ended March 31, 2004 and 2003 follows (in thousands): 2004
    
    2003Warranty accrual at the beginning of the period
    
    $
    99
    
    
    
    28Accruals for warranties issued during the period
    
    
    81
    
    
    
    57Settlements made in kind during the period
    
    
    (58
    )
    
    
    (8
    )Warranty accrual at the end of the period
    
    $
    122
    
    
    
    77
 8. Stock-based compensation As permitted by SFAS No. 123, Accounting for Stock-Based Compensation,
(SFAS No. 123), as amended by SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure  an amendment of FASB Statement No.
123, the Company accounts for employee stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock
Issued to Employees, and related interpretations in accounting for its
stock-based compensation plans. The Company granted 273,000 shares of restricted stock to its employees
during the first three months ended March 31, 2004. The restricted stock
shares have zero exercise price and three years of cliff vesting with the
potential of acceleration if certain company objectives are met. The Company
is amortizing the total restricted stockexpense of $2.4 million, calculated
based on the fair market value of the stock on the date of the grant, over the
vesting term of three years on a straight-line basis. Future restricted stock
expense shall be $0.7 million, $0.8 million, $0.8 million and $0.1 million for
the years 2004, 2005, 2006 and 2007, respectively. Of the total restricted
stock expense of $2.4 million, $0.3 million and $0.3 million is related to cost
of sales and research and development, respectively and $1.8 million is
related to selling, general and administrative expenses. For the three months
ended March 31, 2004, $80,000 of restricted stock employee compensation expense
is included in the net loss as reported and no restricted stock employee
compensation expenses is included in the net loss reported for the three months
ended March 31, 2003. The following table provides a reconciliation of net loss to pro forma net
loss as if the fair value method, pursuant to SFAS No. 123, had been applied to
all employee awards (in thousands, except per share data): 7




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Three Months Ended March 31,2004
    
    2003Net loss, as reported
    
    $
    (7,128
    )
    
    $
    (11,025
    )Add: stock-based compensation expense
included in
reported net loss
    
    
    80
    
    
    
    Less: Total stock-based employee
compensation expense determined under
fair value based method for all awards
    
    
    (2,652
    )
    
    
    (1,782
    )Pro forma net loss
    
    $
    (9,700
    )
    
    $
    (12,807
    )Basis and diluted net loss per shareAs reported
    
    $
    (0.31
    )
    
    $
    (0.52
    )Pro forma
    
    $
    (0.42
    )
    
    $
    (0.60
    )
 The Company has adopted the disclosure only provisions of SFAS No. 123.
The Company calculated the fair value of each option on the date of grant using
the fair value method as prescribed by SFAS No. 123. The weighted average
assumptions used are as follows: Three Months Ended March 31,2004
    
    2003Risk-free interest rate
    
    
    2.0
    %
    
    
    2.4
    %Expected life (in years)
    
    
    3.4
    
    
    
    4.0Expected volatility factor
    
    
    0.70
    
    
    
    0.92Dividend yield
    
    
    
    
    
    
    
 To comply with pro forma reporting requirements of SFAS No. 123,
compensation cost is also estimated for the fair value of the Companys
Employee Stock Purchase Plan (ESPP) rights, which are included in the pro forma
totals above. The fair value of the ESPP rights is calculated at each reporting date
using the following assumptions: Three Months Ended March 31,2004
    
    2003Risk-free interest rate
    
    
    1.1
    %
    
    
    1.2
    %Expected life (in years)
    
    
    1.0
    
    
    
    1.0Expected volatility factor
    
    
    0.60
    
    
    
    0.53Dividend yield
    
    
    
    
    
    
    
 The weighted-average fair value per share of options, excluding ESPP
rights, granted was $6.57 and $4.63, respectively, for the three months ended
March 31, 2004 and 2003. Stock-based compensation arrangements to non-employees are accounted for
in accordance with SFAS No. 123 and Emerging Issues Task Force Issue (EITF) No.
96-18, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services,
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 periodic adjustment as the underlying equity instruments vest.
Stock-based compensation expense relating to non-employees was $135,000 and
$1,000 for the three months ended March 31, 2004 and 2003, respectively. 8




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The fair value of the stock options granted is calculated at each
reporting date using the following assumptions: Three Months Ended March 31,2004
    
    2003Risk-free interest rate
    
    
    4.2
    %
    
    
    3.8
    %Expected life (in years)
    
    
    10.0
    
    
    
    10.0Expected volatility factor
    
    
    1.34
    
    
    
    1.41Dividend yield
    
    
    
    
    
    
    
 9. Computation of Net Loss Per Share Basic net loss per share is computed using the weighted-average number of
common shares outstanding during each period. Diluted net loss per share is
computed using the weighted-average number of common and potential dilutive
shares outstanding during each period. Under the requirements for calculating
basic net loss per share, the effect of potentially dilutive securities such as
stock options, restricted stock grants, common stock shares subject to
repurchase, warrants and convertible securities are excluded. Basic and
diluted net loss per share is equivalent for all periods presented due to the
Companys net loss position. During all periods presented, the Company had securities outstanding,
which could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share, as their effect
would have been antidilutive. Potentially dilutive outstanding securities were
4,084,000 and 3,449,000 as of March 31, 2004 and December 31, 2003,
respectively. 10. Comprehensive Loss Total comprehensive loss for the three months ended March 31, 2004
consisted of foreign currency translation gains of $2,000 and net loss of
$7,128,000 as unrealized gains and losses on available-for-sale securities were
immaterial. For the three months ended March 31, 2003, total comprehensive
loss consisted of foreign currency translation losses of $13,000 and net loss
of $11,025,000 as unrealized gains and losses on available-for-sale securities
were immaterial. 11. Stockholders Equity On February 25, 2004, the Company completed a private placement of
approximately 3,000,000 shares of common stock at $8.50 per share. The net
proceeds to the Company, after fees and other offering costs totaling
$1,600,000, were approximately $23,900,000. 12. Legal Proceedings From time to time the Company is involved in legal proceedings arising in
the ordinary course of business. The Company believes there is no litigation
pending that could have, individually or in the aggregate, a material adverse
effect on its financial position, result of operations or cash flow. 13. Recent Accounting Pronouncements In December 2003, the FASB issued a revised FASB Interpretation No. 46
(FIN 46R), Consolidation of Variable Interest Entities, an interpretation of
ARB No. 51. The FASB published the revision to clarify and amend some of the
original provisions of FIN 46, which was issued in January 2003, and to exempt
certain entities from its requirements. A variable interest entity (VIE)
refers to an entity subject to consolidation according to the provisions of
this Interpretation. FIN 46R applies to entities whose equity investment at
risk is insufficient to finance that entitys activities without receiving
additional subordinated financial support provided by any parties, including
equity holders, or where the equity investors (if any) do not have a
controlling financial interest. FIN 46R provides
that if an entity is the primary beneficiary of a VIE, the assets,
liabilities, and results of operations of the VIE should 9




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be consolidated in the
entitys financial statements. In addition, FIN 46R requires that both the
primary beneficiary and all other enterprises with a significant variable
interest in a VIE provide additional disclosures. The provisions of FIN 46R
were effective for the Companys fiscal 2004 first quarter. The adoption of FIN
46R did not have a material impact on the Companys financial position or
results of operations. 10




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Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations The following discussion of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and related notes thereto included in Part
I-Item 1 of this quarterly report. In addition, the following discussion
contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. We wish to alert readers that the
risk factors set forth in our Annual Report on Form 10-K for the year ended
December 31, 2003, as well as other factors, including those set forth in the
following discussion and under Risk Factors below, could in the future
affect, and in the past have affected, our actual results and could cause our
results for future periods to differ materially from those expressed or implied
in any forward-looking statements made by us. Overview We develop, manufacture and market Essure, an innovative and proprietary
non-incisional permanent birth control device for women that was approved for
marketing in the United States in November 2002 by the United States Food and
Drug Administration (FDA). Essure is a soft and flexible micro-insert
delivered into a womans fallopian tubes designed to provide permanent birth
control by causing a benign tissue in-growth that blocks the fallopian tubes.
A successfully placed Essure micro-insert prohibits the egg from traveling
through the fallopian tubes and therefore prevents fertilization. The Essure Procedure The Essure placement procedure is typically performed as an outpatient
procedure and is intended to be a less invasive and a less costly alternative
to tubal ligation, the leading form of 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 placement procedure does not require
cutting or penetrating the abdomen, which lowers the likelihood of
post-operative pain due to the incisions/punctures, and is typically performed
in an outpatient setting without general or regional anesthesia. In the
Pivotal trial of Essure, the total procedure time averaged 35 minutes, with an
average of 13 minutes of hysteroscopic time to place the Essure micro-insert.
A patient is typically discharged approximately 45 minutes after the Essure
placement procedure. No overnight hospital stay is required. Furthermore,
Essure 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, the patient completes a follow-up examination called a
hysterosalpingogram (HSG), which can determine that the device was placed
successfully and that the fallopian tubes are occluded. We believe that the Essure procedure is an attractive alternative to tubal
ligation for physicians, hospitals and payors. Essure 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 placement procedure compared with tubal ligation and payors are
experiencing 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, payors may also benefit from the
reduction of unplanned pregnancies associated with non-permanent methods of
birth control used by patients who have chosen to avoid the drawbacks of
traditional permanent birth control methods but who may elect to use Essure. Published reports estimate that 700,000 tubal ligation procedures are
performed each year in the United States and we believe there is a larger
market worldwide. We intend to tap into this market and establish the Essure
procedure as the standard of care for permanent birth control. Essure is currently being marketed in multiple countries. In November
2002, we received from the FDA, approval to market Essure in the United States.
In 2001, we were given approval to affix the CE Mark to Essure, indicating
that Essure is certified for sale throughout the European Union, subject to
compliance with local regulations such as registration with health ministries
and/or particular requirements regarding labeling or distribution. In 1999,
Essure was listed with Australias Therapeutic Goods Administration, which
allows us to 11




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market and sell Essure in Australia. In Canada, we received clearance
from Health Canada to market Essure in Canada in November 2001. We also have
distributors in Singapore, Indonesia, Morocco, Turkey and New Zealand. Effectiveness of Essure Based on clinical trial data filed with the FDA in November 2003, Essure
has been demonstrated to be 99.8% effective at three years of follow-up. We
have submitted data to the FDA to support a change in this effectiveness rate
to 99.8% at three years of follow-up. We are working with the FDA to finalize
the exact wording of the labeling, as well as other changes that are part of
the FDAs continuing effort to standardize contraceptive labeling. We expect
to complete the labeling changes to the FDAs satisfaction by the end of the
second quarter of 2004. Penetration As of March 31, 2004, Conceptus has trained or is in the process of
training 969 physicians on the Essure procedure. Doctors are required to be
preceptored for between 3 and 5 cases by a certified trainer before they can
perform procedures independently. This represents an increase of 177
physicians over the number of physicians at December 31, 2003. The level of
sales for Essure, particularly in this early period of adoption, is highly
dependent on the number of physicians trained to perform the procedure. Reimbursement of Essure Market acceptance of Essure will also depend in part upon the availability
of reimbursement within prevailing healthcare payment systems. We believe that
physician advocacy of our product will be required to obtain reimbursement. As
of March 31, 2004, we received positive reimbursement decisions for Essure from
private insurers covering an additional 9 million covered lives in the United
States, bringing the total to 134 million covered lives, which represents more
than 63% of all the insured, non-Medicare population of the United States. We
intend to continue our effort to educate payors of the cost-effectiveness of
our product, and to further establish programs to help physicians to navigate
issues with reimbursement. In the first quarter of 2004, we received several positive responses from
government and private agencies, which we believe will help us to speed up the
acceptance of Essure by doctors and patients. In March 2004, the American Medical Association accepted our application
for a category I CPT code, which may be effective as early as January 2005,
subject to the completion of certain processes. Category I codes are reserved
for those procedures that have demonstrated clinical efficacy, widespread use
and have FDA approval. By having a CPT code specific to the Essure procedure,
it is expected that coding for reimbursement will become considerably easier
for doctors and facilities and that there will be fewer incidents of doctors
being reimbursed incorrectly. We expect that the new code, once the process
to establish it is complete, will significantly ease the burden on a
physicians office in obtaining reimbursement for Essure, and accelerate the
coverage of Essure by private insurance companies and Medicaid. In March 2004, the Committee for Medicare and Medicaid Services (CMS)
established a temporary Healthcare Common Procedure Coding System (HCPCS) code
for separate payment of the Essure device. The HCPCS code became effective on
April 1, 2004 and will be used in office settings and outpatient/ambulatory
surgery centers as appropriate for private payors and Medicaid. 2004. CMS
issues temporary codes while permanent codes are being established, a process
that typically takes six to 12 months. CMS issues permanent HCPCS codes for
use in procedures that may be covered by Medicare and Medicaid. Private
insurance companies use the CMS issued codes and payment levels as a baseline
for establishing their own coverage systems and levels. We believe the CMS
reimbursement code helps create an avenue to have the product reimbursed when
used in the physicians office and surgery centers. Utilization of Essure We are attempting to introduce a novel product into the contraception
market, which is dominated by procedures that are well established among
physicians and patients and are routinely taught to new physicians. As a
result, we believe that recommendations and endorsements by physicians will be
essential for market acceptance of 12




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our product. Physicians are traditionally slow to adopt new products and
treatment practices, partly because of perceived liability risks. Our biggest
challenge is to speed up the adoption process to make the Essure procedure the
standard of care for permanent birth control. Utilization, which is the average number of procedures performed per
physician, declined again this quarter to 0.8 from an average of 0.9 in the
fourth quarter of 2003 and 1.1 in the third quarter of 2003. This decline,
which has been occurring continuously since the commercial launch of the
product, is directly attributable to the difficult reimbursement environment
faced by physicians who otherwise want to utilize the Essure device. Either it
has been difficult to obtain a favorable payment decision from third party
payers or those that have given favorable coverage decisions frequently but
inadvertently decline a reimbursement request or pay incorrect amounts. The
uncertainty that this creates for the physician who wants to be paid for
services performed causes doctors to be hesitant to perform procedures in the
future and has caused the decline in utilization for Essure. In order to increase utilization, our strategy in the near term is to
focus on the earlier adopters who have already been trained by our professional
education group. We intend to help those doctors to build their practices so
that they will perform more Essure procedures on a monthly basis. We will
increase our call frequency to those doctors by our field representatives,
strengthen referral programs to get women who are interested in the Essure
procedure to those doctors, and continue with our marketing programs to
increase Essure awareness among women and the medical community. We have also
built strategic alliances with other businesses to help to promote Essure and
to train new doctors. In early March 2004, Planned Parenthood Federation of America (Planned
Parenthood) approved Essure for use in qualifying Planned Parenthood affiliates
across the United States. Planned Parenthood has nearly 900 clinics under 123
Planned Parenthood affiliates that serve nearly five million people per year.
Planned Parenthood tested the Essure procedure in clinics in Oregon and
Pennsylvania, evaluating the ability of a typical clinic to successfully offer
the procedure. Standards for the use of Essure in Planned Parenthood
affiliates were then developed along with guidelines for the introduction of
the procedure into Planned Parenthood clinic settings. We believe that Planned
Parenthood conducted a thorough evaluation that demonstrated that Essure could
safely and effectively be offered in a clinical setting. We believe that their
approval is of vital importance to our goal of making sure all women have
access to Essure, including those who do not have private insurance coverage. We have a limited history of operation and have incurred significant
operating losses since our inception in 1992. We will continue to be in a net
loss position until sufficient revenues can be generated to offset expenses.
In February 2004, we completed a private placement of common stock to generate
enough cash to help us to reach profitability. However, if our revenue growth
does not materialize as planned, we may in the future seek to raise additional
funds through bank facilities, debt or equity offerings or other sources of
capital. We maintain a website located at www.conceptus.com. We make available
free of charge on or through our 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
such material with, or furnish it to, the SEC. Information contained on our
website is not incorporated by reference into and does not form a part of this
Form 10-Q. Results of Operations - Three Months Ended March 31, 2004 and 2003 Net Sales Net
sales were $2.41 million for the three months ended March 31, 2004 as
compared to $1.2 million for the three months ended March 31, 2003. The
increase of $1.2 million, or 100%, in net sales is due to increased sales in
the United States. After we received FDA approval to market Essure in the
United States in November of 2002, we have launched an aggressive marketing
campaign to increase awareness of Essure among physicians and patients while at
the same time increase our customer base by establishing physicians training
programs. The revenue increase is a direct result of our continuous effort in
the selling and marketing of Essure in the United States. We expect net sales to increase on a quarterly basis for the remainder of
fiscal 2004 and have put in place sales, marketing and reimbursement programs
to help us to reach our revenue goal. However, as we have noted 13




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elsewhere in this Form 10-Q, our expected revenue growth is dependant on
market acceptance of Essure and third party reimbursement for the device, which
involves factors that are outside of our control. For the three months ended March 31, 2004, net sales to one distributor
accounted for 14% of our total consolidated net sales. Accounts receivable
from one distributor accounted for 19% of our total net accounts receivables
outstanding as of March 31, 2004. For the three months ended March 31, 2003,
net sales to two distributors accounted for 15% and 12% of our total
consolidated net sales. Accounts receivable from three distributors accounted
for 22%, 15% and 15%, respectively, of our total net accounts receivables
outstanding as of March 31, 2003. Net product sales by geographic region as a percentage of net sales in
tabular form is as follows: March 31,2004
    
    2003Net Sales (in thousands)
    
    $
    2,381
    
    
    $
    1,154United States of America
    
    
    81
    %
    
    
    65
    %Europe
    
    
    14
    %
    
    
    18
    %Australia
    
    
    4
    %
    
    
    14
    %Asia and Canada
    
    
    1
    %
    
    
    3
    %
 Net sales are attributed to region based on the shipping location of the
external customers. Gross Profit Cost of goods sold for the three months ended March 31, 2004 were $2.1
million as compared to $1.2 million for the three months ended March 31, 2003.
The increase of $0.9 million, or 75%, is primarily due to higher sales volume.
Gross profit margin also improved from less than 1% to 13%, which represents
improved efficiency in our manufacturing processes and the result of our
outsourcing effort. We have reduced per unit production cost by increasing
production volume without increasing fixed cost. In April 2004, we received
FDA approval to begin manufacturing at UTI Venusa, Ltd, in Ciudad Juarez,
Mexico. We expect to transition generally all manufacturing activities to our
third party subcontractor in Mexico and maintain only limited production
capability for research and development of new manufacturing processes in San
Carlos. We expect this change will result in significant further decreases in
manufacturing costs in future periods and we expect our gross profit margin to
improve significantly once the transition is complete. Cost of goods sold for
the three months ended March 31, 2003 represented the costs of early stage
product introduction and limited production volumes. Operating Expenses Research and development expenses, which includes expenditures related to
product development, clinical research and regulatory affairs, decreased to
$1.3 million for the three months ended March 31, 2004 from $1.6 million for
the three months ended March 31, 2003. The decline of $0.3 million, or 19%,
reflects the reduction in clinical research and regulatory affairs expenses in
payroll ($0.2 million) and consulting ($0.1 million). The reduction in
spending reflects the decline of clinical research and regulatory affair
activities after FDA approval of Essure in November 2003. We expect research
and development expenses for the remaining quarters of fiscal 2004 to trend
down slightly from the level of the first quarter of fiscal 2004. Selling, general and administrative spending for the three months ended
March 31, 2004 was $6.2 million as compared to $9.6 million for the three
months ended March 31, 2003. The decrease of $3.4 million, or 34%, is
primarily a result of reduced spending in training and marketing expenses.
In early 2003, we had focused on group training physicians to attain an
aggressive training goal within a relatively short period of time. As a
result, we successfully reached our goal of training more than 700 doctors in
2003. Our current goal is to help our trained physicians to build their
practices so that they can increase the number of procedures performed, which
is benefited by one on one training. The decrease in marketing spending is
primarily due to the reduction in spending related to the initial cost of
building our marketing infrastructure such as concept design, development of
videos, marketing brochures and other marketing medias. In addition to the
marketing and training expense reductions, we also 14




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decreased spending as a result of the spin-off of our former French
subsidiary in January 2004. In order to focus our resource domestically, we
are also in the process of negotiating an asset sale agreement of our wholly
owned Australia subsidiary to our Australian management team along with a
long-term distribution agreement and a call option to repurchase the
subsidiary. We expect to complete the agreement by the end of second quarter
of 2004. We expect selling, general and administrative expenses for the
remaining quarters of 2004 to increase over the levels of first quarter of
2004. Net interest and other income decreased by $0.2 million for the three
months ended March 31, 2004 as compared to the three months ended March 31,
2003. The decrease was a result of the sale of our former French subsidiary at
a net loss and lower interest income earned due to lower average cash, cash
equivalent and short-term investments balances. We have experienced significant operating losses since inception and, as
of March 31, 2004, had an accumulated deficit of $164.4 million. We expect our
operating losses to continue at least through 2004 as we continue to expend
substantial resources in the selling and marketing of Essure in the United
States. Due to the unpredictable nature of these activities, we do not know
whether we will achieve or sustain profitability in the future. Liquidity and Capital Resources As of March 31, 2004, we had cash, cash equivalents, restricted cash and
short-term investments of $48.2 million, compared with $30.9 million at
December 31, 2003. The increase of $17.3 million is due to net proceeds of
$23.9 million received from issuance of approximately 3.0 million shares of our
common stock in a private placement in February 2004 and $0.8 million received
from exercises of stock options, partially offset by $7.3 million of cash used
in operating activities and $0.1 million used in capital and investment
expenditures. In April 2004, we received FDA approval to begin manufacturing the Essure
product at UTI Venusa, LTD, our third-party subcontractor located in Mexico.
This will substantially decrease our production cost and we expect the
transition of the manufacturing activities to reduce our operating cash
requirements in the remaining quarters of 2004. We are at the early stage of marketing our products and have incurred
significant operating losses since inception. We have historically financed
our operations primarily through equity financing. Although we expect our
existing cash will be sufficient to fund us through profitability, if our
expected revenue growth does not materialize, we may in the future seek to
raise additional funds through bank facilities, debt or equity offerings or
other sources of capital. Operating Activities Net cash used in operating activities was $7.3 million in the three months
ended March 31, 2004, primarily as a result of our net loss of $7.1 million
adjusted for non-cash related items of $1.3 million relating to depreciation
and amortization, stock compensation expenses, provisions for bad debt
allowance and inventories. Other major items that contributed to net cash used
in operating activities were related to an increase in other assets of $0.7
million primarily from prepaid insurance premiums and pay down of accounts
payable and other liabilities of $1.0 million, offset by changes in other
assets and liabilities such as accounts receivable, inventories, other
non-current assets and long-term liabilities of $0.3 million. We expect cash
usage in operating activities to decrease sequentially from quarter to quarter
as we expect moderate revenue growth on a quarterly basis. The increase in provision for inventories of $0.7 million was related to
cost adjustments to inventory value to reflect lowered production costs due to
the transition of manufacturing activities to an outsourced third-party vendor. The changes in accounts receivable were negligible because we did not
experience a material fluctuation in revenues and collections activities. As
of March 31, 2004, our worldwide days sales outstanding was 60 days as compared
to 62 days as of December 31, 2003. We have credit policies that help us to
monitor our collection activities and reduce our credit loss exposure. We
continue to improve and modify those policies as our business evolves. Our
goal is to consistently improve our days sales outstanding to the best of our
ability. We may not be 15




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able to maintain our current ratio or we may experience less than
satisfactory performance in collection due to factors outside of our control
such as changes in economic climates. The changes in other accrued liability consisted of decreased in accrued
compensation of $0.5 million related primarily to compensation liability
relieved after the divestiture of our former French subsidiary, offset by
increase in liability of approximately $0.5 million due to the financing of our
Director and Officers insurance premium. Net cash used in operating activities for the three months ended March 31,
2003 was $11.1 million consisting primarily of our net loss of $11.0 million,
adjusted for non-cash related items of $0.4 million related to depreciation
expenses, stock compensation expenses and provision for bad debt allowance.
Net cash used in operating activities also consisted of increases in accounts
receivable of $0.3 million related to increases in revenue and increases in
other current assets of $0.5 million, which were primarily related to prepaid
insurance premiums. Net cash used in operating activities was offset by
decreases in inventories of $0.3 million due to increased number of units
shipped. Investing Activities Net cash used by investing activities for the three months ended March 31,
2004 was $17.5 million, primarily from purchases of short-term investments.
Net cash provided by investing activities for the three months ended March 31,
2003 was $3.5 million primarily from the maturity of investments of $9.6
million, partially offset by purchases of investments of $6.0 million and $0.1
million of capital expenditures. Financing Activities Net cash provided by financing activities was $24.7 million for the three
months ended March 31, 2004, primarily from the issuance of our common stock in
a private placement completed in February 2004. Our net proceeds from the
issuance of approximately 3.0 million shares of our common stock at $8.50 per
share in the private placement were approximately $23.9 million, after
deducting offering costs and commissions totaling $1.6 million. We also
received $0.8 million from the exercises of stock options in the first quarter
of 2004. Net cash provided by financing activities was $0.1 million for the
three months ended March 31, 2003, primarily from the exercise of stock
options. We expect to have negative cash flows from operations into at least 2005
and we estimate that our existing capital resources will be sufficient to meet
our cash requirements for at least the next 12 months. The successful
achievement of our business objectives may require additional financing and
therefore, we may in the future seek to raise additional funds through bank
facilities, debt or equity offerings or other sources of capital. Any
additional equity financing may be dilutive to stockholders, and debt
financing, if available, may involve restrictive covenants. Additional funding
may not be available when needed or on terms acceptable to us. If we are unable
to obtain additional capital, we may be required to delay, reduce the scope of
or eliminate our sales and marketing activities. Our future liquidity and
capital requirements will depend upon many factors, including, among others:  
    
    Resources devoted to establish sales, marketing and distribution capabilities;
    
    Resources devoted to increasing our manufacturing capacity;
    
    The rate of product adoption by doctors and patients; and
    
    The insurance payor communitys acceptance of and reimbursement for the Essure
procedure. Recent Accounting Pronouncements In December 2003, the FASB issued a revised FASB Interpretation No. 46
(FIN 46R), Consolidation of Variable Interest Entities, an interpretation of
ARB No. 51. The FASB published the revision to clarify and amend some of the
original provisions of FIN 46, which was issued in January 2003, and to exempt
certain entities from its requirements. A variable interest entity (VIE)
refers to an entity subject to consolidation according to the provisions of
this Interpretation. FIN 46R applies to entities whose equity investment at
risk is insufficient to finance 16




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that entitys activities without receiving additional subordinated
financial support provided by any parties, including equity holders, or where
the equity investors (if any) do not have a controlling financial interest. FIN
46R provides that if an entity is the primary beneficiary of a VIE, the assets,
liabilities, and results of operations of the VIE should be consolidated in the
entitys financial statements. In addition, FIN 46R requires that both the
primary beneficiary and all other enterprises with a significant variable
interest in a VIE provide additional disclosures. The provisions of FIN 46R
were effective for the Companys fiscal 2004 first quarter. The adoption of FIN
46R did not have a material impact on the Companys financial position or
results of operations. Risk Factors In addition to the other information in thisForm 10-Q, the following
factors should be considered carefully in evaluating Conceptus and our
business. ThisForm 10-Qcontains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth below and elsewhere in thisForm 10-Q. We have a limited history of operation with Essure and have incurred
significant operating losses since inception. We expect to incur significant
operating losses for the foreseeable future and we may never achieve or
maintain profitability. We have a limited history of operation with Essure and have incurred
significant operating losses since our inception in 1992, including operating
losses of $7.2 million for the three months ended March 31, 2004, $40.2 million
in 2003, $33.1 million in 2002 and $18.8 million in 2001. We expect to continue
to incur significant operating expenses and net losses as we continue sales and
marketing efforts in the United States. Our net losses may continue until
sufficient revenues can be generated to offset these expenses. We may not be
able to generate these revenues, and we may never achieve profitability. Our
failure to achieve and sustain profitability would negatively impact the market
price of our common stock. If our product fails to gain market acceptance, our business will suffer. We are attempting to introduce a novel product into the contraception
market, which is dominated by procedures that are well established among
physicians and patients and are routinely taught to new physicians. As a
result, we believe that recommendations and endorsements by physicians will be
essential for market acceptance of our product. We do not know whether
physicians and patients will accept our product or whether we will be able to
obtain their recommendations or endorsements in sufficient amounts to be
profitable. We believe that physicians will not use a product unless they
determine, based on clinical data and other factors, that it is an attractive
alternative to other means of contraception and that it offers clinical utility
in a cost-effective manner. Physicians are traditionally slow to adopt new
products and treatment practices, partly because of perceived liability risks.
If Essure does not achieve significant market acceptance among physicians,
patients and healthcare payors, even if reimbursement levels are sufficient and
necessary United States and international regulatory approvals are maintained,
we may never achieve significant revenues or profitability. Government or third party reimbursement for Essure may not be available or
may be inadequate, which would limit our future product revenues and delay or
prevent our profitability. Market acceptance of Essure in the United States and in international
markets will depend in part upon the availability of reimbursement within
prevailing healthcare payment systems. Reimbursement systems in international
markets 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 health care systems that
determine reimbursement for new devices and procedures. In most markets, there
are private insurance systems as well as government-managed systems. Regardless
of the type of reimbursement system, we believe that physician advocacy of our
product will be required to obtain reimbursement. Availability of continued
reimbursement will depend, at least in part, on the clinical and cost
effectiveness of our product. We do not know whether reimbursement for our
product will continue to be available in the United States or in international
markets under either government or private reimbursement systems, or whether
physicians will support and advocate reimbursement for use of our product for
all indications intended by us. Large-scale market acceptance of Essure will
depend on the availability 17




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and level of reimbursement in the United States and targeted international
markets. We may be unable to obtain or maintain reimbursement in any country
within a particular time frame, for a particular amount, or at all, which would
limit our future product revenues and delay or prevent our profitability. If the effectiveness and safety of our product are not supported by
long-term data, we may not achieve market acceptance and we could be subject to
liability. The Pivotal trial of Essure was designed to support a PMA application and
to have five years of post-market follow-up. In addition, patients in the
Phase II study will be followed to five years. The long-term results of using
Essure will not be available for several years. If long-term studies or
clinical experience indicate that Essure is less effective or less safe than
our current data suggest, we may not achieve or sustain market acceptance
and/or we could be subject to significant liability. Our Co-Promotion Agreement with GYNECARE may not be successful On October 30, 2003, we announced the signing of an exclusive U.S.
co-promotion agreement with GYNECARE for marketing Essure in the United States
in combination with GYNECARES Thermachoice endometrial ablation product.
Before joint marketing may begin, however, the FDA must approve supplements to
our PMA regarding marketing and labeling claims of the compatibility of the
Essure and ThermaChoice device and treatment in the same patient. In addition,
once the PMA supplements are approved by the FDA, if at all, the success of the
joint marketing campaign would depend upon the effectiveness of our GYNECARE
sales team training programs, market demand for Essure in conjunction with the
Thermachoice treatment and the efforts and commitment of GYNECARE to this new
program. We have limited sales and marketing experience and minimal distribution
capabilities, and if we are unable to develop our sales and marketing
capabilities or be successful in our co-marketing agreement with GYNECARE, we
may be unsuccessful in commercializing Essure. In order to market, sell and distribute Essure, we will need to maintain
and continue to develop a sales force and marketing group with relevant
experience and continue to develop the relationship with GYNECARE for
co-marketing the Essure device to the endometrial ablation market. Developing
a marketing and sales force is expensive and time consuming and can impact the
effectiveness of our product launch. If we fail to establish adequate
marketing and sales capabilities, we may be unable to commercialize Essure
successfully. Furthermore, certain factors in our relationship with GYNECARE
are outside of our control, such as the number of sales persons, their
compensation and the number of products they are selling, which could adversely
impact the revenues and market development we expect from this co-marketing
agreement. We have limited experience in manufacturing Essure in commercial
quantities and are presently pursing the outsourcing of our manufacturing to a
third party, which may result in disruption to supply. In April 2004, we received FDA approval to begin manufacturing the Essure
product at UTI Venusa, LTD, our third-party subcontractor located in Mexico.
We are in the process of transitioning our internal manufacturing operations to
Venusa to manufacture the entire processes and assemblies of our product.
Third-party manufacturers often encounter difficulties in scaling up production
of new products, including problems involving production yields, quality
control and assurance, component supply and shortages of qualified personnel,
and compliances with FDA or other health authority requirements. We and/or
Venusa may encounter manufacturing difficulties, which could negatively impact
or delay commercialization of Essure. Changes in stock option accounting rules may adversely impact our reported
operating results prepared in accordance with generally accepted accounting
principles, our stock price and our competitiveness in the employee
marketplace. Technology companies like ours have a history of using broad based
employee stock option programs to hire, incentivize and retain our workforce in
a competitive marketplace. Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123) allows companies the
choice of either using a fair value method of accounting for options, which
would result in expense recognition for all options 18




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granted, or using an intrinsic value method, as prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25), with a pro forma disclosure of the impact on net income (loss) of
using the fair value option expense recognition method. We have elected to
apply APB 25 and accordingly we generally do not recognize any expense with
respect to employee stock options as long as such options are granted at
exercise prices equal to the fair value of our common stock on the date of
grant. During March 2004 the FASB issued an Exposure Draft (proposed statement)
Share-Based Payment, an amendment of FASB Statements No. 123 and 95. The
proposed statement eliminates the treatment for share-based transactions using
APB 25 and generally would require share-based payments to employees be
accounted for using a fair-value-based method and recognized as expenses in our
statements of operations. The proposed standard would require the modified
prospective method be used, which would require that the fair value of new
awards granted from the beginning of the year of adoption plus unvested awards
at the date of adoption be expensed over the vesting term. In addition, the
proposed statement encourages companies to use the binomial approach to value
stock options, as opposed to the Black-Scholes option-pricing model that we
currently use for the fair value of our options under SFAS 123 disclosure
provisions. The effective date the proposed standard is recommending is for fiscal
years beginning after December 15, 2004. Should this proposed statement be
finalized, it will have a significant impact on our consolidated statement of
operations as we will be required to expense the fair value of our stock
options rather than disclosing the impact on our consolidated result of
operations within our footnotes in accordance with the disclosure provisions of
SFAS 123 (see Note 8 of the Notes to the condensed consolidated financial
statements). This will result in lower reported earnings per share, which could
negatively impact our future stock price. In addition, should the proposal be
finalized, this could impact our ability to utilize broad based employee stock
plans to reward employees and could result in a competitive disadvantage to us
in the employee marketplace. We may not maintain regulatory approvals for Essure, our only product,
which would delay or prevent us from generating product revenues, and would
harm our business and force us to curtail or cease operations. Numerous government authorities, both in the United States and
internationally, regulate the manufacture and sale of medical devices,
including Essure. In the United States, the principal regulatory authorities
are the FDA and corresponding state agencies, such as the California Department
of Health Services. The process of obtaining and maintaining required
regulatory clearances is lengthy, expensive and uncertain. We have received FDA approval to market Essure in the United States. If
we lose that approval or fail to comply with existing or future regulatory
requirements, it could delay or prevent us from generating further product
revenues. Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary widely from country to country.
The time required to obtain clearance required by foreign countries may be
longer or shorter than that required for FDA clearance, and requirements for
licensing may differ significantly from FDA requirements. Many countries in
which we currently market or intend to market Essure either do not currently
regulate medical devices or have minimal registration requirements; however,
these countries may develop more extensive regulations in the future, which
could delay or prevent us from marketing Essure in these countries. The FDA and certain foreign regulatory authorities impose numerous
requirements with which medical device manufacturers must comply in order to
maintain regulatory approvals. FDA enforcement policy strictly prohibits the
promotion of approved medical devices for uses other than those for which the
device is specifically approved by the FDA. We will be required to adhere to
applicable FDA regulations, such as the Quality System Regulation, and similar
regulations in other countries, which include testing, control and
documentation requirements. Ongoing compliance with the Quality System
Regulation and other applicable regulatory requirements will be monitored
through periodic inspections by federal and state agencies, including the FDA
and the California Department of Health Services, and by comparable agencies in
other countries. If we fail to comply with applicable regulatory requirements,
we may be subject to, among other things, warning letters, fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, refusal of the government to grant pre-market clearance or
pre-market approval for devices, withdrawal of approvals and criminal
prosecution, any of which could negatively impact our business. 19




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We currently have applied for PMA approvals on three supplements: warning
label changes for the concomitant use of Essure with Thermachoice; the 3 year
effectiveness claim and the proposed hysterosalpingogram, or HSG substitute.
The HSG substitute supplement is related to our effort to remove the HSG
requirement as part of the Essure procedure. As part of the FDA approval in
November 2002, we are required, three months post-procedure and consistent with
our pivotal trial protocol, to perform a HSG, which calls for contrast dye to
be injected into the uterus and fallopian tubes to confirm occlusion and
micro-insert location. Because an HSG can be uncomfortable for women, we are
working with the FDA to approve a less-invasive alternative, such as a pelvic
x-ray. There can be no guarantees that we will receive approvals on any or all
of these submissions. Further, the timing of FDA approval is not something
that we control and delays in approvals could materially impact our business. Our intellectual property rights may not provide meaningful commercial
protection for our product, which could enable third parties to use our
technology, or very similar technology, and could impair our ability to compete
in the market. We rely on patent, copyright, trade secret and trademark laws to limit the
ability of others to compete with us using the same or similar technology in
the United States and other countries. However, as described below, these laws
afford only limited protection and may not adequately protect our rights to the
extent necessary to sustain any competitive advantage we may have. The laws of
some foreign countries do not protect proprietary rights to the same extent as
the laws of the United States, and many companies have encountered significant
problems in protecting their proprietary rights abroad. These problems can be
caused by the absence of rules and methods for defending intellectual property
rights. We will be able to protect our technology from unauthorized use by third
parties only to the extent that they are covered by valid and enforceable
patents or are effectively maintained as trade secrets. The patent positions of
companies developing medical devices, including our patent position, generally
are uncertain and involve complex legal and factual questions concerning the
enforceability of such patents against alleged infringement. Recent judicial
decisions have established new case law and a reinterpretation of previous
patent case law, and consequently we cannot assure you that historical legal
standards surrounding the questions of infringement and validity will be
applied in future cases. In addition, legislation may be pending in Congress
that, if enacted in its present form, may limit the ability of medical device
manufacturers in the future to obtain patents on surgical and medical
procedures that are not performed by, or as a part of, devices or compositions
that are themselves patentable. Our ability to protect our proprietary methods
and procedures may be compromised by the enactment of this legislation or any
other limitation or reduction in the patentability of medical and surgical
methods and procedures. Changes in either the patent laws or in interpretations
of patent laws in the United States and other countries may therefore diminish
the value of our intellectual property. We own, or control through licenses, a variety of issued patents and
pending patent applications. However, the patents on which we rely may be
challenged and invalidated, and our patent applications may not result in
issued patents. Moreover, our patents and patent applications may not be
sufficiently broad to prevent others from practicing our technologies or from
developing competing products. We also face the risk that others may
independently develop similar or alternative technologies or design around our
patented technologies. We have taken security measures to protect our proprietary information,
especially proprietary information that is not covered by patents or patent
applications. These measures, however, may not provide adequate protection of
our trade secrets or other proprietary information. We seek to protect our
proprietary information by entering into confidentiality agreements with
employees, collaborators and consultants. Nevertheless, employees,
collaborators or consultants could still disclose our proprietary information
and we may not be able to protect our trade secrets in a meaningful way. If we
lose any employees we may not be able to prevent the unauthorized disclosure or
use of our technical knowledge or other trade secrets by those former employees
despite the existence of a nondisclosure and confidentiality agreement and
other contractual restrictions designed/intended to protect our proprietary
technology. In addition, others may independently develop substantially
equivalent proprietary information or techniques or otherwise gain access to
our trade secrets. Our ability to compete effectively will depend substantially on our
ability to develop and maintain proprietary aspects of our technology. Our
issued patents, any future patents that may be issued as a result of our 20




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United States or foreign patent applications, or the patents under which
we have license rights may not offer any degree of protection against
competitive products. Any patents that may be issued or licensed to us or any
of our patent applications could be challenged, invalidated or circumvented in
the future. If we cannot operate our business without infringing third-party
intellectual property rights, our prospects will suffer. Our success will also depend on our ability to operate without infringing
or misappropriating the proprietary rights of others. We may be exposed to
future litigation by third parties based on claims that our product infringes
the intellectual property rights of others. There are numerous issued patents
in the medical device industry and, as described in the next risk factor, the
validity and breadth of medical device patents involve complex legal and
factual questions for which important legal principles remain unresolved. Our
competitors may assert that our product and the methods we employ may be
covered by United States or foreign patents held by them. In addition, because
patent applications can take many years to issue, there may be currently
pending patent applications of which we are unaware that may later result in
issued patents that our product may infringe. There could also be existing
patents of which we are unaware that our product may inadvertently infringe. If
we lose a patent infringement lawsuit, we could be prevented from selling our
product unless we can obtain a license to use technology or ideas covered by
that patent or are able to redesign the product to avoid infringement. A
license may not be available to us on terms acceptable to us, or at all, and we
may not be able to redesign our product to avoid any infringement. If we are
not successful in obtaining a license or redesigning our product, we may be
unable to sell our product and our business would suffer. We have been, and may in the future, be a party to patent litigation,
which could be expensive and divert our managements attention. The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
industry have used intellectual property litigation to gain a competitive
advantage. We may become a party to patent infringement claims and litigation
or interference proceedings declared by the United States Patent and Trademark
Office (PTO), to determine the priority of inventions. The defense and
prosecution of these matters are both costly and time consuming. We may need to
commence proceedings against others to enforce our patents, to protect our
trade secrets or know-how or to determine the enforceability, scope and
validity of the proprietary rights of others. These proceedings would result in
substantial expense to us and significant diversion of effort by our technical
and management personnel. A third party, Ovion, Inc., brought to our attention a patent and certain
claims from a pending patent application owned by it. Ovion indicated it
believes that the claims of its patent and application cover Essure and its
use. On October 23, 2003, we entered into a settlement agreement with Ovion
pursuant to which we received a sole, worldwide license to Ovions patent
rights relative to the Essure system, and Ovion may not grant any additional
such licenses to other parties. The settlement agreement provides for the
payment of a royalty to Ovion that will be equal to 3.25% of the cumulative net
sales of Essure in excess of $75.0 million for a period of no longer than ten
years. In addition, the settlement agreement provides for a cash payment of
$2.0 million in the fourth quarter of 2003 as a prepaid royalty, and a license
fee of $2.0 million payable in our common stock in equal installments in the
first and second quarters of 2004. Ovion was not granted any rights to our
intellectual property pursuant to the settlement agreement. The settlement
agreement was approved by the U.S. District Court for the Northern District of
California on November 6, 2003. Although we have reached a settlement agreement with Ovion, we still
believe that some or all of Ovions claims should be included within our own
patents and we have requested that the PTO declare an interference. An
interference is a proceeding within the PTO to determine which party was the
first to invent, and which party is thereby entitled to ownership of, the
claims. We believe that we filed our patent applications for Essure before
Ovion filed the application that issued as its patent, and that we are entitled
to any patentable claims now appearing in their patent that cover our product.
We do not know whether the PTO will declare an interference, whether we
invented our product prior to Ovions date of invention, or whether we will
prevail in an interference proceeding if it is declared by the PTO. If the
PTO declares an interference in our favor and we are found to have priority of
invention, we may avoid having to pay Ovion future royalties on the sales of
our product. 21




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An adverse determination in litigation or interference proceedings to
which we are or may become a party could subject us to significant liabilities
to third parties or require us to seek licenses from third parties. Although
patent and intellectual property disputes in the medical device area have often
been settled through licensing or similar arrangements, costs associated with
such arrangements may be substantial and could include ongoing royalties. We
may be unable to obtain necessary licenses on satisfactory terms, if at all.
Adverse determinations in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent us from manufacturing and selling
Essure. One of the patents included in our license from Target Therapeutics, a
division of Boston Scientific Corporation, has been the subject of
reexamination proceedings in the PTO and an infringement lawsuit by Target
Therapeutics. The patent is directed to variable stiffness catheters for use
with guidewires, as might be used in our future products. Although the PTO
reaffirmed the patent with amended claims and the lawsuit was settled, the
patent could be challenged or invalidated in the future. If this patent is
invalidated, our ability to prevent others from using this proprietary
technology would be compromised. If we fail to manage our expansion, our business could be impaired. Although we have no current plans to do so, we may in the future acquire
one or more technologies, products or companies that complement our business.
We may not be able to effectively integrate these into our business. If we fail
to manage our growth and expansion, our business could be impaired. Our third-party manufacturer and we will depend upon third party and
single source suppliers for raw materials and finished goods and we do not have
forward contracts with many of these suppliers. We and our third party manufacturer purchase both raw materials used in
our product and finished goods from various suppliers, and we rely on a single
source for one component of our product, the polyester fiber. We do not have
formal supply contracts with several key vendors and, accordingly, these firms
may not continue to supply us or our third party manufacturer with raw
materials or finished goods in sufficient quantities, or at all. Delays
associated with any future raw materials or finished goods shortages could
delay commercialization of Essure, particularly as our third-party manufacturer
scales up its manufacturing activities in support of United States and
international commercial sales of Essure. Health care reform may limit our return on our product. The levels of revenue and profitability of medical device companies may be
affected by the efforts of government and third party payors to contain or
reduce the costs of health care through various means. In the United States,
there have been, and we expect that there will continue to be, a number of
federal, state and private proposals to control health care costs. These
proposals may contain measures intended to control public and private spending
on health care as well as to provide universal public access to the health care
system. If enacted, these proposals may result in a substantial restructuring
of the health care delivery system. Significant changes in the United States
health care system are likely to have a substantial impact over time on the
manner in which we conduct our business and could have a material adverse
effect on our business, financial condition and results of operations. We may be exposed to product liability claims, and we have only limited
insurance coverage. The manufacture and sale of medical products involve an inherent risk of
exposure to product liability claims and product recalls. Although we have not
experienced any product liability claims to date, we cannot assure you that we
will be able to avoid significant product liability claims and potential
related adverse publicity. We currently maintain product liability insurance
with coverage limits of $10.0 million per occurrence and an annual aggregate
maximum of $10.0 million, which we believe is comparable to that maintained by
other companies of similar size serving similar markets. However, we cannot
assure you that product liability claims in connection with clinical trials or
commercial sales of Essure will not exceed such insurance coverage limits or
that such insurance will continue to be available on commercially reasonable
terms, or at all. Insurance is expensive and in the future may not be available
on acceptable terms, if at all. A successful product liability claim or series
of claims brought against us in excess of our insurance coverage, or a recall
of our product, could cause our stock price to fall. 22




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We may not be able to attract and retain additional key management, sales
and marketing and technical personnel or we may lose existing key management,
sales and marketing or technical personnel, which may delay our development and
marketing efforts. We depend on a number of key management, sales and marketing and technical
personnel. The loss of the services of one or more key employees could delay
the achievement of our development and marketing objectives. Our success will
also depend on our ability to attract and retain additional highly qualified
management, sales and marketing and technical personnel to meet our growth
goals. We face intense competition for qualified personnel, many of whom are
often subject to competing employment offers, and we do not know whether we
will be able to attract and retain such personnel. We face intense competition, and if we are unable to compete effectively,
demand for Essure may be reduced. The medical device industry is highly competitive and is characterized by
rapid and significant technological change. The length of time required for
product development and regulatory approval plays an important role in a
companys competitive position. As we commercialize Essure, we expect to
compete with:  
    
    other methods of permanent contraception, in particular tubal
ligation;
    
    other methods of non-permanent contraception, including
devices such as intrauterine devices, or IUDs, vaginal rings,
condoms and prescription drugs such as the birth control pill,
injectable and implantable contraceptives and patches; and
    
    other companies that may develop permanent contraception
devices those are similar to or otherwise compete with Essure. We are aware of a company that is in the earlier stages of development for
non-incisional permanent contraception devices, and other companies may develop
products that could compete with Essure. Competitive factors may render Essure
obsolete or noncompetitive or reduce demand for Essure. Our future liquidity and capital requirements are uncertain. As we commercialize Essure on a wide-scale basis, we may require
additional financing and therefore 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 selling and marketing activities. We expect to
have negative cash flows from operations into at least 2005. Our future
liquidity and capital requirements will depend upon many factors, including,
among others:  
    
    the rate of product adoption by doctors and patients;
    
    obtaining government and third-party reimbursement for Essure;
    
    the resources devoted to increasing manufacturing capacity to meet commercial demands;
    
    our ability to reduce our cost of sales;
    
    the resources devoted to establishing sales and marketing and distribution capabilities; and
    
    the progress and cost of product development programs. Our future quarterly results may fluctuate. Our future revenues and results of operations may fluctuate significantly
from quarter to quarter and will depend upon, among other factors: 23




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
    
    the rate at which new physicians are trained;
    
    actions relating to reimbursement matters;
    
    the rate at which we establish United States and
international distributors or marketing partners and the degree of
their success;
    
    the extent to which Essure gains market acceptance;
    
    the timing and size of distributor purchases; and
    
    introduction of competitive products. 
 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 have been exposed to interest rate risk as it
applies to interest earned on holdings of short-term marketable investments.
Interest rates that may affect these items in the future will depend on market
conditions and may differ from the rates we have experienced in the past. A
10% change in interest rates would not be material to our results of
operations. We reduce the sensitivity of our results of operations to these
risks by maintaining an investment portfolio, which is primarily comprised of
highly rated, short-term investments. We do not hold or issue derivative,
commodity instruments or other financial instruments for trading purposes. Foreign Currency Exchange Risk: Our expenses, except for those related to
Australia, were denominated in United States dollars. Our revenues, 4% and 35%
of which were in foreign currencies in the three months ended March 31, 2004
and 2003, respectively, were immaterial in relation to our overall financial
position. As a result, we have relatively little exposure for currency
exchange risks and foreign exchange losses have been minimal to date. We do
not currently enter into forward exchange contracts to hedge exposure
denominated in foreign currencies or any other derivative financial instruments
for trading or speculative purposes. In the future, if we feel our foreign
currency exposure has increased, we may consider entering into hedging
transactions to help mitigate that risk. As of March 31, 2004, a fluctuation
in exchange rates of 10% in the foreign currencies to which we are exposed
would not have a material impact on our results of operations or financial
condition. 
 Item 4. 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 SECs rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow 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 management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. As required by SEC Rule 13a-15(b), 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 as of the end of
the period covered by this report. Based on the foregoing, our Chief Executive
Officer and our Chief Financial Officer concluded that our disclosure controls
and procedures were effective at the reasonable assurance level. There has been no change in our internal controls over financial reporting
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting. 24




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PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings From time to time, we are involved in legal proceedings arising in the
ordinary course of business. We believe there is no other litigation pending
that could have, individually or in the aggregate, a material adverse effect on
its financial position, result of operations or cash flows. 
 Item 2. Changes in Securities and Use of Proceeds On February 25, 2004, we sold and issued approximately 3.0 million shares
of our common stock for $8.50 per share to certain institutional and other
accredited investors in a private placement transaction exempt from
registration under section 4(2) and Regulation D promulgated under the
Securities Act of 1993, as amended. Net proceeds were approximately $23.9
million, after deducting offering costs and fees totaling $1.6 million. These
funds will be used for working capital and are currently invested in
investment-grade instruments. On January 27, 2004, we issued 102,627 shares of our common stock pursuant
to the Settlement and License Agreement, dated October 22, 2003, between us and
Ovion, Inc., William S. Tremulis and Jeffrey P. Callister. The securities are
exempt from registration pursuant to Section 3(a)(10) of the Securities Act
because they were issued in exchange for Ovion and Messrs. Tremulis and
Callister entering into the settlement agreement, which was approved by the
court after a hearing on the fairness of the terms of the settlement. 
 Item 3. Defaults upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders None. 
 Item 5. Other Information None. 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. 10.1
    
    Form of Stock Purchase Agreement, dated February 24, 2004,
between the Registrant and the Purchasers (as defined therein).*10.2
    
    Employment agreement dated March 23, 2004 between the Company
and Mr. Ric Cote as the Companys new Vice President of Sales.31.1
    
    Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 25




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*
    
    Incorporated by reference to Exhibit 4.1 of the Registrants
Registration Statement on Form S-3 (file no.333-113611) filed on
March 15, 2004.(b)
    
    Reports on Form 8-K.On February 11, 2004, the Company filed a current report on Form 8-K
under Item 5 (Other events), Item 7 (Financial Statements, Pro
Forma Financial Information and Exhibits) and Item 12 (Disclosure of
Results of Operations and Financial Condition) reporting that it had
issued a press release announcing certain financial results for the
three and twelve months ended December 31, 2003.On February 26, 2004, the Company filed a current report on Form 8-K
under Item 5 (Other events) reporting that it had issued a press
release announcing the completion of a private placement of
approximately 3 million shares of newly issued common stock to certain
institutional and other accredited investors.On February 26, 2004, the Company filed a current report on Form 8-K
under Item 5 (Other events) reporting that it had issued a press
release announcing the revision of its guidance for revenue and net
loss for 2004.On March 1, 2004, the Company filed a current report on Form 8-K under
Item 5 (Other events) and Item 7 (Financial Statements, Pro Forma
Financial Information and Exhibits) for the purpose of filing the
following exhibits: (1) Exclusive Co-Promotion Agreement, dated as of
October 30, 2003, by and between the Company and Gynecare Worldwide
Division of Ethicon, Inc. and (2) Share Purchase and Call Option
Agreement, dated as of January 17, 2004, by and between Mr. Yves
Guillemain dEchon et al. and the Company.On March 2, 2004, the Company filed a current report on Form 8-K under
Item 5 (Other events) reporting that it had issued a press release
on March 2, 2004 announcing that Planned Parenthood Federation of
America had approved Essure for use in qualifying Planned Parenthood
Affiliates across the United States and that it had issued a press
release on March 4, 2004 announcing that the Company had received
notice from the American Medical Association CPT Editorial Panel that
the Panel will establish a Category I CPT code for hysteroscopic
sterilization using the Essure system.
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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. CONCEPTUS, INC. By: /s/ Gregory E. LichtwardtGregory E. LichtwardtExecutive Vice President, Treasurer and Chief Financial Officer
 Date: May 10, 2004 27




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EXHIBIT INDEX.10.1
    
    Form of Stock Purchase Agreement, dated February 24, 2004,
between the Registrant and the Purchasers (as defined therein).*10.2
    
    Employment agreement dated March 23, 2004 between the Company
and Mr. Ric Cote as the Companys new Vice President of Sales.31.1
    
    Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
    
    Incorporated by reference to Exhibit 4.1 of the Registrants
Registration Statement on Form S-3 (file no. 333-113611) filed on
March 15, 2004.