Urologix develops, manufactures, and markets non-surgical, therapies that use proprietary technology for the treatment of benign prostatic hyperplasia (BPH), a disease that affects more than 23 million men worldwide. Cooled ThermoTherapy™ (CTT) technology uses targeted microwave energy combined with a unique cooling mechanism that protects healthy urethral tissue and enhances patient comfort to provide safe, effective, lasting relief from the symptoms of BPH by the thermal ablation of hyperplastic prostatic tissue. In addition, on September 6, 2011 we acquired the Prostiva® Radio Frequency (RF) Therapy System that delivers radio frequency energy directly into the prostate destroying targeted tissue, which reduces constriction of the urethra, thereby relieving BPH voiding symptoms. The combination of Prostiva RF Therapy with Cooled ThermoTherapy allows Urologix to offer urologists clinically proven products with established reimbursement that can treat the widest range of patients. We market our Cooled ThermoTherapy control units under the CoolWave® and Targis® names and our procedure kits, that consist of a disposable treatment catheter, Rectal Thermal Unit (RTU) balloon and coolant bag, under the CTC Advance® and Targis names. The Prostiva RF Therapy System is marketed under the Prostiva name. Cooled ThermoTherapy and Prostiva RF Therapy can be performed without general anesthesia or intravenous sedation and can be performed in a urologist’s office or an outpatient clinic. We believe that Cooled ThermoTherapy and Prostiva RF Therapy provide an efficacious, safe and cost-effective solution for BPH with results clinically superior to medication and without the complications and side effects inherent in surgical procedures.
Our goal is to establish Cooled ThermoTherapy and Prostiva RF Therapy as the two principal treatments of choice for BPH patients who prefer not taking daily medication or who are dissatisfied with symptom improvement, cost or side effects from chronic BPH drugs. The urologist would choose between these two therapies based upon clinical criteria specific to the BPH patient’s presentation. Our business strategy to achieve this goal is to (i) educate both patients and urologists on the benefits of Cooled ThermoTherapy and Prostiva RF Therapy through the Company’s “Think Outside the Pillbox!” campaign, (ii) increase the use of Cooled ThermoTherapy and Prostiva RF Therapy by urologists who already have access to a Cooled ThermoTherapy and/or Prostiva RF Therapy system, (iii) provide more urologists with access to Cooled ThermoTherapy and Prostiva RF Therapy through the use of our own mobile service, (iv) increase the number of urologists who provide Cooled ThermoTherapy and Prostiva RF Therapy to their patients, and (v) continue to partner with our third party mobile providers to grow our businesses within the United States.
We believe that third-party reimbursement is essential to the continued adoption of Cooled ThermoTherapy and Prostiva RF Therapy, and that clinical efficacy, overall cost-effectiveness and physician advocacy will be keys to maintaining such reimbursement. We estimate that 70% to 80% of patients who receive Cooled ThermoTherapy and Prostiva RF Therapy treatment in the United States are eligible for Medicare coverage. The remaining patients will be covered by either private insurers, including traditional indemnity health insurers and managed care organizations, or they will be private paying patients. As a result, Medicare reimbursement is particularly critical for widespread market adoption of Cooled ThermoTherapy and Prostiva RF Therapy in the United States.
Each calendar year the Medicare reimbursement rate for Cooled ThermoTherapy, a transurethral microwave therapy, and Prostiva RF Therapy, a radio frequency energy procedure, is determined by the Centers for Medicare and Medicaid Services (CMS). The Medicare reimbursement rate for physicians varies depending on the procedure type, site of service, wage indexes and geographic location. The national average reimbursement rate is the fixed rate for the year without any geographic adjustments, but does vary based on site of service. Cooled ThermoTherapy and Prostiva RF Therapy can be performed in the urologist’s office, an ambulatory surgery center (ASC), or a hospital as an outpatient procedure.
The national average of Medicare reimbursement in the physician office setting for all transurethral microwave therapy procedures is $2,350 per procedure and for the radio frequency energy procedure is $2,266 for calendar 2011. We continue to monitor all reimbursement developments closely and will continue to execute on our active reimbursement strategy.
Cooled ThermoTherapy and Prostiva RF Therapy procedures also are reimbursed when performed in an ASC or a hospital outpatient setting, but these are a small portion of our business and the CMS changes to these rates will not have a material effect on our financial performance.
Private insurance companies and HMOs make their own determinations regarding coverage and reimbursement based upon “usual and customary” fees. To date, we have received coverage and reimbursement from private insurance companies and HMOs throughout the United States. We intend to continue our efforts to maintain coverage and reimbursement across the United States. There can be no assurance that reimbursement determinations for Cooled ThermoTherapy and Prostiva RF Therapy from these payers or that amounts reimbursed to urologists for performing these procedures will be sufficient to encourage urologists to use Urologix’ product and service offerings.
As a result of recently enacted federal health care reform legislation, substantial changes are anticipated in the United States health care system. Such legislation includes numerous provisions affecting the delivery of health care services, the financing of health care costs, reimbursement of health care providers and the legal obligations of health insurers, providers and employers. These provisions are currently slated to take effect at specified times over approximately the next decade. The federal health care reform legislation did not directly affect our fiscal year 2011 financial statements and we do not expect the legislation to affect our financial results for fiscal year 2012.
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For calendar 2012, CMS published the Physician Fee Schedule (PFS) final rule covering Cooled ThermoTherapy and Prostiva RF Therapy. The reimbursement for calendar year 2012 will be determined by both the PFS final rule, as well as, congressional actions to address the Sustainable Growth Rate (SGR) formula that affects Medicare reimbursement for all physicians. If Congress acts to stop the negative impacts of the SGR, which they have done in the past, reimbursement in the physician office setting for calendar year 2012 will be $2,156 for Cooled ThermoTherapy and $2,081 for Prostiva RF Therapy. If Congress takes no action to offset the impacts from the SGR, reimbursement for Medicare physician payments for all procedures covered by Medicare Part B will drop by an additional 28%. We are monitoring these developments closely and will continue to execute our reimbursement strategy.
Internationally, reimbursement approvals for the Cooled ThermoTherapy and Prostiva procedures are awarded on an individual-country basis.
We will continue to invest in research and development and clinical trials to improve our products and our therapy. These investments are intended to improve our product offering and expand the clinical evidence supporting our proprietary Cooled ThermoTherapy treatment for BPH. We continue to highlight our five year durability data and the ability of urologists using our system to customize the treatment for patients.
We have incurred net losses of $1,384,000 for the three-month period ended September 30, 2011 and $3,733,000 and $2,169,000 in the fiscal years ended June 30, 2011 and 2010, respectively. In addition, the Company has accumulated aggregate net losses from the inception of business through September 30, 2011 of $111,415,000. Subsequent to the end of our 2011 fiscal year, we entered into a license agreement with Medtronic and paid Medtronic $500,000 of the $1,000,000 initial license fee on September 6, 2011. As a result of our history of operating losses and negative cash flows from operations, the licensing fee and integration expenses related to the Prostiva product, and the uncertainty regarding our ability to obtain additional capital, our auditors have expressed substantial doubt about our ability to continue as a going concern.
Our financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary as a result of this uncertainty.
As stated in our press release of September 6, 2011 announcing the Prostiva RF Therapy System license, we expect revenues in fiscal year 2012 from the combined CTT and Prostiva product lines to be in the range of $18 to $20 million. Our actual revenue results could differ materially from our expectation as a result of risks and uncertainties, including those set forth in Item 1A “Risks Factors” of this Form 10-K.
Critical Accounting Policies:
A description of our critical accounting policies was provided in theManagement’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended June 30, 2011. At September 30, 2011, our critical accounting policies and estimates continue to include revenue recognition, allowance for doubtful accounts, inventories, valuation of long-lived assets, income taxes, and stock-based compensation. In addition, as of September 30, 2011, our critical accounting policies also include valuation of goodwill and other intangible assets as follows:
Valuation of Identifiable Intangible Assets and Goodwill
At September 30, 2011, the carrying value of goodwill was $3.3 million. Goodwill is tested for impairment each April 30th or more frequently if changes in circumstance or the occurrence of events suggests an impairment exists. The test for impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows.
As of September 30, 2011, net identifiable intangible assets consist of patents and technology, customer base, trademarks, and other of $1.5 million, $598,000, $324,000 and $23,000, respectively. All intangible assets are amortized on a straight-line basis over their estimated useful lives (see Note 8 for further information). We review identifiable intangible assets for impairment as changes in circumstance or the occurrence of events suggests the remaining value is not recoverable.
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RESULTS OF OPERATIONS
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Net Sales |
Net sales for the three-month period ended September 30, 2011 was $3.1 million compared to $3.4 million during the same period of the prior fiscal year. The $210,000 or 6 percent decrease in net sales for the three-month periods ended September 30, 2011, is primarily attributable to reduced order volume due to decreased sales in our direct and mobile channels, partially offset by approximately $430,000 in additional sales from the newly acquired Prostiva product since September 6, 2011. |
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During the first quarter of fiscal 2012, revenue derived from sales to direct accounts were 44 percent of sales in the first quarter of fiscal 2012 compared to 38 percent in the prior year period. Revenue derived from the Urologix-owned Cooled ThermoTherapy mobile service constituted 42 percent of overall revenue in the current quarter compared to 46 percent of revenues in the first quarter of fiscal 2011. In addition, third party mobile catheter revenue constituted 13 percent of overall revenue in the first quarter of fiscal 2012 compared with 14 percent in the first quarter of fiscal 2011. The increase in direct sales as a percentage of total sales is a result of the newly acquired Prostiva product being sold through the direct channel. |
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Cost of Goods Sold and Gross Profit |
Cost of goods sold includes raw materials, labor, overhead, and royalties incurred in connection with the production of our Cooled ThermoTherapy system control units and single-use treatment catheters, amortization related to developed technologies, costs associated with the delivery of our Cooled ThermoTherapy mobile service, as well as costs for the newly acquired Prostiva products. Cost of goods sold for the three-month period ended September 30, 2011 increased $204,000, or 13 percent, to $1.7 million, from $1.5 million for the three-month period ended September 30, 2010. The increase in costs of goods sold for the three-month period ended September 30, 2011 is primarily a result of increased cost per unit due to unabsorbed manufacturing expense from lower production. |
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Gross profit as a percentage of sales decreased to 45 percent for the three-month period ended September 30, 2011, from 55 percent for the three-month period ended September 30, 2010. The decrease in the gross margin rate is also due to the increased cost per unit as a result of lower production as mentioned above. |
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Selling, General & Administrative |
Selling, general and administrative expenses of $2.3 million for the first quarter of fiscal 2012 increased $271,000, or 14 percent when compared to selling, general and administrative expenses of $2.0 million in the same period of fiscal 2011. The increase in selling, general and administrative expenses for the three-month period ended September 30, 2011 is primarily due to a $106,000 increase in wages and commissions due to increased sales headcount, a $63,000 increase in consulting fees, a $61,000 increase in legal and audit fees related to the acquisition, and a $38,000 increase in conventions and meetings due to timing of sales meetings. |
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Research and Development |
Research and development expenses, which include expenditures for product development, regulatory compliance and clinical studies, decreased to $481,000 for the three-month period ended September 30, 2011, from $546,000 in the same respective period of the prior fiscal year. The decrease in expense of $65,000, or 12 percent for the three-month period ended September 30, 2011, is due to a decrease in consulting fees of approximately $54,000, a decrease in recruiting fees of $17,000 as well as a decrease in temporary workers of $10,000, partially offset by an increase in wages of $35,000 due to increased headcount. |
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Net Interest Income/(Expense) |
Net interest expense of approximately $56,000 for the three-month period ended September 30, 2011 is due to implied interest on the deferred acquisition payments, partially offset by minor amounts of interest income on our cash and cash equivalents balance. This compares to interest income of approximately $1,000 for the three-month period ended September 30, 2010. |
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Provision for Income Taxes |
We recognized an income tax expense of $5,000 for the three-month period ended September 30, 2011, compared to income tax expense of $6,300 for the comparable prior year fiscal period. The tax expense in the three -month periods ended September 30, 2011 and 2010 relates to provisions for state taxes. |
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception through sales of equity securities and, to a lesser extent, sales of our Cooled ThermoTherapy system control units and single-use treatment catheters. As of September 30, 2011, we had total cash and cash equivalents of $1.6 million compared to cash and cash equivalents of $3.1 million as of June 30, 2011. During the first quarter of fiscal 2012, the Company entered into a license agreement with Medtronic for the Prostiva RF Therapy System. The Company paid Medtronic $500,000 on September 6, 2011 for half of the $1,000,000 initial license fee, the remainder due on the anniversary of this date. The $1.5 million decrease in our cash and cash equivalents balance is primarily due to this licensing payment, transaction related expenses, the net loss incurred in the current business and one-time annual operating expenses such as insurance premiums. The amount of decrease in our cash balance in the first quarter of fiscal year 2012 is not expected to continue throughout the remainder of the fiscal year. The cash outflows in the first quarter related to annual operating expenses and the licensing fee will not occur again in fiscal year 2012. In addition, as part of the licensing agreement, payments for Prostiva products and royalties are deferred into the next fiscal year while collections of Prostiva revenue commence immediately.
As a result of our history of operating losses and negative cash flows from operations, the licensing fee and integration expenses related to the Prostiva product, and the uncertainty regarding our ability to obtain additional capital, there is substantial doubt about our ability to continue as a going concern. Our cash and cash equivalents may not be sufficient to sustain our day-to-day operations for the next 12 months and our ability to continue as a going concern is dependent upon improving our liquidity. While our primary goal is to generate capital through cash flow from operations, we are also pursuing financing alternatives. We intend to seek additional financing by incurring indebtedness or from an offering of our equity securities or both.
There can be no assurance that the Company will be able to raise additional capital through a debt or equity financing. If the Company does obtain such financing, there can be no assurance that additional financing will be obtained in an amount that is sufficient for our needs, in a timely manner, or on terms and conditions acceptable to us or our shareholders. If we are unable to obtain additional capital in an amount sufficient for our needs and in a timely manner, we may be required to further reduce our expenses and curtail our capital expenditures, sell our assets, or suspend or discontinue our operations.
The first quarter fiscal year 2012 financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
During the three-month period ended September 30, 2011, we used $1.1 million of cash for operating activities. The net loss of $1.4 million included non-cash charges of $139,000 from depreciation and amortization expense and $87,000 from stock-based compensation expense. Fluctuations in operating items resulted in cash generation for the period of $12,000 as a result of decreased finished goods inventories of $348,000 as a result of decreased production, lower accrued expenses and deferred income balances of $277,000 as a result of an increase in our payroll accrual due to timing and an increase in commission accrual due to increased September sales, partially offset by higher accounts receivable of $433,000 due to higher September sales, and lower prepaid and other assets of $105,000 due to the amortization of a prepaid licensing fee.
During the three-months ended September 30, 2011, we used $505,000 for investing activities of which $500,000 relates to payment of half of the $1 million licensing fee related to the Prostiva RF Therapy System acquisition. See Note 4 to the Condensed Financial Statements for further details on this acquisition.
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During the three-months ended September 30, 2011, we generated $79,000 of cash from financing activities as a result of proceeds from the exercise of stock options.
We plan to continue offering customers a variety of programs for both evaluation and longer-term use of our Cooled ThermoTherapy system control units in addition to purchase options. We also will continue to provide physicians and patients with efficient access to our Cooled ThermoTherapy system control units on a pre-scheduled basis through our mobile service. As of September 30, 2011, our property and equipment, net, included approximately $531,000 of control units used in evaluation or longer-term use programs and in our Company-owned mobile service.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
Recently Issued Accounting Standards
Information regarding recently issued accounting pronouncements is included in Note 14 to the condensed financial statements in this Quarterly Report on Form 10-Q.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Our financial instruments include cash equivalent instruments. Increases and decreases in prevailing interest rates generally translate into decreases and increases, respectively, in the fair value of these instruments, as our investments are variable rate investments. Also, fair values of interest rate sensitive instruments may be affected by the credit worthiness of the issuer, prepayment options, relative values of alternative instruments, the liquidity of the instrument and other general market conditions.
Market risk was estimated as the potential decrease in fair value resulting from a hypothetical 1% change in interest rates and was not materially different from the quarter-end carrying value. Due to the nature of our cash equivalent instruments, we have concluded that we do not have a material market risk exposure.
Our policy is not to enter into derivative financial instruments. We do not have any significant foreign currency exposure since we do not generally transact business in foreign currencies. In addition, we do not enter into any futures or forward commodity contracts since we do not have significant market risk exposure with respect to commodity prices.
ITEM 4. CONTROLS AND PROCEDURES
(a)Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer, Stryker Warren, Jr., and Chief Financial Officer, Brian J. Smrdel, have evaluated the Company’s “disclosure controls and procedures,” as defined in the Exchange Act Rule 13a-15(e), as of the end of the period covered by this report. Based upon this review, they have concluded that these controls and procedures are effective.
(b)Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting that occurred during the fiscal period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
We have been and are involved in various legal proceedings and other matters that arise in the normal course of our business, including product liability claims that are inherent in the testing, production, marketing and sale of medical devices. Based upon currently available information, we believe that the ultimate resolution of these matters will not have a material effect on our financial position, liquidity or results of operations.
The most significant risk factors applicable to the Company are described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended June 30, 2011, as updated by our subsequent filings with the Securities and Exchange Commission. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.
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ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Not applicable.
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ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
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ITEM 4. | [REMOVED AND RESERVED] |
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ITEM 5. | OTHER INFORMATION |
On August 12, 2011, the Company received a letter from The NASDAQ Stock Market stating that the bid price of the Company’s common stock was below $1.00 per share for 30 consecutive business days and that the Company was therefore not in compliance with Listing Rule 5550(a)(2) requiring a minimum bid price of $1.00 per share.
Under the Listing Rules, the Company has 180 days, or until February 8, 2012, to regain compliance with the minimum bid price requirement for continued listing. In order to achieve compliance with the bid price requirement, the Company’s common stock must maintain a closing $1.00 bid price for a minimum of 10 consecutive business days during the compliance period.
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Exhibit 31.1 | Certification of Chief Executive Officer Pursuant to Section 13a-14(a) and 15d-14(a) of the Exchange Act. |
Exhibit 31.2 | Certification of Chief Financial Officer Pursuant to Section 13a-14(a) and 15d-14(a) of the Exchange Act. |
Exhibit 32 | Certification pursuant to 18 U.S.C. §1350. |
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SIGNATURES
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.
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| Urologix, Inc. | |
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| (Registrant) | |
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| /s/ Stryker Warren, jr. | |
| Stryker Warren, jr. | |
| Chief Executive Officer | |
| (Principal Executive Officer) | |
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| /s/ Brian J. Smrdel | |
| Brian J. Smrdel | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) | |
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| Date November 14, 2011 | |
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