Even if such an approval is obtained, our failure to comply with applicable regulatory approvals could, among other things, result in fines, suspension of regulatory approvals, product recalls, operating restrictions and criminal prosecution. In addition, government regulations may be established that could prevent, delay, modify or rescind regulatory approval of our products. Any such position or change of position by the FDA may adversely impact our business and financial condition. Regulatory approvals, if granted, may include significant limitations on the indicated uses for which our products may be marketed in the United States or in other countries. In addition to obtaining such approvals, the FDA and foreign regulatory authorities may impose numerous other requirements on us. The FDA prohibits the marketing of approved medical devices for unapproved uses. In addition, product approvals can be withdrawn for failure to comply with regulatory standards or the occurrence of unforeseen problems following initial marketing.
In addition, the health care industry in the United States is generally subject to fundamental change due to regulatory as well as political influences. We anticipate that Congress and state legislatures will continue to review and assess alternative health care delivery and payment systems. Potential approaches that have been considered include controls on health care spending through limitations on the growth of private purchasing groups and price controls. We cannot predict what impact the adoption of any federal or state health care reform measures may have on our business.
The Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act of 2010 were enacted into law in March 2010. As a U.S. based company with significant sales in the United States, these health care reform laws will materially impact us and are expected to materially impact us. Certain provisions of these laws will not be effective for a number of years and there are many programs and requirements for which the details have not yet been fully established. Accordingly, it is unclear what the full impact will be from the recent health care reform legislation. However, beginning in January 2013, the legislation imposes a 2.3% excise tax on sales of our Cooled ThermoTherapy and Prostiva products in the United States. We expect the new tax will materially and adversely affect our business, cash flows and results of operations. For the fiscal year ended June 30, 2013, we paid approximately $106,000 in medical device excise tax.
The laws also focus on a number of Medicare provisions aimed at improving quality and decreasing costs. The Medicare provisions include value-based payment programs, increased funding of comparative effectiveness research, reduced hospital payments for avoidable readmissions and hospital acquired conditions, and pilot programs to evaluate alternative payment methodologies that promote care coordination (such as bundled physician and hospital payments). Additionally, the recent health care reform legislation includes a reduction in the annual rate of inflation for Medicare payments to hospitals that began in 2011 and the establishment of an independent payment advisory board to recommend ways of reducing the rate of growth in Medicare spending beginning in 2014. We cannot predict what healthcare programs and regulations will be ultimately implemented at the federal or state level, or the effect of any future legislation or regulation. However, any changes that lower reimbursement for our products or reduce medical procedure volumes could adversely affect our business and results of operations.
We manufacture CoolWave control units and single-use treatment catheters for use with CoolWave control units at our suburban Minneapolis facility. Our success will depend upon our ability to cost-effectively manufacture a reliable product and deliver that product in a timely manner. We may encounter difficulties in maintaining production efficiencies, quality control and assurance, component supply and qualified personnel. We cannot offer assurance that we will be able to manufacture a reliable product and deliver that product to customers in a timely fashion. Our failure to maintain a reputation among our customers as a timely, responsive manufacturer, or our failure to remedy manufacturing issues in a timely manner and to our customers’ satisfaction, or higher than expected manufacturing costs, would adversely affect our business.
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Our reliance on outside suppliers for our components and for the Prostiva product involves risks, including limited control over the price and uncertainty regarding timely delivery and quality of parts and product. The start-up, transfer, termination or interruption of any of these relationships or products, or the failure of these manufacturers or suppliers, some of which operate in countries outside of the United States, to supply products or components to us on a timely basis or in sufficient quantities, likely would cause us to be unable to meet customer orders for our products and harm our reputation with customers and our business. Identifying and qualifying alternative suppliers of components or manufacturers of products takes time and involves significant additional costs and may delay the production of our products.
If we obtain a new supplier for a component, manufacture our product with an alternative component, or if our products are manufactured by an alternative manufacturer, we likely will need either FDA approval of a pre-market approval (PMA) supplement or FDA clearance of a 510(k) application to make a change in component or product manufacturing. The process for obtaining FDA approval or FDA clearance may result in extended delays in delivery of our product to customers and increased costs associated with the change.
The failure of our third-party manufacturers to manufacture the products for us, and the failure of our components suppliers to supply us with the components, consistent with our requirements as to quality, quantity and timeliness, would materially harm our business.
Our business of the manufacturing, marketing, and sale of medical devices involves the risk of liability claims and such claims could seriously harm our business, particularly if our insurance coverage is inadequate.
Our business exposes us to potential product liability claims that are inherent in the testing, production, marketing and sale of medical devices. Like other participants in the medical device industry, we are from time to time involved in lawsuits, claims and proceedings alleging product liability and related claims such as negligence. If any current or future product liability claims become substantial, our reputation could be damaged significantly, thereby harming our business. We may be required to pay substantial damage awards as a result of any successful product liability claims. Any product liability claim against us, whether with or without merit, could result in costly litigation, and divert the time, attention, and resources of our management.
As a result of our exposure to product liability claims, we currently carry product liability insurance covering our products with policy limits per occurrence and in the aggregate that we have deemed to be sufficient. Our insurance may not cover certain product liability claims or our liability for any claims may exceed our coverage limits. Therefore, we cannot predict whether this insurance is sufficient, or if not, whether we will be able to obtain sufficient insurance to cover the risks associated with our business or whether such insurance will be available at premiums that are commercially reasonable. In addition, these insurance policies must be renewed annually. Although we have been able to obtain liability insurance, such insurance may not be available in the future on acceptable terms, if at all. A successful claim against us or settlement by us with respect to uninsured liabilities or in excess of our insurance coverage, or our inability to maintain insurance in the future, or any claim that results in significant costs to or adverse publicity against us, could have a material adverse effect on our business, financial condition and results of operations.
We are dependent on adequate protection of our patent and proprietary rights.
We rely on patents, trade secrets, trademarks, copyrights, know-how, license agreements and contractual provisions to establish and protect our intellectual property rights. However, these legal means afford us only limited protection and may not adequately protect our rights or remedies to gain or keep any advantages we may have over our competitors.
Other competitors may independently develop the same or similar technologies or otherwise obtain access to our technology and trade secrets. Our competitors, many of which have substantial resources and may make substantial investments in competing technologies, may apply for and obtain patents that will prevent, limit, or interfere with our ability to manufacture or market our products. Further, while we do not believe that any of our products or processes interfere with the rights of others, third parties may nonetheless assert patent infringement claims against us in the future.
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Costly litigation may be necessary to enforce patents issued or licensed to us, to protect trade secrets or “know-how” we own, to defend us against claimed infringement of the rights of others or to determine the ownership, scope, or validity of our proprietary rights and the rights of others. In connection with the settlement of a patent infringement suit we filed in March 2002, we granted, in January 2004, ProstaLund AB, ProstaLund Operations AB and Circon Corporation (a/k/a ACMI Corporation) a non-exclusive, royalty free license under certain of our patents to sell the ProstaLund transurethral microwave thermotherapy system marketed in the United States by ACMI Corporation as the CoreTherm device.
Any claim of infringement against us may involve significant liabilities to third parties, could require us to seek licenses from third parties, and could prevent us from manufacturing, selling, or using our products. The occurrence of this litigation or the effect of an adverse determination in any of this type of litigation could have a material adverse effect on our business, financial condition and results of operations.
Our products may be subject to product recalls even after receiving FDA clearance or approval, which would harm our reputation and our business.
The FDA and similar governmental authorities in other countries in which our products are sold, have the authority to request and, in some cases, require the recall of our products in the event of material deficiencies or defects in design, manufacture or labeling. A government-mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors, labeling errors or design defects. Any recall of product would divert managerial and financial resources, harm our reputation with our customers and damage our business.
We are dependent on key personnel.
Our failure to attract and retain skilled personnel could hinder the management of our business, our research and development, our sales and marketing efforts, and our manufacturing capabilities. Our future success depends to a significant degree upon the continued services of key senior management personnel, including Gregory J. Fluet, our Chief Executive Officer, Brian J. Smrdel, our Chief Financial Officer, and Lisa Ackermann, our Executive Vice President, Sales and Marketing. Each of these members of senior management is employed “at will” by us. However, if there is a change in control and we terminate Mr. Fluet’s, Mr. Smrdel’s or Ms. Ackermann’s employment without cause, we would be required to make specified payments to him or her as described in an amended and restated change of control letter agreement dated April 23, 2012. We do not have key person life insurance on any member of senior management.
Our future success also depends on our continuing ability to attract, retain and motivate highly qualified managerial, technical and sales personnel. Our inability to retain or attract qualified personnel could have a significant negative effect and thereby materially harm our business and financial condition.
Risks Related to the Prostiva RF Therapy System and Related Agreements
On September 6, 2011, we entered into a license agreement and other agreements with Medtronic, Inc.
(“Medtronic”) and its subsidiary, VidaMed, Inc., relating to the Prostiva RF Therapy System. In addition, on June 28, 2013 we entered into a Restructuring Agreement and Amendment to Transaction Documents (the “Restructuring Agreement”). For a summary of the agreements with Medtronic, please see “Prostiva Related Agreements” in the “Business” section of this Annual Report on Form 10-K. The addition of the Prostiva RF product to our business and these agreements present additional risks to us and our business that are described below.
If we fail to comply with our obligations under our license agreement with Medtronic or if the license agreement terminates for any reason, we would lose the ability to sell the Prostiva product.
In September 2011, we entered into a License Agreement with Medtronic, Inc. and its subsidiary, VidaMed, Inc., that granted us an exclusive worldwide license to the Prostiva RF Therapy System in the field of the radio frequency treatment of the prostate, including BPH. At the same time we entered into the License Agreement, we also entered into other agreements with Medtronic and VidaMed, including a Transition Services and Supply Agreement, an Acquisition Option Agreement and an Asset Purchase Agreement. Summaries of each of these agreements may be found in the “Business” section of this Annual Report on Form 10-K under the heading “Prostiva Related Agreements.”
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The term of the License Agreement is ten years or the earlier closing date of a purchase under the Acquisition Option Agreement. In addition, either party may terminate the License Agreement by written notice for breach after an opportunity to cure and Medtronic may terminate the License Agreement in the event of our bankruptcy or insolvency. The License Agreement also will automatically terminate concurrently with certain terminations of the Transition Services and Supply Agreement, including terminations relating to regulatory challenges specified under the Transition Services and Supply Agreement. Upon termination of the License Agreement, all rights to the Prostiva intellectual property will revert back to Medtronic and the Transition Services and Supply Agreement and Acquisition Option Agreement will terminate. Further, upon termination of the License Agreement by Medtronic as a result of our breach or bankruptcy or default on the promissory note entered into with Medtronic on June 28, 2013, Medtronic will have the right to repurchase the assets from us that we previously purchased under the Asset Purchase Agreement for the same purchase price we previously paid.
Any termination of the License Agreement would result in the loss of the right to sell the Prostiva product and would materially harm our business. In addition, if the License Agreement were terminated, we would not be able to recoup the transaction expenses associated with the acquisition of the Prostiva business or the expenses we have incurred associated with the integration of the Prostiva business.
The Prostiva RF Therapy System license, Restructuring Agreement and other agreements require significant future payments.
Under the License Agreement,, Transition Services and Supply Agreement, and Restructuring Agreement with Medtronic for the Prostiva RF Therapy System, we are obligated to make certain future payments, including:
| | |
| • | $65,000 annually as a license maintenance fee; |
| • | Royalties on net sales of product payable thirty days following the end of each contract year (or minimum royalty amounts beginning in the second contract year that are payable ninety days following the end of each contract year); |
| • | five equal annual payments of principal and accrued interest beginning on March 31, 2015 on the $5,332,538 promissory note which accrues interest at 6 percent compounded annually. The promissory note represents amounts owed to Medtronic for inventory received as part of the acquisition of the Prostiva business, as well as inventory purchased subsequent to the acquisition. |
Our failure to pay these amounts when due would be a breach of the agreement, entitling Medtronic to terminate these agreements and our right to sell the Prostiva product after proper notice and an opportunity to cure.
The addition of the Prostiva RF Therapy System to our product portfolio may result in the exacerbation of certain risks to our business.
As detailed above, we face a number of risks in our business and risks associated with our Cooled ThermoTherapy products. Because the addition of the Prostiva RF Therapy System to our product portfolio presents some of these same risks to us, these risks may be magnified. For example, with the Prostiva RF Therapy System, we face risks associated with:
| | |
| • | reliance on third party reimbursement; |
| • | intense competition, primarily from pharmaceutical companies that market and sell BPH medication; |
| • | our lack of diversification because our products are minimally invasive treatments for BPH; |
| • | significant impact of government regulation; |
| • | risk of product liability claims; |
| • | risk of managing third party manufacturers; and |
| • | the possibility of product recalls. |
If we are unable to address these risks as they relate to both the CTT and Prostiva products, our results of operations, cash flows and the value of our common stock would be negatively impacted.
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| |
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
We lease approximately 26,000 square feet of office, manufacturing and warehouse space in a suburb of Minneapolis, Minnesota. On September 9, 2010, the Company entered into a new lease agreement with our current landlord, covering the same square footage, for a period of seventy-two months, effective August 1, 2010. We believe our facilities will be sufficient to meet our current and future requirements and that additional space at or near the current location will be available at a reasonable cost if additional space is required in the future.
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 the financial position, liquidity or results of operations of the Company.
| |
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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PART II
| |
ITEM 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock was traded on The Nasdaq Capital Market under the symbol “ULGX” through June 6, 2013. As a result of our voluntary delisting from the Nasdaq Capital Market on June 5, 2013, our common stock began trading on the OTCQB Marketplace (“OTCQB”) under the symbol “ULGX” on June 7, 2013. The following table sets forth quarterly high and low last-sale prices of our common stock for each quarter during the past two fiscal years.
| | | | | | | | | | | | | | | | |
| | | | | Quarter | |
Fiscal Year | | | | | First | | Second | | Third | | Fourth | |
| | | | | | | | | | | | | | | | |
2013 | | | High | | | $1.00 | | | $0.84 | | | $0.77 | | | $0.54 | |
| | | Low | | | 0.64 | | | 0.61 | | | 0.54 | | | 0.16 | |
| | | | | | | | | | | | | | | | |
2012 | | | High | | | $1.17 | | | $1.08 | | | $1.60 | | | $1.28 | |
| | | Low | | | 0.86 | | | 0.86 | | | 1.05 | | | 0.77 | |
The foregoing prices reflect inter-dealer prices, without dealer markup, markdown or commissions, and may not represent actual transactions.
Dividends
To date, we have not declared or paid any cash dividends on our common stock, and we do not intend to do so in the foreseeable future.
Equity Compensation Plan Information
The table below presents our equity compensation plan information as of June 30, 2013:
| | | | | | | | | | | | | |
Plan Category | | | Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights | | | Weighted-average exercise
price of outstanding options,
warrants and rights | | | Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in first column) | |
Equity compensation plans approved by security holders | | | 2,093,818 | | | | $1.33 | | | | 1,719,165 | | |
Equity compensation plan not approved by security holders | | | - | | | | - | | | | - | | |
Total | | | 2,093,818 | | | | $1.33 | | | | 1,719,165 | | |
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The “equity compensation plans approved by security holders” listed above represent shares issuable under the Urologix, Inc. 2012 Stock Incentive Plan, an “employee benefit plan” as defined by Rule 405 of Regulation C of the Securities Act of 1933. Shareholders approved the most recent Stock Incentive Plan at the 2012 Annual Meeting of Shareholders held on November 16, 2012.
| |
ITEM 6. | SELECTED FINANCIAL DATA |
| | | | | | | | | | | | | | | | |
| | Years ended June 30, | |
| | | 2013 | | 2012 | | 2011 | | 2010 | | 2009 | |
| | (in thousands, except per share data) | |
Statements of Operations Data: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Sales | | $ | 16,590 | | $ | 17,027 | | $ | 12,571 | | $ | 14,771 | | $ | 12,816 | |
Cost of goods sold | | | 8,407 | (1) | | 8,645 | | | 6,030 | | | 6,569 | | | 6,367 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 8,183 | | | 8,382 | | | 6,541 | | | 8,202 | | | 6,449 | |
| | | | | | | | | | | | | | | | |
Costs and Expenses: | | | | | | | | | | | | | | | | |
Sales and marketing | | | 7,719 | | | 7,027 | | | 5,197 | | | 5,657 | | | 5,849 | |
General and administrative | | | 2,515 | | | 3,393 | | | 2,808 | | | 2,944 | | | 2,685 | |
Research and development | | | 2,269 | | | 2,189 | | | 2,238 | | | 1,834 | | | 2,356 | |
Change in value of acquisition consideration | | | (447 | ) | | (172 | ) | | - | | | - | | | - | |
Gain on demutualization | | | (321 | ) | | - | | | - | | | - | | | - | |
Medical device tax | | | 106 | | | - | | | - | | | - | | | - | |
Amortization of identifiable intangible assets | | | 104 | | | 90 | | | 24 | | | 24 | | | 24 | |
Impairment of identifiable intangible assets | | | 160 | (2) | | - | | | - | | | - | | | - | |
| | | | | | | | | | | | | | | | |
Total costs and expenses | | | 12,105 | | | 12,527 | | | 10,267 | | | 10,459 | | | 10,914 | |
| | | | | | | | | | | | | | | | |
Operating loss | | | (3,922 | ) | | (4,145 | ) | | (3,726 | ) | | (2,257 | ) | | (4,465 | ) |
Interest income/(expense), net | | | (555 | ) | | (482 | ) | | 1 | | | - | | | 53 | |
Gain on debt extinguishment | | | 206 | | | - | | | - | | | - | | | - | |
Foreign currency exchange gain/(loss) | | | (7 | ) | | (13 | ) | | - | | | - | | | - | |
Loss before income taxes | | | (4,278 | ) | | (4,640 | ) | | (3,725 | ) | | (2,257 | ) | | (4,412 | ) |
Income tax expense (benefit) | | | 14 | | | 55 | | | 8 | | | (88 | ) | | 7 | |
Net loss | | $ | (4,292 | ) | $ | (4,695 | ) | $ | (3,733 | ) | $ | (2,169 | ) | $ | (4,419 | ) |
| | | | | | | | | | | | | | | | |
Basic: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net loss per common share: | | $ | (0.21 | ) | $ | (0.32 | ) | $ | (0.26 | ) | $ | (0.15 | ) | $ | (0.31 | ) |
Weighted average shares used in computing net loss per share | | | 20,703 | | | 14,741 | | | 14,556 | | | 14,508 | | | 14,469 | |
Diluted: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net loss per common share: | | $ | (0.21 | ) | $ | (0.32 | ) | $ | (0.26 | ) | $ | (0.15 | ) | $ | (0.31 | ) |
Weighted average shares used in computing net loss per share | | | 20,703 | | | 14,741 | | | 14,556 | | | 14,508 | | | 14,469 | |
| | | | | | | | | | | | | | | | |
| | | 2013 | | 2012 | | 2011 | | 2010 | | 2009 | |
Balance Sheet Data: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 2,290 | | $ | 1,899 | | $ | 3,061 | | $ | 5,702 | | $ | 7,032 | |
Working capital/(deficit)(3) | | | 3,865 | | | (1,520 | ) | | 4,038 | | | 6,720 | | | 7,963 | |
Total assets | | | 12,527 | | | 12,676 | | | 6,763 | | | 10,203 | | | 12,141 | |
Total liabilities | | | 12,107 | | | 12,050 | | | 1,917 | | | 1,997 | | | 2,216 | |
Shareholders’ equity | | | 420 | | | 626 | | | 4,846 | | | 8,206 | | | 9,925 | |
| |
(1) | Includes a $274,000 non-cash charge to partially impair our developed technology acquired as part of the Prostiva acquisition as of June 30, 2013. |
|
(2) | Represents the following non-cash charges to partially impair intangible assets acquired as part of the Prostiva acquisition as of June 30, 2013: |
| | |
| Customer Base | $95,000 |
| Trademarks | $65,000 |
| |
(3) | Significant increase in working capital from fiscal year 2012 to fiscal year 2013 is a result of the restructuring of the Prostiva liabilities from accounts payable and short-term deferred acquisition payment to long-term debt. |
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SELECTED QUARTERLY FINANCIAL DATA
| | | | | | | | | | | | | |
| | Year Ended June 30, 2013 | |
| | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | |
| | (in thousands, except per share data) | |
| | | |
Sales | | | $3,970 | | | $4,354 | | | $4,082 | | | $4,184 | |
Gross profit | | | 2,016 | | | 2,237 | | | 2,026 | | | 1,905 | (1) |
Loss before income taxes | | | (1,053 | ) | | (954 | ) | | (988 | ) | | (1,281 | )(2) |
Net Loss | | | (1,069 | ) | | (970 | ) | | (1,005 | ) | | (1,247 | )(2) |
Basic net loss per share | | | $(0.05 | ) | | $(0.05 | ) | | $(0.05 | ) | | $(0.06 | ) |
Diluted net loss per share | | | $(0.05 | ) | | $(0.05 | ) | | $(0.05 | ) | | $(0.06 | ) |
(1) Includes a non-cash impairment charge of $274,000 related to developed technologies acquired as part of the Prostiva acquisiton.
(2) Includes the following non-cash charges to partially impair intangibles assets acquired as part of the Prostiva acquisiton as of June 30, 2013:
| | | | |
Developed Technologies | | $ | 274,000 | |
Customer Base | | | 95,000 | |
Trademarks | | | 65,000 | |
| | $ | 434,000 | |
| | | | | | | | | | | | | |
| | Year Ended June 30, 2012 | |
| | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | |
| | (in thousands, except per share data) | |
| | | | | | | | | | | | | |
Sales | | | $3,142 | | | $4,653 | | | $4,735 | | | $4,497 | |
Gross profit | | | 1,415 | | | 2,289 | | | 2,401 | | | 2,277 | |
Loss before income taxes | | | (1,379 | ) | | (1,113 | ) | | (941 | ) | | (1,208 | ) |
Net Loss | | | (1,384 | ) | | (1,119 | ) | | (968 | ) | | (1,225 | ) |
Basic net loss per share | | | $(0.09 | ) | | $(0.08 | ) | | $(0.07 | ) | | $(0.08 | ) |
Diluted net loss per share | | | $(0.09 | ) | | $(0.08 | ) | | $(0.07 | ) | | $(0.08 | ) |
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| |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with our financial statements and related notes contained elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of risks and uncertainties, including those set forth under “Risk Factors” in Item 1A. All forward-looking statements included herein are based on information available to us as of the date hereof, and we undertake no obligation to update any such forward-looking statements.
OVERVIEW
Urologix develops, manufactures, and markets non-surgical, office-based therapies for the treatment of the symptoms and obstruction resulting from non-cancerous prostate enlargement also known as benign prostatic hyperplasia (BPH). These therapies use proprietary technology in the treatment of BPH, a disease that affects more than 30 million men worldwide and is the most common prostate problem for men over 50. We market both the Cooled ThermoTherapy™ (CTT) product line and the Prostiva® Radio Frequency (RF) Therapy System. We acquired the exclusive worldwide license to the Prostiva® RF Therapy System in September 2011. These two technologies are designed to be used by urologists in their offices without placing their patients under general anesthesia. CTT uses a flexible catheter to deliver 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 BPH voiding symptoms by the thermal ablation of hyperplastic prostatic tissue surrounding the urethra. The proprietary Prostiva® RF Therapy System delivers radio frequency energy directly into the prostate through the use of insulated electrodes deployed from a transurethral scope, ablating targeted prostatic tissue under the direct visualization of the urologist. These focal ablations reduce constriction of the urethra, thereby relieving BPH voiding symptoms. These two proven technologies have slightly different, yet complementary, patient indications and providing them to our urologist customers enables them to treat a wide range of patients in their office. We believe that these office-based BPH therapies are efficacious, safe and cost-effective solutions for BPH as they have shown results clinically superior to those of medication based treatments and without the complications and side effect profile inherent with surgical procedures.
Our goal is to grow our business by establishing Cooled ThermoTherapy and Prostiva RF Therapy as the preferred therapeutic options considered by urologists for their BPH patients in the earlier stages of disease progression who do not want to take chronic BPH medication or are unhappy with the side effects, costs or results. A urologist can choose between our two therapies based upon clinical criteria specific to the BPH patient’s presentation. Our business strategy to achieve this goal is to:
| | |
| • | Educate patients and urologists on the benefits of Cooled ThermoTherapy and Prostiva RF Therapy through the Company’s “Think Outside the Pillbox!” campaign and other market development efforts, |
| | |
| • | Increase utilization of Cooled ThermoTherapy and Prostiva RF Therapy by urologists who already have access to a Cooled ThermoTherapy and/or Prostiva RF Therapy system, |
| | |
| • | Increase the number of urologists who utilize one or both of our therapy treatment options for their patients, |
| | |
| • | Continue to partner with our European distributors to support the customers outside the United States, and |
| | |
| • | Pursue other technologies to add to our portfolio that fit our brand, distribution channels and clinical standards through acquisition or other partnering structures. |
We continue to invest in research, development, and clinical trials to build upon our intellectual property, and our scientific and clinical knowledge to develop innovative future generations of BPH products and services. These investments are intended to improve our product offerings and expand the clinical evidence supporting each of our therapies for BPH. Our research and development efforts and goals are currently focused primarily on improving the features and functions of the technologies used in our Cooled ThermoTherapy and Prostiva RF Therapy procedures; improving the ease of use, patient comfort and clinical response to treatment; and also reducing the manufacturing cost of our products.
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We have incurred net losses of $4.3 million in fiscal year 2013, and $4.7 million and $3.7 million in the fiscal years ended 2012 and 2011, respectively. In addition, we have accumulated aggregate net losses since the inception of business through June 30, 2013 of $119.0 million. In the first quarter of fiscal year 2012 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. On June 28, 2013, we entered into a Restructuring Agreement with Medtronic related to the $7.5 million in obligations we owed to Medtronic under the Transaction Documents. As part of this agreement we paid Medtronic $2.0 million in satisfaction of royalties earned for the 12 months ended September 6, 2012, the second half of the initial licensing fee, the license maintenance fee for the 12 month period ended September 6, 2012, for outstanding transition services fees, and for payment for Prostiva inventory included as part of the acquisition and purchased subsequent to the acquisition. In addition, we entered into a promissory note (the “Note”) with Medtronic for $5.3 million for the remaining amounts owed on Prostiva inventory acquired as part of the acquisition and purchased subsequent to the acquisition. Interest on the Note will accrue at a rate of 6 percent, compounded annually and is payable in five equal installments of principal plus accrued interest on March 31st of each year beginning on March 31, 2015. The $206,000 difference between the $7.5 million in obligations owed to Medtronic and the $2.0 million paid and the $5.3 million Note was recorded as a gain on debt extinguishment. It was the Company’s preference to extend the payment terms to Medtronic as long as possible in order to allow us to deploy our cash resources to turnaround the Prostiva business and implement our market development strategy.
During the quarter ended September 30, 2012, the Company completed a follow-on offering in which we sold 5,980,000 shares of common stock at a price of $0.75 per share which contributed approximately $3.8 million of net proceeds after deducting underwriting discounts and commissions and other expenses payable by the Company. However, as a result of the Company’s history of operating losses and negative cash flows from operations, the $2.0 million payment to Medtronic in June 3013 for liabilities associated with the Prostiva acquisition, and the remaining liabilities related to the Prostiva acquisition and Note owed to Medtronic, there is substantial doubt about our ability to continue as a going concern. Our cash, cash generated from operations, if any, and available borrowings under our agreement with Silicon Valley Bank, may not be sufficient to sustain day-to-day operations for the next 12 months, particularly if product sales do not generate revenues in the amounts currently anticipated, if our operating costs are greater than anticipated or greater than our business can support, or if our cost reduction is not effective. Our ability to continue as a going concern is dependent upon improving our liquidity. The Company may seek to improve its liquidity position by raising capital through additional indebtedness or an offering of its equity securities or both.
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 August 20, 2013, we expect revenues in fiscal year 2014 to be in the range of $15 to $17 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 and Estimates:
In accordance with Securities and Exchange Commission guidance, we set forth below those material accounting policies that we believe are the most critical to an investor’s understanding of our financial results and condition, and require complex management judgment.
Revenue Recognition
We recognize revenue from the sale of Cooled ThermoTherapy control units upon delivery to the customer, which include urologists, urology practices, mobile units, clinics and hospitals. We recognize revenue from the sale of Prostiva generators upon shipment to the customer. Revenue is recognized in accordance with generally accepted accounting principles as outlined in Accounting Standards Codification (“ASC”) 605-10-S99,Revenue Recognition, which requires that four basic criteria be met before revenue can be recognized: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) product delivery has occurred or services have been rendered. The Company recognizes revenue as products are shipped based on FOB shipping point terms when title passes to customers. In addition to our sales of Cooled ThermoTherapy control units and Prostiva generators, we place our control units and generators with customers free of charge under a variety of programs for both evaluation and long-term use, and also provide access to Cooled ThermoTherapy and Prostiva RF Therapy treatments via our Urologix mobile service. We retain title to the control units and generators placed with our customers for evaluation and longer-term use. These programs, as well as our Urologix mobile service, are designed to expand access to our technology, and thus expand the market for our single-use treatment catheters and Prostiva handpieces. The free use of our Cooled ThermoTherapy control units and Prostiva generators are bundled with the sale of single-use treatment catheters or Prostiva handpieces and scopes, respectively, and are considered a single unit of accounting. Revenue from the bundled sales is recognized when the single-use treatment catheters or handpieces and scopes are shipped to our customers. Revenue from our mobile service is recognized upon treatment of the patient. Revenue for extended warranty service contracts is deferred and recognized over the contract period on a straight-line basis. We record a provision for estimated sales returns on product sales in the same period as the related revenue is recorded. The provision for estimated sales returns is based on historical sales returns, analysis of credit memo data and specific customer-based circumstances. Should actual sales returns differ from our estimates, revisions to the sales return reserve would be required. Sales and use taxes are reported on a net basis, excluding them from revenue.
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Inventories
We value our inventories, consisting primarily of control units, single-use treatment catheters, and raw materials to produce the control units and treatment catheters, at the lower of cost or market value on a first-in, first-out (“FIFO”) basis. The inventory cost includes merchandise, labor, overhead and freight. A periodic review of the inventory on hand is performed to determine if the inventory is properly stated at the lower of cost or market. In performing this analysis we consider, at a minimum, the following factors: average selling prices, reimbursement changes, and changes in demand for our products due to competitive conditions or market acceptance. Each type of inventory is analyzed to determine net realizable values. A provision is recorded to reduce the cost of inventories to the estimated net realizable values, if required (a new cost basis).
We also analyze the level of inventory on hand on a periodic basis, in relation to estimated customer requirements to determine whether write-downs for excess, obsolete, or slow-moving inventory are required. Any significant or unanticipated change in the factors noted above could have a significant impact on the value of our inventories and on our reported operating results.
Valuation of Long-Lived Assets and Goodwill
We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset or asset group is considered impaired if its carrying amount exceeds the undiscounted future net cash flows the asset or asset group is expected to generate. If an asset or asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. If estimated fair value is less than the book value, the asset is written down to the estimated fair value and an impairment loss is recognized.
Goodwill is tested for impairment annually on April 30th or more frequently if changes in circumstance or the occurrence of events suggests an impairment may exist. To determine if there is goodwill impairment, the fair value of the reporting unit is compared to its carrying amount. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill is less than the carrying value of the goodwill. The test for impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows.
Considerable management judgment is necessary in estimating future cash flows and other factors affecting the valuation of long-lived assets and goodwill, including the operating and macroeconomic factors that may affect them. We use historical financial information, internal plans and projections and industry information in making such estimate.
As a result of the delisting of our common stock from the NASDAQ exchange on June 7, 2013 and the continued decline of our stock price, we tested our long-lived assets and goodwill for impairment as of June 30, 2013. Based on this impairment testing it was determined that our intangible assets acquired as part of the Prostiva acquisition were impaired. As a result, we recorded an impairment charge of $274,000 on our developed technology asset which was recorded in cost of goods sold, a $95,000 impairment charge on our customer base asset and a $65,000 impairment charge on trademarks both of which were recorded in operating expense. There was no impairment of goodwill as it was determined that the fair value of the reporting unit exceeded its carrying amount as of June 30, 2013. See Footnote 11 for a description of our intangible assets and the impairment charges recorded as of June 30, 2013.
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Income Taxes
We utilize the asset and liability method of accounting for income taxes. We recognize deferred tax liabilities or assets for the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities. We regularly assess the likelihood that our deferred tax assets will be recovered from future taxable income. We consider projected future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance necessary to offset our deferred tax assets that will not be recoverable. We have recorded and continue to carry a full valuation allowance against our gross deferred tax assets that will not reverse against deferred tax liabilities within the scheduled reversal period. If we determine in the future that it is more likely than not that we will realize all or a portion of our deferred tax assets, we will adjust our valuation allowance in the period we make the determination. We expect to provide a full valuation allowance on our future tax benefits until we can sustain a level of profitability that demonstrates our ability to realize these assets. At June 30, 2013, we carried a valuation allowance of $30.2 million against our net deferred tax assets.
Stock-Based Compensation
The Company uses the fair value recognition provisions of the revised authoritative guidance for equity-based compensation and applies the modified prospective method in determining stock compensation expense. Stock compensation expense is based on the fair value of the award at the date of grant and is recognized over the requisite service period which corresponds to the vesting period. Options and restricted stock awards typically vest 25 percent after the first year of service with the remaining vesting 1/36th each month thereafter. Generally, options granted to non-employee directors are immediately exercisable at the date of grant while restricted stock awards generally vest after one year. Options are priced based on the closing price of a share of our common stock at the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. To determine the inputs for the Black-Scholes option pricing model, we use historical data to estimate expected volatility and the period of time that option grants are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The range of these assumptions and the range of option pricing and number of options granted at the different grant dates will impact our calculation of the fair value of the awards and will therefore impact the amount of expense reflected in our statement of operations for any given period. Fair value for restricted stock is based on the market price on the day of grant.
Fair Value of Contingent Consideration
Contingent consideration is recorded at the acquisition date at the estimated fair value of the future royalty payments in excess of contractual minimums. The acquisition date fair value is measured based on the consideration expected to be transferred discounted back to present value. The discount rate used is determined at the time of measurement in accordance with accepted valuation methods. The fair value of the contingent consideration is remeasured to the estimated fair value at each reporting period with the change in fair value recognized as gain or loss in our statement of operations. Changes to the fair value of the contingent consideration liability occur as a result of changes in discount rates and changes in the timing and amount of projected payments.
Results of Operations
Fiscal Years Ended June 30, 2013 and 2012
Net Sales
Net sales decreased 3 percent to $16.6 million in fiscal year 2013 from $17.0 million in fiscal year 2012. The decrease in sales from fiscal year 2012 is due to a slight decline in sales of our Cooled ThermoThearpy product line of $709,000, partially offset by a slight increase in sales of our Prostiva product line of $271,000. The increase in sales of our Prostiva product line was a result of a full year of Prostiva sales in fiscal year 2013 compared to only approximately ten months of sales in fiscal 2012 as a result of the Prostiva acquisition on September 6, 2011.
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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 Prostiva products. Cost of goods sold for fiscal year 2013 decreased $238,000 or 3 percent to $8.4 million, from $8.6 million in fiscal year 2012. This decrease in cost of goods sold is a result of the decrease in sales year over year as well as better absorption of manufacturing expenses and reductions in royalty expenses which expired at the end of fiscal 2012. These decreases were partially offset by a $274,000 impairment charge related to the developed technologies acquired in the Prostiva acquisition.
Gross profit as a percentage of sales remained consistent at 49 percent in fiscal years 2013 and 2012. The fiscal year 2013 gross margin percentage was impacted by 2 percentage points as a result of the $274,000 developed technology impairment charge mentioned above.
Sales and Marketing
Sales and marketing expenses in fiscal year 2013 increased $692,000, or 10 percent, to $7.7 million from $7.0 million in fiscal year 2012. The increase in sales and marketing expense is the result of a $674,000 increase in wages and benefits, including commissions, as a result of the expansion of the sales force from the Prostiva acquisition which occurred at the end of the first quarter of fiscal 2012.
General & Administrative
General and administrative expense in fiscal year 2013 decreased $878,000, or 26 percent, to $2.5 million from $3.4 million in fiscal year 2012. The decrease in general and administrative expense is mainly a result of a decrease in legal and audit fees of $333,000 as a result of one-time expenses related to the Prostiva transaction in fiscal 2012. The remaining decrease largely relates to a $337,000 decrease in non-cash accretion expense on the contingent deferred acquisition payments as a result of a shift of accretion expense from general and administrative expenses to interest expense in the current fiscal year as a result of the restructuring of Medtronic liabilities.
Research and Development
Research and development expenses, which include expenditures for product development, regulatory compliance and clinical studies, increased slightly to $2.3 million for fiscal year 2013, from $2.2 million in fiscal year 2012. The $80,000, or 4 percent, increase in research and development expense is due to an increase in product testing and project materials of $37,000, a $28,000 increase in recruiting fees, as well as an increase of $21,000 in consulting expenses, net of compensation expense savings as a result of open headcount positions.
The fiscal year 2013 research and development expenses includes $206,000 of transition services fees that were not paid as a result of the Restructuring Agreement entered into on June 28, 2013 with Medtronic. The non-payment of these fees was recorded in a separate line as a gain on debt extinguishment in our Statements of Operations.
Change in Value of Acquisition Consideration
The change in the value of acquisition consideration of $447,000 for the fiscal year ended June 30, 2013 represents the net effect of a reduction in fair value of contingent consideration of $1.4 million, partially offset by an increase of $933,000 in non-contingent consideration. These changes are due to an increase in the projected time it will take the Company to reach the cumulative $10 million of royalty and license fees owed on the Prostiva acquisition, and reduced the projected royalty payments in excess of contractual minimums in earlier years.
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Gain on Demutualization
The one-time gain on demutualization of $321,000 for the fiscal year ended June 30, 2013 represents the gain resulting from the demutualization of our products liability insurance carrier.
Medical Device Tax
The medical device excise tax expense of $106,000 for the fiscal year ended June 30, 2013 represents the excise tax imposed beginning January 1, 2013 on all U.S. medical device sales as part of the Federal health care reform legislation.
Amortization of Identifiable Intangible Assets
Amortization of identifiable intangible assets was approximately $104,000 in fiscal years 2013 compared to $90,000 in fiscal year 2012. The increase in the amortization expense of $14,000 is a result of having a full year of amortization expense related to the intangible assets acquired as part of the Prostiva acquisition, compared to only 10 months in the previous fiscal year.
Impairment of Identifiable Intangible Assets
We recorded an impairment charge of $160,000 on identifiable intangible assets in fiscal year 2013. The impairment charge relates to a $95,000 write-down of the customer base and a $65,000 write-down of the trademarks acquired as part of the Prostiva acquisition.
Net Interest Income/(Expense)
Net interest expense of approximately $555,000 for the fiscal year ended June 30, 2013, increased $73,000 over interest expense of $482,000 for the fiscal year ended June 30, 2012. Interest expense represents the non-cash interest accretion on the non-contingent deferred acquisition payments. The increase in interest expense is a result of a shift of accretion expense from general and administrative expenses to interest expense in the current fiscal year as a result of the restructuring of Medtronic liabilities.
Gain on Debt Extinguishment
The one-time gain on debt extinguishment of $206,000 is a result of the Restructuring Agreement entered into on June 28, 2013 with Medtronic which resulted in the restructuring of $7.5 million in outstanding Prostiva liabilities into a $2.0 million cash payment and a $5.3 million promissory note.
Provision for Income Taxes
We recorded $14,000 of income tax expense for the fiscal year ended June 30, 2013 compared to income tax expense of $55,000 for the fiscal year ended June 30, 2012. The decrease in income tax expense of $41,000 is mainly the result of adjustments to the deferred tax liability resulting from the amortization of goodwill for tax purposes created in the Prostiva acquisition in the current fiscal year, partially offset by state taxes.
The Company utilizes the asset and liability method of accounting for income taxes. The Company recognizes deferred tax liabilities or assets for the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities. We have recorded and continue to carry a full valuation allowance against our gross deferred tax assets that will not reverse against deferred tax liabilities. We will continue to assess the assumptions used to determine the amount of our valuation allowance and may adjust the valuation allowance in future periods based on changes in assumptions of estimated future income and other factors.
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Fiscal Years Ended June 30, 2012 and 2011
Net Sales
Net sales increased 35 percent to $17.0 million in fiscal year 2012 from $12.6 million in fiscal year 2011. The increase in sales from fiscal year 2011 is due to the addition of Prostiva product sales after the completion of the acquisition on September 6, 2011.
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 fiscal year 2012 increased to $8.6 million, or 43 percent, from $6.0 million in fiscal year 2011. This increase in cost of goods sold is attributed to the increase in sales year over year, as well as an additional $268,000 of non-cash expenses, such as amortization and depreciation expense, related to the acquired Prostiva assets.
Gross profit as a percentage of sales decreased to 49 percent in fiscal year 2012 from 52 percent in the prior fiscal year. The three percentage point decrease in fiscal year 2012 as compared to fiscal year 2011 is primarily the result of the addition to the product mix of the lower margin Prostiva product line.
Sales and Marketing
Sales and marketing expenses in fiscal year 2012 increased $1.8 million, or 35 percent, to $7.0. million from $5.2 million in fiscal year 2011. The increase in sales and marketing expense is the result of a $1.3 million increase in wages and benefits, including commissions, as a result of the expansion of the sales force from the Prostiva acquisition. In addition, conventions and meetings increased by approximately $486,000 as a result of increased American Urological Association (AUA) meeting expenses and the expansion of our patient seminars program.
General & Administrative
General and administrative expense in fiscal year 2012 increased $585,000, or 21 percent, to $3.4 million from $2.8 million in fiscal year 2011. The increase in general and administrative expense is mainly a result of an increase in legal and audit fees of $206,000 as a result of one-time expenses related to the Prostiva transaction, as well as non-cash accretion expense on the contingent deferred acquisition payments of $161,000, and a $88,000 increase in investor relations as a result of hiring an investment relations firm.
Research and Development
Research and development expenses, which include expenditures for product development, regulatory compliance and clinical studies, remained relatively consistent at $2.2 million for fiscal year 2012, decreasing slightly 2 percent from fiscal year 2011. The decrease in research and development is due to a decrease in product testing and project materials of $112,000 as well as a decrease in recruiting fees of $37,000, partially offset by an increase in consulting and professional fees of $95,000.
Amortization of Identifiable Intangible Assets
Amortization of identifiable intangible assets was approximately $90,000 in fiscal years 2012 compared to $24,000 in fiscal year 2011. The increase in the amortization expense of $66,000 is a result of the amortization on the newly acquired intangible assets resulting from the Prostiva acquisition. The prior year amortization expense relates to the amortization of our remaining customer base intangible asset from the EDAP acquisition.
Net Interest Income/(Expense)
Net interest expense of approximately $482,000 for the fiscal year ended June 30, 2012, is due to non-cash interest accretion on the non-contingent 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 fiscal year ended June 30, 2011.
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Provision for Income Taxes
We recorded $55,000 of income tax expense for the fiscal year ended June 30, 2012 compared to income tax expense of $8,000 for the fiscal year ended June 30, 2011. The increase in income tax expense of $47,000 is mainly the result of recording a deferred tax liability resulting from the amortization of goodwill for tax purposes created in the Prostiva acquisition. The deferred tax liability related to the goodwill which is considered an indefinite lived intangible asset cannot be offset against deferred tax assets with finite lives. The $8,000 of income tax for the fiscal year ended June 30, 2011 was the result of recording $11,000 of state income tax expense partially offset by a small federal tax benefit of $3,000.
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 products and, beginning September 6, 2011, sales of the Prostiva RF Therapy System product. As of June 30, 2013, we had cash of $2.3 million compared to cash of $1.9 million as of June 30, 2012. The increase in cash of $391,000 is the result of the use of approximately $3.4 million of net cash for operating and investing activities, partially offset by the completion of a secondary offering in the first quarter of fiscal 2013 which contributed approximately $3.8 million of net proceeds.
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, with the remaining $500,000 payable on September 6, 2012. On June 28, 2013, we entered into a Restructuring Agreement with Medtronic related to the $7.5 million in obligations we owed to Medtronic under the Transaction Documents. As part of this agreement we paid Medtronic $2.0 million in satisfaction of royalties earned for the 12 months ended September 6, 2012, the second half of the initial licensing fee, the license maintenance fee for the 12 month period ended September 6, 2012, for outstanding transition services fees, and for Prostiva inventory included as part of the acquisition and purchased subsequent to the acquisition. In addition, we entered into a promissory note (the “Note”) with Medtronic for $5.3 million for the remaining amounts owed on Prostiva inventory acquired as part of the acquisition and purchased subsequent to the acquisition. Interest on the Note will accrue at a rate of 6 percent, compounded annually and is payable in five equal installments of principal plus accrued interest on March 31st of each year beginning on March 31, 2015. The $206,000 difference between the $7.5 million in obligations owed to Medtronic and the $2.0 million paid and the $5.3 million Note was recorded as a gain on debt extinguishment.
During the first quarter of fiscal year 2013 the Company completed a follow-on offering which contributed approximately $3.8 million of net proceeds. However, as a result of the Company’s history of operating losses and negative cash flows from operations, and the need for additional working capital to support future operations, there is substantial doubt about our ability to continue as a going concern. The Company’s cash and cash equivalents may not be sufficient to sustain day-to-day operations for the next 12 months. The Company’s ability to continue as a going concern is dependent upon our ability to generate positive cash flows from our business, maintain available borrowing under our line of credit with Silicon Valley Bank entered into on January 11, 2012, as amended on November 30, 2012, and aggressively manage our expenses, including those associated with our acquisition of the Prostiva product line from Medtronic. The line of credit with Silicon Valley Bank allows borrowing by the Company of up to the lesser of $2.0 million or the defined borrowing base consisting of 80% of eligible accounts receivable. As of June 30, 2013, the Company has not borrowed against this facility.
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As part of our efforts to align our expenses with our revenue, management adopted a cost reduction plan which calls for cuts in planned spending and expense in nearly all departments. There is no assurance that our cash, cash generated from operations, if any, and available borrowing under our agreement with Silicon Valley Bank will be sufficient to fund our anticipated capital needs, operating expenses, and Note repayments, particularly if product sales do not generate revenues in the amounts currently anticipated, if our operating costs are greater than anticipated or greater than our business can support, or if our cost reduction plan is not effective.
The Company may seek to improve its liquidity position by raising capital through additional indebtedness or an offering of our equity securities or both. If the Company is unable to generate sufficient liquidity to meet its needs and in a timely manner, the Company may be required to further reduce expenses and curtail capital expenditures, sell assets, or suspend or discontinue operations.
The fiscal year 2013 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.
Cash Provided by Operating Activities
During fiscal year 2013, we used $2.0 million of cash from operating activities compared to $713,000 in fiscal year 2012. The net loss of $4.3 million included non-cash charges of $674,000 from depreciation and amortization expense, $434,000 of impairment of long-lived assets, $257,000 from stock-based compensation expense and $544,000 of accreted interest expense, which was partially offset by a $447,000 gain as a result of a fair value adjustment to deferred acquisition payments and a $206,000 gain on debt extinguishment. Changes in operating items resulted in the generation of $1.1 million of operating cash flow for the period as a result of higher accounts payable of $1.8 million, partially offset by higher inventory balances of $626,000 and lower accrued expenses and deferred income of $227,000. The increase in accounts payable is the result of additional purchases of Prostiva product during the period. As of June 30, 2013, $4.3 million of accounts payable related to Prostiva inventory purchases were included in the $5.3 million promissory note to Medtronic and shown as long-term debt on the balance sheet as a result of the Restructuring Agreement with Medtronic. The increase in inventory is a result of increased finished goods mainly related to purchases of Prostiva generators. The decrease in accrued expenses and deferred income is the result of a decrease in miscellaneous accruals mainly related to a decrease in the sales tax accrual as a result of a favorable outcome of a sales tax audit.
Cash Used for Investing Activities
We used $1.5 million for investing activities of which $1.4 million relates to payment of liabilities related to the Prostiva RF Therapy System acquisition. The remaining $111,000 of investing activities relates to the purchase of property and equipment to support our business operations and investments in intellectual property. See Note 4 to the Condensed Financial Statements for further details on the Prostiva acquisition.
Cash Provided by Financing Activities
We generated $3.8 million of cash from financing activities. During the first quarter of fiscal year 2013 we sold 5,980,000 shares of common stock at a price of $0.75 per share, resulting in net proceeds of $3.8 million, after deducting underwriting discounts and commissions and other expenses payable by the Company. In addition, we generated $15,000 of proceeds from stock option exercises.
Contractual Commitments
We plan to continue offering customers a variety of programs for both evaluation and longer-term use of our Cooled ThermoTherapy system control units and Prostiva RF Therapy System generators and scopes in addition to purchase options. We also will continue to provide physicians and patients with efficient access to our Cooled ThermoTherapy system control units and Prostiva RF Therapy System generators and scopes on a pre-scheduled basis through our mobile service. As of June 30, 2013, our property and equipment, net, included approximately $462,000 of control units, generators and scopes used in evaluation or longer-term use programs and units used in our Company-owned mobile service. Depending on the growth of these programs, we may use additional capital to finance these programs.
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Future contractual commitments that will affect cash flows are as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | |
Building and equipment leases | | $ | 224 | | $ | 225 | | $ | 228 | | $ | 31 | | $ | 5 | |
Prostiva Payments
Prostiva payments are commitments related to the acquisition of the Prostiva RF Therapy product line from Medtronic on September 6, 2011 (see Footnote 4 for more details). Royalty obligations represent royalties, including minimum royalty obligations, based on management’s estimates of future revenues to be generated through sales of Prostiva products. Actual revenues generated through sales of Prostiva product and actual royalty payments may differ from these estimates. In addition, on June 28, 2013, we entered into a promissory note (the “Note”) with Medtronic for $5.3 million for the remaining amounts owed on Prostiva inventory acquired as part of the acquisition and purchased subsequent to the acquisition. Interest on the Note will accrue at a rate of 6 percent, compounded annually and is payable in five equal installments of principal plus accrued interest on March 31st of each year beginning on March 31, 2015 (see Footnote 12 for more details).
| | | | | | | | | | | | | | | | |
| | Fiscal Years | |
| | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | |
Prostiva Payments | | | | | | | | | | | | | | | | |
Annual license maintenance fee | | $ | 65 | | $ | 65 | | $ | 65 | | $ | 65 | | $ | 65 | |
Royalty obligations | | | 650 | | | 650 | | | 650 | | | 672 | | | 797 | |
Note payments, including interest | | | - | | | 1,342 | | | 1,342 | | | 1,342 | | | 1,342 | |
Total contractual Prostiva payments | | $ | 715 | | $ | 2,057 | | $ | 2,057 | | $ | 2,079 | | $ | 2,204 | |
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 2 to the Financial Statements included in this Annual Report on Form 10-K.
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our financial instruments include cash and as a result 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. Therefore, we do not have significant overall currency exposure. 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.
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
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Management’s Report on Internal Control over Financial Reporting
The Board of Directors and Shareholders
Urologix, Inc.:
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a15-(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that:
| | |
| (i) | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
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| (ii) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
| | |
| (iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision of our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment and those criteria, management concluded that the Company maintained effective internal control over financial reporting as of June 30, 2013.
* * *
This Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm, Baker Tilly Virchow Krause, LLP regarding internal controls over financial reporting. Management’s report was not subject to attestation by Baker Tilly Virchow Krause, LLP pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K.
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Report of Independent Registered Public Accounting Firm
To the Shareholders, Audit Committee and Board of Directors
Urologix, Inc.
We have audited the accompanying balance sheet of Urologix, Inc. as of June 30, 2013, and the related statements of operations, shareholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Urologix, Inc. as of June 30, 2013 and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the company will continue as a going concern. As discussed in Note 3 to the financial statements, the company has suffered recurring operating losses and negative cash flows from operations, and needs additional working capital to support future operations. These factors raise substantial doubt about its ability to continue as a going concern. Managements plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Baker Tilly Virchow Krause, LLP
Minneapolis, Minnesota
September 20, 2013
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Urologix, Inc.:
We have audited the accompanying balance sheet of Urologix, Inc. (the Company) as of June 30, 2012, and the related statements of operations, shareholders’ equity, and cash flows for each of the years in the two-year period ended June 30, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Urologix, Inc. as of June 30, 2012, and the results of its operations and its cash flows for each of the years in the two-year period ended June 30, 2012, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses from operations and negative operating cash flows and has significant current obligations related to the Prostiva acquisition that raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| |
| /s/ KPMG LLP |
| |
Minneapolis, Minnesota | |
September 21, 2012 | |
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Urologix, Inc.
Balance Sheet
(In thousands)
| | | | | | | |
| | June 30, | |
| | 2013 | | 2012 | |
ASSETS | | | | | | | |
Current Assets: | | | | | | | |
Cash | | $ | 2,290 | | $ | 1,899 | |
Accounts receivable, net of allowance of $79 and $83, respectively | | | 2,132 | | | 2,132 | |
Inventories | | | 1,952 | | | 1,448 | |
Prepaids and other current assets | | | 128 | | | 290 | |
Total current assets | | | 6,502 | | | 5,769 | |
Property and equipment: | | | | | | | |
Property and equipment | | | 12,165 | | | 12,006 | |
Less accumulated depreciation | | | (11,430 | ) | | (11,144 | ) |
Property and equipment, net | | | 735 | | | 862 | |
Other intangible assets, net | | | 1,587 | | | 2,262 | |
Goodwill | | | 3,036 | | | 3,115 | |
Long-term inventories | | | 662 | | | 663 | |
Other assets | | | 5 | | | 5 | |
Total assets | | $ | 12,527 | | $ | 12,676 | |
| | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | | $ | 628 | | $ | 3,376 | |
Accrued compensation | | | 721 | | | 732 | |
Deferred income | | | 5 | | | 7 | |
Short-term deferred acquisition payment | | | 681 | | | 2,395 | |
Other accrued expenses | | | 602 | | | 779 | |
Total current liabilities | | | 2,637 | | | 7,289 | |
| | | | | | | |
Deferred tax liability | | | 36 | | | 35 | |
Long-term deferred acquisition payment | | | 4,026 | | | 4,613 | |
Long-term debt | | | 5,333 | | | - | |
Other accrued expenses | | | 75 | | | 113 | |
Total liabilities | | | 12,107 | | | 12,050 | |
Commitments and Contingencies (Note 13) | | | | | | | |
SHAREHOLDERS’ EQUITY: | | | | | | | |
Common stock, $.01 par value, 25,000 shares authorized; 20,909 and 14,803 shares issued; and 20,795 and 14,719 shares outstanding | | | 208 | | | 147 | |
Additional paid-in capital | | | 119,230 | | | 115,205 | |
Accumulated deficit | | | (119,018 | ) | | (114,726 | ) |
Total shareholders’ equity | | | 420 | | | 626 | |
Total liabilities and shareholders’ equity | | $ | 12,527 | | $ | 12,676 | |
The accompanying notes to financial statements are an integral part of these statements.
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Urologix, Inc.
Statements of Operations
(In thousands, except per share data)
| | | | | | | | | | | | |
| | For the Years Ended June 30 | |
| | 2013 | | | 2012 | | | 2011 | |
SALES | | $ | 16,590 | | | $ | 17,027 | | | $ | 12,571 | |
COST OF GOODS SOLD | | | 8,407 | | | | 8,645 | | | | 6,030 | |
Gross profit | | | 8,183 | | | | 8,382 | | | | 6,541 | |
| | | | | | | | | | | | |
COSTS AND EXPENSES | | | | | | | | | | | | |
Sales and marketing | | | 7,719 | | | | 7,027 | | | | 5,197 | |
General and administrative | | | 2,515 | | | | 3,393 | | | | 2,808 | |
Research and development | | | 2,269 | | | | 2,189 | | | | 2,238 | |
Change in value of acquisition consideration | | | (447 | ) | | | (172 | ) | | | - | |
Gain on demutualization | | | (321 | ) | | | - | | | | - | |
Medical device tax | | | 106 | | | | - | | | | - | |
Amortization of identifiable intangible assets | | | 104 | | | | 90 | | | | 24 | |
Impairment of identifiable intangible assets | | | 160 | | | | - | | | | - | |
Total costs and expenses | | | 12,105 | | | | 12,527 | | | | 10,267 | |
OPERATING LOSS | | | (3,922 | ) | | | (4,145 | ) | | | (3,726 | ) |
| | | | | | | | | | | | |
INTEREST INCOME/(EXPENSE) | | | (555 | ) | | | (482 | ) | | | 1 | |
GAIN ON DEBT EXTINGUISHMENT | | | 206 | | | | | | | | | |
FOREIGN CURRENCY EXCHANGE LOSS | | | (7 | ) | | | (13 | ) | | | - | |
LOSS BEFORE INCOME TAXES | | | (4,278 | ) | | | (4,640 | ) | | | (3,725 | ) |
INCOME TAX EXPENSE | | | 14 | | | | 55 | | | | 8 | |
NET LOSS | | $ | (4,292 | ) | | $ | (4,695 | ) | | $ | (3,733 | ) |
| | | | | | | | | | | | |
NET LOSS PER COMMON SHARE - BASIC | | $ | (0.21 | ) | | $ | (0.32 | ) | | $ | (0.26 | ) |
| | | | | | | | | | | | |
NET LOSS PER COMMON SHARE - DILUTED | | $ | (0.21 | ) | | $ | (0.32 | ) | | $ | (0.26 | ) |
| | | | | | | | | | | | |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC | | | 20,703 | | | | 14,741 | | | | 14,556 | |
| | | | | | | | | | | | |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED | | | 20,703 | | | | 14,741 | | | | 14,556 | |
The accompanying notes to financial statements are an integral part of these statements.
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Urologix, Inc.
Statements of Shareholders’ Equity
(In thousands)
| | | | | | | | | | | | | | | | |
| | | | | | | | Additional
Paid-In
Capital | | Accumulated
Deficit | | Total
Shareholders’
Equity | |
| | Common Stock | | | | |
| | Shares | | Amount | | | | |
Balance, June 30, 2010 | | | 14,447 | | $ | 144 | | $ | 114,360 | | $ | (106,298 | ) | $ | 8,206 | |
Net loss | | | - | | | - | | | - | | | (3,733 | ) | | (3,733 | ) |
Stock options exercised | | | 6 | | | - | | | 4 | | | - | | | 4 | |
Vesting of restricted stock | | | 47 | | | 1 | | | (1 | ) | | - | | | - | |
Stock-based compensation | | | - | | | - | | | 369 | | | - | | | 369 | |
Balance, June 30, 2011 | | | 14,500 | | $ | 145 | | $ | 114,732 | | $ | (110,031 | ) | $ | 4,846 | |
Net loss | | | - | | | - | | | - | | | (4,695 | ) | | (4,695 | ) |
Stock options exercised | | | 104 | | | 1 | | | 115 | | | - | | | 116 | |
Vesting of restricted stock | | | 115 | | | 1 | | | (1 | ) | | - | | | - | |
Stock-based compensation | | | - | | | - | | | 359 | | | - | | | 359 | |
Balance, June 30, 2012 | | | 14,719 | | $ | 147 | | $ | 115,205 | | $ | (114,726 | ) | $ | 626 | |
Net loss | | | - | | | - | | | - | | | (4,292 | ) | | (4,292 | ) |
Stock options exercised | | | 20 | | | - | | | 15 | | | - | | | 15 | |
Vesting of restricted stock | | | 76 | | | 1 | | | (1 | ) | | - | | | - | |
Stock-based compensation | | | - | | | - | | | 257 | | | - | | | 257 | |
Issuance of common stock | | | 5,980 | | | 60 | | | 3,754 | | | - | | | 3,814 | |
Balance, June 30, 2013 | | | 20,795 | | $ | 208 | | $ | 119,230 | | $ | (119,018 | ) | $ | 420 | |
The accompanying notes to financial statements are an integral part of these statements
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Urologix, Inc.
Statements of Cash Flows
(In thousands)
| | | | | | | | | | |
| | For the Years Ended June 30 | |
| | 2013 | | 2012 | | 2011 | |
| | | | | | | | | | |
OPERATING ACTIVITIES | | | | | | | | | | |
Net loss | | $ | (4,292 | ) | $ | (4,695 | ) | $ | (3,733 | ) |
Adjustments to reconcile net loss to net cash used for operating activities: | | | | | | | | | | |
Depreciation and amortization | | | 674 | | | 695 | | | 565 | |
Impairment of long-lived assets | | | 434 | | | - | | | - | |
Employee stock-based compensation expense | | | 257 | | | 359 | | | 369 | |
Provision for bad debts | | | (23 | ) | | (34 | ) | | (46 | ) |
Loss on disposal of assets | | | 7 | | | 15 | | | 12 | |
Accretion expense on deferred acquisition payments | | | 544 | | | 644 | | | - | |
Net adjustment to acquisition consideration | | | (447 | ) | | (172 | ) | | - | |
Gain on debt extinguishment | | | (206 | ) | | - | | | - | |
Deferred income taxes | | | 1 | | | 35 | | | - | |
Change in operating assets and liabilities: | | | | | | | | | | |
Accounts receivable | | | 23 | | | (740 | ) | | 66 | |
Inventories | | | (626 | ) | | 131 | | | 243 | |
Prepaids and other assets | | | 162 | | | (41 | ) | | 234 | |
Accounts payable | | | 1,760 | | | 2,635 | | | 307 | |
Accrued expenses and deferred income | | | (227 | ) | | 455 | | | (387 | ) |
Net cash used for operating activities | | | (1,959 | ) | | (713 | ) | | (2,370 | ) |
| | | | | | | | | | |
INVESTING ACTIVITIES | | | | | | | | | | |
Purchase of property and equipment | | | (79 | ) | | (57 | ) | | (272 | ) |
Acquisition of business | | | (1,368 | ) | | (500 | ) | | - | |
Other | | | (32 | ) | | (8 | ) | | (3 | ) |
Net cash used for investing activities | | | (1,479 | ) | | (565 | ) | | (275 | ) |
| | | | | | | | | | |
FINANCING ACTIVITIES | | | | | | | | | | |
Proceeds from stock option exercises | | | 15 | | | 116 | | | 4 | |
Issuance of common stock | | | 3,814 | | | - | | | - | |
Net cash provided by financing activities | | | 3,829 | | | 116 | | | 4 | |
| | | | | | | | | | |
NET INCREASE/(DECREASE) IN CASH | | | 391 | | | (1,162 | ) | | (2,641 | ) |
| | | | | | | | | | |
CASH | | | | | | | | | | |
Beginning of period | | | 1,899 | | | 3,061 | | | 5,702 | |
End of year | | $ | 2,290 | | $ | 1,899 | | $ | 3,061 | |
| | | | | | | | | | |
Supplemental cash-flow information | | | | | | | | | | |
Income taxes paid during the period | | $ | 17 | | $ | 12 | | $ | 17 | |
Net carrying amount of inventory transferred to property and equipment | | $ | 202 | | $ | 293 | | $ | 128 | |
Non-cash consideration for acquisition | | $ | - | | $ | 6,532 | | $ | - | |
Deferred acquisition payment and accounts payable transferred to long-term debt | | $ | 5,333 | | $ | - | | $ | - | |
The accompanying notes to financial statements are an integral part of these statements.
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UROLOGIX, INC.
Notes to Financial Statements
Description of Operating Activities
Urologix, Inc. (the “Company,” “Urologix,” “we”) consists of one reportable segment. Urologix is based in Minneapolis and develops, manufactures and markets minimally invasive medical products for the treatment of obstruction and symptoms due to Benign Prostatic Hyperplasia (BPH). Urologix’ Cooled ThermoTherapy™ produces targeted microwave energy combined with a unique cooling mechanism to protect healthy tissue and enhance patient comfort. The Cooled ThermoTherapy™ product line includes the CoolWave® and Targis® Control Units and the CTC Advance® catheter. The Prostiva® RF Therapy System owned by Medtronic, Inc. but distributed by Urologix, delivers radio frequency energy directly into the prostate destroying prostate tissue, reducing constriction of the urethra, and thereby relieving BPH voiding symptoms. Both of these products provide safe, effective and lasting relief of the symptoms and obstruction due to BPH.
| |
2. | Significant Accounting Policies |
Revenue Recognition
We recognize revenue from the sale of Cooled ThermoTherapy control units upon delivery to the customer, which include urologists, urology practices, mobile units, clinics and hospitals. We recognize revenue from the sale of Prostiva generators upon shipment to the customer. Revenue is recognized in accordance with generally accepted accounting principles as outlined in Accounting Standards Codification (“ASC”) 605-10-S99,Revenue Recognition, which requires that four basic criteria be met before revenue can be recognized: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) product delivery has occurred or services have been rendered. The Company recognizes revenue as products are shipped based on FOB shipping point terms when title passes to customers. In addition to our sales of Cooled ThermoTherapy control units and Prostiva generators, we place our control units and generators with customers free of charge under a variety of programs for both evaluation and long-term use, and also provide access to Cooled ThermoTherapy and Prostiva RF Therapy treatments via our Urologix mobile service. We retain title to the control units and generators placed with our customers for evaluation and longer-term use. These programs, as well as our Urologix mobile service, are designed to expand access to our technology, and thus expand the market for our single-use treatment catheters and Prostiva handpieces. The free use of our Cooled ThermoTherapy control units and Prostiva generators are bundled with the sale of single-use treatment catheters or Prostiva handpieces and scopes, respectively, and are considered a single unit of accounting. Revenue from the bundled sales is recognized when the single-use treatment catheters or handpieces and scopes are shipped to our customers. Revenue from our mobile service is recognized upon treatment of the patient. Revenue for extended warranty service contracts is deferred and recognized over the contract period on a straight-line basis. We record a provision for estimated sales returns on product sales in the same period as the related revenue is recorded. The provision for estimated sales returns is based on historical sales returns, analysis of credit memo data and specific customer-based circumstances. Should actual sales returns differ from our estimates, revisions to the sales return reserve would be required. Sales and use taxes are reported on a net basis, excluding them from revenue.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We consider factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay when determining the adequacy of the allowance. Invoices are generally due 30 days after presentation. Accounts receivable over 30 days are considered past due. Accounts receivable are written-off after management determines they are uncollectible.
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UROLOGIX, INC.
Notes to Financial Statements
Bad debt and sales returns provisions and accounts receivable write-offs for the years ended June 30, 2013, 2012 and 2011 were as follows (in thousands):
| | | | | | | | | | | | | |
Years Ended | | | Beginning
Balance | | | Provisions | | | Write-offs | | | Ending
Balance | |
| | | | | | | | | | | | | |
June 30, 2013 | | | $83 | | | $38 | | | $ (42) | | | $79 | |
| | | | | | | | | | | | | |
June 30, 2012 | | | 50 | | | 115 | | | (82) | | | 83 | |
| | | | | | | | | | | | | |
June 30, 2011 | | | 96 | | | (10) | | | (36) | | | 50 | |
Inventories
Inventories are stated at the lower of cost or market on a first-in, first-out (FIFO) basis and consist of (in thousands):
| | | | | | | |
| | June 30, 2013 | | June 30, 2012 | |
| | | | | | | |
Raw materials | | $ | 734 | | $ | 555 | |
Work-in-process | | | 112 | | | 164 | |
Finished goods | | | 1,768 | | | 1,392 | |
Total inventories | | $ | 2,614 | | $ | 2,111 | |
The June 30, 2013 finished goods inventory balance includes the inventory acquired as a result of the September 6, 2011 Prostiva acquisition, of which approximately $645,000 remained at June 30, 2013. In addition, as of June 30, 2013 and 2012, $662,000 and $663,000, respectively, of the above finished goods balance represents long-term inventories that the Company does not expect to sell within the next 12 months, however, they are not considered excess or obsolete.
Valuation of Long-Lived Assets and Goodwill
We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset or asset group is considered impaired if its carrying amount exceeds the undiscounted future net cash flows the asset or asset group is expected to generate. If an asset or asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. If estimated fair value is less than the book value, the asset is written down to the estimated fair value and an impairment loss is recognized.
Goodwill is tested for impairment annually on April 30th or more frequently if changes in circumstance or the occurrence of events suggests an impairment may exist. To determine if there is goodwill impairment, the fair value of the reporting unit is compared to its carrying amount. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill is less than the carrying value of the goodwill. The test for impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows.
Considerable management judgment is necessary in estimating future cash flows and other factors affecting the valuation of long-lived assets and goodwill, including the operating and macroeconomic factors that may affect them. We use historical financial information, internal plans and projections and industry information in making such estimates.
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UROLOGIX, INC.
Notes to Financial Statements
As a result of the delisting of our common stock from the NASDAQ exchange on June 7, 2013 and the continued decline of our stock price, we tested our long-lived assets and goodwill for impairment as of June 30, 2013. Based on this impairment testing it was determined that our intangible assets acquired as part of the Prostiva acquisition were impaired. As a result, we recorded an impairment charge of $274,000 on our developed technology asset which was recorded in cost of goods sold, a $95,000 impairment charge on our customer base asset and a $65,000 impairment charge on trademarks both of which were recorded in operating expense. There was no impairment of goodwill as it was determined that the fair value of the reporting unit exceeded its carrying amount as of June 30, 2013. See Footnote 11 for a description of our intangible assets and the impairment charges recorded as of June 30, 2013.
Property and Equipment
Property and equipment are stated at cost. Company owned Cooled ThermoTherapy control units and Prostiva RF Therapy generators located at customer sites for evaluation and long-term use programs are transferred from inventory and classified as property and equipment that are valued at cost to manufacture and depreciated on a straight-line basis over a useful life of four years. Improvements that extend the useful lives of property and equipment are capitalized at cost and depreciated over their remaining useful lives. Repairs and maintenance are charged to expense as incurred. Depreciation is calculated using the straight-line method based upon estimated useful lives of three to seven years for machinery, equipment, furniture and vehicles. Leasehold improvements are amortized over the shorter of the useful life of the assets or term of the lease.
Property and equipment, net consisted of the following (in thousands):
| | | | | | | |
| | June 30, 2013 | | June 30, 2012 | |
| | | | | | | |
Leasehold improvements, equipment, furniture and vehicles | | $ | 241 | | $ | 284 | |
Computer equipment | | | 32 | | | 25 | |
Control units, generators and scopes | | | 462 | | | 553 | |
Total property and equipment, net | | $ | 735 | | $ | 862 | |
Depreciation expense for the years ended June 30, 2013, 2012 and 2011 was $401,000, $462,000 and $541,000, respectively.
Contingent Consideration
Contingent consideration was recorded on the balance sheet at the acquisition date fair value based on the consideration expected to be transferred, discounted back to present value. The discount rate used is determined at the time of measurement in accordance with accepted valuation methods. The fair value of the contingent consideration is remeasured at the estimated fair value at each reporting period with the change in fair value recognized as income or expense in operating income. Any changes in fair value will impact earnings in such reporting period until the contingencies are resolved.
Leases and Deferred Rent
We lease all of our office space. We evaluate and classify all of our leases as operating or capital leases for financial reporting purposes. As of June 30, 2013, all of our leases were accounted for as operating leases. For leases that contain rent escalations, we record the total rent payable during the lease term, as determined above, on a straight-line basis over the term of the lease and record the difference between the rents paid and the straight-line rent as a deferred rent. Any lease incentives we receive for items such as leasehold improvements, we record a deferred credit for the amount of the lease incentive and amortize it over the lease term, which may or may not equal the amortization period of the leasehold improvements.
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UROLOGIX, INC.
Notes to Financial Statements
Warranty Costs
Certain of our products, including the newly acquired Prostiva products, are covered by warranties against defects in material and workmanship for periods of up to 24 months. We record a liability for warranty claims at the time of sale. The amount of the liability is based on the trend in the historical ratio of product failure rates, material usage and service delivery costs to sales, the historical length of time between the sale and resulting warranty claim and other factors.
Warranty provisions and claims for the years ended June 30, 2013, 2012 and 2011 were as follows (in thousands):
| | | | | | | | | | | | | |
Years Ended | | | Beginning
Balance | | | Warranty
Provisions | | | Warranty
Claims | | | Ending
Balance | |
| | | | | | | | | | | | | |
June 30, 2013 | | | $47 | | | $63 | | | $ (52) | | | $58 | |
| | | | | | | | | | | | | |
June 30, 2012 | | | 10 | | | 98 | | | (61) | | | 47 | |
| | | | | | | | | | | | | |
June 30, 2011 | | | 13 | | | 40 | | | (43) | | | 10 | |
Income Taxes
We utilize the asset and liability method of accounting for income taxes. We recognize deferred tax liabilities or assets for the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities. We regularly assess the likelihood that our deferred tax assets will be recovered from future taxable income. We consider projected future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance necessary to offset our deferred tax assets that will not be recoverable. We have recorded and continue to carry a full valuation allowance against our gross deferred tax assets that will not reverse against deferred tax liabilities within the scheduled reversal period. If we determine in the future that it is more likely than not that we will realize all or a portion of our deferred tax assets, we will adjust our valuation allowance in the period we make the determination. We expect to provide a full valuation allowance on our future tax benefits until we can sustain a level of profitability that demonstrates our ability to realize these assets. At June 30, 2013, we carried a valuation allowance of $30.2 million against our net deferred tax assets.
Stock-Based Compensation
The Company uses the fair value recognition provisions of the revised authoritative guidance for equity-based compensation and applies the modified prospective method in determining stock compensation expense. Stock compensation expense is based on the fair value of the award at the date of grant and is recognized over the requisite service period which corresponds to the vesting period. Options typically vest 25 percent after the first year of service with the remaining vesting 1/36th each month thereafter. Generally, options granted to non-employee directors are immediately exercisable at the date of grant while restricted stock awards generally vest after one year. Options are priced based on the closing price of a share of our common stock at the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. To determine the inputs for the Black-Scholes option pricing model, we use historical data to estimate expected volatility and the period of time that option grants are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The range of these assumptions and the range of option pricing and number of options granted at the different grant dates will impact our calculation of the fair value of the awards and will therefore impact the amount of expense reflected in our statement of operations for any given period. The Company also grants restricted stock awards which typically vest over a period of one year to four years. Fair value for restricted stock is based on the market price on the day of grant. See Note 6 for additional discussion.
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UROLOGIX, INC.
Notes to Financial Statements
Net Loss Per Common Share
Basic loss per share was computed by dividing the net loss by the weighted average number of shares of common stock and participating securities outstanding during the periods presented. Diluted net loss per share was computed by dividing the net loss by the weighted average number of shares of common stock outstanding plus all potentially dilutive common shares that result from stock options. The number of shares used in earnings per share computations is as follows (in thousands):
| | | | | | | | | | |
| | For the years ended June 30, | |
| | 2013 | | 2012 | | 2011 | |
Weighted average common shares outstanding - basic | | | 20,703 | | | 14,741 | | | 14,556 | |
Dilutive effect of stock options | | | - | | | - | | | - | |
Weighted average common shares outstanding - diluted | | | 20,703 | | | 14,741 | | | 14,556 | |
The dilutive effect of stock options in the above table excludes 1.7 million, 1.2 million, and 1.9 million of underlying options for which the exercise price was higher than the average market price for the years ended June 30, 2013, 2012 and 2011, respectively. In addition, dilutive potential common shares of 1,061 shares, 26,653 shares and 918 shares, where the exercise price was lower than the average market price, were excluded from diluted weighted average common shares outstanding for the year ended June 30, 2013, 2012 and 2011, respectively as they would be anti-dilutive due to our net loss for those years.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Shipping and Handling Costs
The Company includes shipping and handling revenues in sales and shipping and handling costs in cost of goods sold.
Concentration of Cash
The Company deposits its cash in what management believes are high credit quality financial institutions. The balance, at times, may exceed federally insured limits.
Financial Instruments
The carrying amounts of our accounts receivable and accounts payable approximate fair value due to their short-term nature.
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UROLOGIX, INC.
Notes to Financial Statements
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates and assumptions are based on management’s best estimates and judgments. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors that management believes to be reasonable under the circumstances, including the current economic environment. The Company adjusts such estimates and assumptions when facts and circumstances dictate. These include, among others, the continued difficult economic conditions, tight credit markets, Medicare reimbursement rate uncertainty, and a decline in consumer spending and confidence, all of which have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual amounts could differ significantly from those estimated at the time the financial statements are prepared. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
Recently Issued Accounting Standards
In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-08 “Testing Goodwill for Impairment” (ASU 2011-08), which amends ASC 350 “Intangibles – Goodwill and Other.” This update permits entities to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the two-step impairment test for that reporting unit. This update is effective for fiscal years beginning after December 15, 2011. The adoption of this statement did not have an impact on our financial position or results of operations.
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurements (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”, which is effective for annual reporting periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. The adoption of this statement did not have an impact on our financial position or results of operations.
In July 2012, the FASB issued ASU 2012-02 “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment”. This update permits entities to make a qualitative assessment to determine whether it is necessary to perform the quantitative impairment test for an indefinite-lived intangible asset if it is more likely than not that the asset is impaired. This update is effective for interim and annual impairment tests performed for fiscal years beginning after September 15, 2012. We do not anticipate the adoption of this statement to have an impact on our financial position or results of operations.
At June 30, 2013, the Company had cash and cash equivalents of $2,290,000. The Company incurred net losses of $4,292,000 in fiscal year 2013 and $4,695,000 and $3,733,000 in the fiscal years ended 2012 and 2011, respectively. In addition, the Company has accumulated aggregate net losses from the inception of business through June 30, 2013 of $119.0 million.
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, with the remaining $500,000 payable on the one-year anniversary of this date, September 6, 2012. On June 28, 2013, we entered into a Restructuring Agreement with Medtronic related to the $7.5 million we owed to Medtronic under the Transaction Documents. As part of this agreement we paid Medtronic $2.0 million in satisfaction of royalties earned for the 12 months ended September 6, 2012, the second half of the initial licensing fee, the license maintenance fee for the 12 month period ended September 6, 2012, for outstanding transition services fees, and for Prostiva inventory included as part of the acquisition and purchased subsequent to the acquisition. In addition, we entered into a promissory note (the “Note”) with Medtronic for $5.3 million for the remaining amounts owed on Prostiva inventory acquired as part of the acquisition and purchased subsequent to the acquisition. Interest on the Note will accrue at a rate of 6 percent, compounded annually and is payable in five equal installments of principal plus accrued interest on March 31st of each year beginning on March 31, 2015. The $206,000 difference between the $7.5 million in obligations owed to Medtronic and the $2.0 million paid and the $5.3 million Note was recorded as a gain on debt extinguishment.
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UROLOGIX, INC.
Notes to Financial Statements
During the first quarter of fiscal 2013, the Company completed a follow-on offering in which we sold 5,980,000 shares of common stock at a price of $0.75 per share which contributed approximately $3.8 million of net proceeds after deducting underwriting discounts and commissions and other expenses payable by the Company. However, as a result of the Company’s history of operating losses and negative cash flows from operations, and the need for additional working capital to support future operations, there is substantial doubt about our ability to continue as a going concern. The Company’s cash may not be sufficient to sustain day-to-day operations for the next 12 months. The Company’s ability to continue as a going concern is dependent upon our ability to generate positive cash flows from our business, maintain available borrowing under our line of credit with Silicon Valley Bank entered into on January 11, 2012, as amended on November 30, 2012 and aggressively manage our expenses, including those associated with our acquisition of the Prostiva product line from Medtronic. The line of credit with Silicon Valley Bank allows borrowing by the Company of up to the lesser of $2.0 million or the defined borrowing base consisting of 80% of eligible accounts receivable. As of June 30, 2013 the Company has not borrowed against this facility.
There is no assurance that our cash, cash generated from operations, if any, and available borrowing under our agreement with Silicon Valley Bank will be sufficient to fund our anticipated capital needs, operating expenses, and Note repayments, particularly if product sales do not generate revenues in the amounts currently anticipated, if our operating costs are greater than anticipated or greater than our business can support.
The Company’s current plan to improve its cash and liquidity position is to generate expected revenues both from sales of our Cooled ThermoTherapy and Prostiva products which will help generate improved cash flow from our business. In addition, management adopted a cost reduction plan which calls for cuts in planned spending and expense in nearly all departments. The Company may also seek to improve its liquidity position by raising capital through additional indebtedness or an offering of its equity securities or both.
If the Company is unable to generate sufficient liquidity to meet its needs and in a timely manner, the Company may be required to further reduce expenses and curtail capital expenditures, sell assets, or suspend or discontinue operations. If the Company is unable to make the required payments to Medtronic with respect to the Prostiva acquisition or the Note, it would give Medtronic the right to terminate the Company’s rights to sell the Prostiva product.
The financial statements as of and for the year ended June 30, 2013 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.
| |
4. | Acquisition of Prostiva Radio Frequency Therapy |
On September 6, 2011, the Company entered into agreements with Medtronic, Inc. relating to the Prostiva® Radio Frequency (RF) Therapy System, a minimally invasive medical product for the treatment of BPH. As a result of those agreements, the Company obtained an exclusive, worldwide license to the Prostiva technology for a ten year term, with an option to purchase the technology anytime during the ten year term for a maximum purchase price of $10 million.
The above transaction was accounted for as a business combination. Under the terms of the agreements the Company will be responsible for the manufacturing, sourcing, operations, compliance, quality, regulatory and other matters of the Prostiva RF Therapy System. The Company entered into this transaction to increase its addressable patient population, customer base and sales force. As a result of this transaction, Urologix became the clear market leader for providing in-office treatment solutions for symptomatic or obstructive BPH with over 50 percent market share.
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UROLOGIX, INC.
Notes to Financial Statements
The Company hired independent valuation specialists to assist management with its determination of the fair value of the consideration to be paid as well as the fair value of the assets acquired in the acquisition of the Prostiva RF Therapy System. Management is responsible for the estimates and valuations. The work performed by the independent valuation specialists has been considered in management’s estimates of fair value reflected below.
The Company estimates that the fair value of the consideration to be paid to acquire the Prostiva business is approximately $7.0 million. Included in the total consideration is the licensing fee, of $1,000,000 of which $500,000 was paid on September 6, 2011, deferred payments for acquired inventory, and royalties on Prostiva products sold, subject to minimum and maximum amounts.
Approximately $5.1 million of the $7.0 million purchase price is unpaid as of June 30, 2013. The consideration is categorized as contingent or non-contingent. The non-contingent consideration consists of the $1.0 million licensing fee, as well as payments made and future cash payments for the consigned inventory and minimum royalty payments with an acquisition date fair value of $3.8 million. The estimated royalty payments between the minimum and maximum amounts are contingent consideration and are measured at fair value at the acquisition date by applying an appropriate discount rate that reflects the risk factors associated with the payment streams. The acquisition date fair value of the contingent consideration was $2.7 million. The contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved with the changes in fair value that do not relate to the initial recognition of the liability as of the acquisition date, recognized in earnings. For the year-ended June 30, 2013, we recognized a gain of $1.4 million from changes in the fair value of the contingent consideration, which was partially offset by an increase of $933,000 in the non-contingent consideration due to an increase in the projected time to reach the cumulative $10 million of royalty and license fees. The net effect is a gain of $447,000 recorded as a change in the value of acquisition consideration in the statement of operations. For the fiscal year ended June 30, 2012, we recognized a gain of $172,000 as a result of the change in the value of acquisition consideration in the statement of operations.
The Company assumed no liabilities in the acquisition. The fair values of the assets acquired by major class in the acquisition are as follows (in thousands):
| | | | |
Manufacturing Equipment | | $ | 128 | |
Finished Goods Inventory | | | 1,484 | |
Identifiable Intangible Assets | | | | |
Patents and Technology | | | 1,529 | |
Customer List | | | 531 | |
Trademarks | | | 325 | |
Goodwill | | | 3,036 | |
Total assets acquired | | $ | 7,033 | |
As a result of the delisting of our common stock from the NASDAQ exchange at the start of trading on June 7, 2013 and the continued decline of our stock price, we tested our long-lived assets and goodwill for impairment as of June 30, 2013. Based on this impairment testing it was determined that our intangible assets acquired as part of the Prostiva acquisition were impaired. As a result, we recorded an impairment charge of $274,000 on our developed technology asset which was recorded in cost of goods sold, a $95,000 impairment charge on our customer base asset and a $65,000 impairment charge on trademarks both of which were recorded in operating expense.
The goodwill of $3.0 million represents the value of the functional business already in place at the time of acquisition and the expected higher future revenue stream from the combined product lines as a result of expected synergies from the combined businesses. For tax purposes, the goodwill value at acquisition was $1.7 million. For tax purposes, the payments related to the acquisition of Prostiva RF Therapy System patent rights are treated as payment in respect of a license agreement and therefore tax deductible in the current year. The inventory and manufacturing equipment acquired is treated for tax purposes as an asset purchase and will be depreciated. The goodwill and other intangible assets are recorded for tax as an acquisition and are amortized and deductible over 15 years for tax purposes.
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The patents and technology intangible assets consist of patents and technology, many of which are used in the Prostiva RF Therapy System. Trademarks consist of the use of the Prostiva name in the BPH marketplace.
Total cumulative transaction expenses were $391,000 primarily related to legal and accounting fees. Of the $391,000 of transaction expenses, $103,000 were incurred in fiscal year 2011, and $288,000 were incurred in fiscal year 2012 and included in general and administrative expenses in those periods.
In addition to the above transaction payments, the Company is required to pay an annual licensing fee of $65,000 to Medtronic, as well as a monthly $30,000 transition services fee that began in October 2011 for transition services provided by Medtronic until the earlier of the end of the initial term of the Transition Agreement or the last of certain United States or European Union regulatory transfers. The $30,000 transition services fee ended in April, 2013. As these fees were for services being provided by Medtronic, they are not included in total consideration for the acquisition of the Prostiva RF Therapy System and were expensed in the period incurred and reported as part of research and development expenses.
The revenue and operating expenses related to the Prostiva business have been included in the Company’s results of operations since September 6, 2011, the date of acquisition. The acquired Prostiva business was not operated as a separate subsidiary, division or entity by Medtronic, Inc. As a result, the Company is unable to accurately determine earnings/(loss) for the Prostiva business on a standalone basis since the date of acquisition. Prostiva revenue included in reported Urologix revenue for the fiscal years ended June 30, 2013 and 2012 totaled approximately $5.8 and $5.4 million, respectively.
As previously mentioned, as the Prostiva business was not operated as a separate subsidiary, division or entity, Medtronic did not maintain separate financial statements for the Prostiva business. As a result, the following unaudited pro-forma financial information represents revenue and only direct expenses for the Prostiva business prior to the September 6, 2011 acquisition date. The below pro-forma financial information shows the revenue and net loss as if the acquisition of Prostiva had occurred on July 1st, the start of our fiscal year, and the Cooled ThermoTherapy and Prostiva business were combined for the fiscal year ended June 30, 2012(in thousands except per share amounts).
| | | | |
| | Fiscal Year Ended
June 30, 2012
(Unaudited) |
Pro forma net revenue | | $ | 18,283 | |
Pro forma net loss | | $ | (4,960 | ) |
Pro forma net loss per share (basic) | | $ | (0.34 | ) |
Pro forma net loss per share (diluted) | | $ | (0.34 | ) |
The above pro forma financial information excludes the non-recurring acquisition related expenses of $391,000. However, the pro forma financial information does include the amortization and depreciation expense from acquired Prostiva assets, the implied interest expense on deferred acquisition payments, and the expense related to the increase in the fair value of acquired Prostiva inventories as if they had occurred as of July 1, 2011. The pro forma financial information is not indicative of the results that would have actually been realized if the acquisitions had occurred as of the beginning of fiscal year 2012, or of results that may be realized in the future.
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| |
5. | Fair Value Measurements |
The Company follows the authoritative guidance on fair value measurements and disclosures with respect to assets and liabilities that are measured at fair value on both a recurring and non-recurring basis. Under this guidance, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The authoritative guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels defined as follows:
| | |
| • | Level 1 - Inputs are quoted prices in active markets for identical assets or liabilities. |
| | |
| • | Level 2 - Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. |
| | |
| • | Level 3 - Inputs are unobservable for the asset or liability. |
As part of the consideration for the Prostiva acquisition, (see Note 4), the estimated royalty payments between the minimum and maximum amounts are considered contingent consideration. The contingent consideration is measured at fair value at the acquisition date and is remeasured to fair value at each reporting date until the contingency is resolved using Level 3 inputs. The Level 3 inputs consist of the projected fiscal year of payments based on projected revenues and an estimated discount rate. The fair value is determined by applying an appropriate discount rate that reflects the risk factors associated with the payment streams. The changes in fair value that do not relate to the initial recognition of the liability as of the acquisition date are recognized in earnings. The Company estimates the fair value of the future contingent consideration at $1.5 million at June 30, 2013. The Company recognized a reduction in fair value of contingent consideration of $1.4 million during the fiscal year ended June 30, 2013. The decrease in fair value of contingent consideration was partially offset by an increase of $933,000 in non-contingent consideration due to an increase in the projected time to reach the cumulative $10 million of royalty and license fees, which increased the number of years subject to minimum royalty payments and reduced the projected royalty payments in excess of contractual minimums in earlier years. The following table provides a reconciliation of the beginning and ending balances of the contingent consideration liability:
| | | | |
(in thousands) | | Fiscal Year
2013 | |
Beginning Balance - Contingent Consideration Liability | | $ | 2,862 | |
Accretion expense | | | (11 | ) |
Change in fair value of contingent consideration | | | (1,380 | ) |
Ending Balance - Contingent Consideration Liability | | $ | 1,471 | |
As a result of the delisting of our common stock from the NASDAQ exchange at the start of trading on June 7, 2013 and the continued decline of our stock price, we tested our long-lived assets and goodwill for impairment as of June 30, 2013. Based on this impairment testing it was determined that our intangible assets acquired as part of the Prostiva acquisition with carrying amount of $1.9 million were impaired (See Note 11). As a result, we wrote the intangible assets down to their implied fair value of $1.5 million and recorded an impairment charge of $434,000. The fair value of patents and technology, customer base and trademark intangible assets was determined based on a discounted cash flow analysis of forecasted future operating results, which represents Level 3 assets measured at fair value on a nonrecurring basis subsequent to its original recognition. The following table provides a reconciliation of the beginning and ending balances of intangible assets:
| | | | |
(in thousands) | | Fiscal Year
2013 | |
Beginning Balance - Intangible Assets | | $ | 2,177 | |
Amortization expense | | | (248 | ) |
Impairment Charge | | | (434 | ) |
Ending Balance - Intangible Assets | | $ | 1,495 | |
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| |
6. | Stock Options and Restricted Stock Awards |
On November 16, 2012, our shareholders approved a new equity compensation plan, the Urologix, Inc. 2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan replaced our Amended and Restated 1991 Stock Option Plan (the “1991 Plan”) and provides stock incentive awards in the form of options (incentive and non-qualified), stock appreciation rights, restricted stock, restricted stock units, performance stock, performance units, and other awards in stock and/or cash. As of June 30, 2013, we had reserved 1,724,165 shares of common stock under the 2012 Plan, which includes 124,165 expired and forfeited shares from the 1991 Plan and 1,719,265 shares were available for future grants. The number of shares available under the 2012 Plan will be increased by an amount equal to the number of shares subject to awards or options granted under the 1991 Plan, which would have become available for additional awards under the 1991 Plan by reason of the forfeiture, cancellation, expiration or termination of those awards. Options expire 10 years from the date of grant and typically vest 25 percent after the first year of service with the remaining vesting 1/36th each month thereafter. The Company issues new shares when stock options are exercised.
Under the terms of the previous 1991 Plan, persons serving as non-employee directors at the date of the annual shareholder meeting receive an option grant to purchase 10,000 shares of common stock at a price equal to fair market value on the date of grant. Generally, such options are immediately exercisable on the date of grant, and expire 10 years from the date of grant, subject to earlier termination one year after the person ceases to be a director of the Company. For the 10,000 share option award granted to each of our four non-employee directors in connection with the 2012 Annual Meeting of Shareholders, our previous equity compensation plan, the 1991 Plan, was used.
Amounts recognized in the financial statements related to stock-based compensation for the fiscal years ended June 30, 2013, 2012 and 2011 were as follows (in thousands):
| | | | | | | | | | |
| | 2013 | | 2012 | | 2011 | |
Cost of goods sold | | $ | 19 | | $ | 29 | | $ | 38 | |
Sales and marketing | | | 46 | | | 88 | | | 43 | |
General and administrative | | | 164 | | | 207 | | | 244 | |
Research and development | | | 28 | | | 35 | | | 44 | |
Total cost of stock-based compensation | | $ | 257 | | $ | 359 | | $ | 369 | |
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. We use historical data to estimate expected volatility, the period of time that option grants are expected to be outstanding, as well as employee termination behavior. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. For restricted stock awards, the fair value is calculated as the market price on date of grant and we amortize the fair value on a straight-line basis over the requisite service period of the award. The following weighted-average assumptions were used to estimate the fair value of options granted during the fiscal years ended June 30, 2013, 2012 and 2011 using the Black-Scholes option-pricing model:
| | | | | | | | | | |
| | | 2013 | | | 2012 | | | 2011 | |
Volatility | | | 72.00% | | | 78.00% | | | 80.00% | |
Risk-free interest rate | | | 0.4% | | | 0.4% | | | 0.9% | |
Expected option life | | | 3.4 years | | | 3.3 years | | | 3.6 years | |
Stock dividend yield | | | - | | | - | | | - | |
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A summary of our options and option activity for the fiscal year ended June 30, 2013 is as follows:
| | | | | | | | | | | | | | | | | | | | | |
Options Outstanding | | Options Exercisable |
| | Outstanding as of
June 30, 2013 | | Weighted
Avg.
Remaining
Contractual
Life | | Weighted
Avg. Exercise
Price | | Exercisable as of
June 30, 2013 | | Weighted
Avg. Exercise
Price |
$ | 0.00 | | $ | 0.97 | | | 622,345 | | | 7.8 | | $ | 0.85 | | | | 315,598 | | $ | 0.84 | |
$ | 0.98 | | $ | 1.86 | | | 994,085 | | | 4.1 | | $ | 1.54 | | | | 917,717 | | $ | 1.57 | |
$ | 1.87 | | $ | 2.75 | | | 44,000 | | | 3.6 | | $ | 2.63 | | | | 44,000 | | $ | 2.63 | |
$ | 2.76 | | $ | 4.06 | | | 32,500 | | | 1.5 | | $ | 3.76 | | | | 32,500 | | $ | 3.76 | |
$ | 4.07 | | $ | 6.95 | | | 11,000 | | | 1.9 | | $ | 5.32 | | | | 11,000 | | $ | 5.32 | |
$ | 6.96 | | $ | 12.23 | | | 7,500 | | | 1.1 | | $ | 12.23 | | | | 7,500 | | $ | 12.23 | |
| | | | | | | 1,711,430 | | | 5.4 | | $ | 1.43 | | | | 1,328,315 | | $ | 1.58 | |
| | | | | | | | | | | | | | |
| | Number of
Options | | | Weighted-avg.
Exercise Price
Per Option | | Weighted-avg.
Remaining
Contractual
Term | | Aggregate
Intrinsic Value | |
Outstanding at July 1, 2012 | | | 1,621,095 | | | $ | 1.50 | | | | | $ | 1,504 | |
Options granted | | | 234,500 | | | | 0.82 | | | | | | | |
Options forfeited | | | (67,439 | ) | | | 0.99 | | | | | | | |
Options expired | | | (56,726 | ) | | | 1.77 | | | | | | | |
Options exercised | | | (20,000 | ) | | | 0.78 | | | | | | | |
Outstanding at June 30, 2013 | | | 1,711,430 | | | $ | 1.43 | | | 5.39 | | $ | - | |
Exercisable at June 30, 2013 | | | 1,328,315 | | | $ | 1.58 | | | 4.49 | | $ | - | |
There is no aggregate intrinsic value in the table above as our closing stock price of $0.17 on June 28, 2013, the last trading day prior to June 30, 2013, was lower than all options outstanding and exercisable as of that date. The aggregate intrinsic value for options exercisable at June 30, 2012 and 2011 was $1,000 and $18,000, respectively, when the closing price of our stock on June 29, 2012 (the last trading day prior to June 30, 2012) and 2011 was $0.77 and $0.95, respectively.
The weighted average fair value of our options at their grant date was approximately $0.40, $0.47 and $0.51 for options granted during the fiscal years ended June 30, 2013, 2012 and 2011, respectively. There was a negative intrinsic value of approximately $600 and $14,000 on options exercised during fiscal years 2013 and 2012, respectively, as some options were exercised at a market price lower than the exercise price. The total intrinsic value of options exercised during the fiscal year ended June 30, 2011 was $360.
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A summary of the status of our non-vested options as of June 30, 2013 is as follows:
| | | | | | | | |
| | Number of Options | | Weighted-avg. Grant-Date
Fair Value | |
Non-vested at June 30, 2012 | | | 475,717 | | | $ | 0.53 | |
Options granted | | | 234,500 | | | | 0.40 | |
Options forfeited | | | (67,439 | ) | | | 0.51 | |
Options vested | | | (259,663 | ) | | | 0.54 | |
Non-vested at June 30, 2013 | | | 383,115 | | | | 0.46 | |
| | | | | | | | |
A summary of restricted stock award activity is as follows: |
| | | | | | | | |
| | Number of Restricted
Stock Awards | | Weighted-avg. Grant-Date
Fair Value | |
Non-vested at June 30, 2012 | | | 83,576 | | | $ | 0.98 | |
Awards granted | | | 106,064 | | | | 0.66 | |
Awards forfeited | | | - | | | | - | |
Awards vested | | | (75,973 | ) | | | 0.98 | |
Non-vested at June 30, 2013 | | | 113,667 | | | | 0.68 | |
As of June 30, 2013, total unrecognized compensation cost related to non-vested stock options and restricted stock awards granted under our plan was $155,000 and $33,000, respectively. That cost is expected to be recognized over a weighted-average period of 2.1 years for non-vested stock options and 0.7 years for restricted stock awards. The total fair value of options vested during the fiscal years ended June 30, 2013, 2012 and 2011 was $140,000, $288,000 and $281,000, respectively.
Other accrued expenses is comprised of the following as of June 30 (in thousands):
| | | | | | | |
| | 2013 | | 2012 | |
Sales tax accrual | | $ | 126 | | $ | 237 | |
Other | | | 476 | | | 542 | |
Total other accrued expenses | | $ | 602 | | $ | 779 | |
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The components of income tax expense (benefit) for each of the years in the three-year period ended June 30, 2013 consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the fiscal year ended June 30, |
| | 2013 | | 2012 | | 2011 |
| | Current | | Deferred | | Total | | Current | | Deferred | | Total | | Current | | Deferred | | Total | |
Federal | | $ | - | | $ | 1 | | $ | 1 | | $ | - | | $ | 32 | | $ | 32 | | $ | (3 | ) | $ | - | | $ | (3 | ) |
State | | | 13 | | | - | | | 13 | | | 20 | | | 3 | | | 23 | | | 11 | | | - | | | 11 | |
Total | | $ | 13 | | $ | 1 | | $ | 14 | | $ | 20 | | $ | 35 | | $ | 55 | | $ | 8 | | $ | - | | $ | 8 | |
A reconciliation of our statutory tax expense (benefit) to our actual tax expense (benefit) is as follows:
| | | | | | | | | | |
| | For the years ended June 30, |
| | 2013 | | 2012 | | 2011 | |
Federal statutory rate at 34 percent | | $ | (1,459 | ) | $ | (1,578 | ) | $ | (1,267 | ) |
State taxes, net of federal tax expense (benefit) and state valuation allowance | | | (128 | ) | | (135 | ) | | (125 | ) |
Nondeductible expenses | | | 17 | | | 49 | | | 47 | |
Stock-based compensation | | | 55 | | | 60 | | | 52 | |
General business credits | | | - | | | - | | | (20 | ) |
Adjustments to net operating losses and credits | | | 5,562 | | | 3,125 | | | 4,236 | |
Other | | | 3 | | | 3 | | | (9 | ) |
Change in valuation allowance | | | (4,036 | ) | | (1,469 | ) | | (2,906 | ) |
| | $ | 14 | | $ | 55 | | $ | 8 | |
The components of our net deferred tax assets and liabilities are as follows (in thousands):
| | | | | | | |
| | June 30, |
| | 2013 | | 2012 | |
Deferred Tax Assets: | | | | | | | |
Non-Current: | | | | | | | |
Net operating loss carry forward | | $ | 27,131 | | $ | 30,730 | |
Definite-lived intangibles | | | 2,414 | | | 2,783 | |
Alternative minimum tax credit | | | 3 | | | 3 | |
Federal and state general business credits | | | 865 | | | 862 | |
Non-qualified stock-based compensation | | | 536 | | | 525 | |
Property, plant and equipment | | | 64 | | | 62 | |
Current: | | | | | | | |
Accrued expenses | | | 318 | | | 434 | |
Gross deferred tax assets | | | 31,331 | | | 35,399 | |
Deferred Tax Liabilities: | | | | | | | |
Non-Current: | | | | | | | |
Amortization of indefinite-lived intangible | | | (36 | ) | | (35 | ) |
Contingent consideration on acquisition | | | (1,155 | ) | | (1,136 | ) |
Gross deferred tax liabilities | | | (1,191 | ) | | (1,171 | ) |
|
Net deferred tax assets before valuation allowance | | | 30,140 | | | 34,228 | |
Less: valuation allowance | | | (30,176 | ) | | (34,263 | ) |
Total net deferred tax liability | | $ | (36 | ) | $ | (35 | ) |
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The valuation allowance for deferred tax assets as of June 30, 2013 and 2012 was $30,176,000 and $34,263,000, respectively. The total valuation allowance decreased by $4,087,000 for the year ended June 30, 2013. A significant portion of the current year decrease in valuation allowance is attributable to expiring NOL carryforward tax benefits. In assessing the need for a valuation allowance, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realized of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
Deferred tax assets relating to the tax benefits of employee stock option grants have been reduced to reflect exercises through the year ended June 30, 2013. Certain exercises resulted in tax deductions in excess of previously recorded tax benefits. The Company’s Federal NOL carryforwards of $73,154,000 referenced below as of June 30, 2013 include $541,000 of income tax deductions in excess of previously recorded tax benefits. Although these additional tax deductions are reflected in NOL carryforwards referenced below, the related tax benefit of $184,000 will not be recognized until the deductions reduce taxes payable. Accordingly, since the tax benefit does not reduce the Company’s current taxes payable in 2013, these tax benefits are not reflected in the Company’s deferred tax assets presented above. The tax benefit of these excess deductions will be reflected as a credit to additional paid-in capital when and if recognized.
At June 30, 2013, the expiration dates and amounts of our net operating loss carryforwards and credits for federal income tax purposes are as follows (in thousands):
| | | | | | | |
Years expiring (in thousands) | | Net Operating
Loss | | Credits | |
June 30, 2014 | | $ | - | | $ | - | |
June 30, 2015 – June 30, 2019 | | | 15,555 | | | - | |
June 30, 2020 – June 30, 2024 | | | 25,315 | | | 115 | |
June 30, 2025 – June 30, 2033 | | | 32,284 | | | 544 | |
| | | | | | | |
| | $ | 73,154 | | $ | 659 | |
The Company completed a Section 382 analysis of the net operating loss carryforwards through February 1, 2006. Through that analysis it was determined that none of the remaining pre-February 1, 2006 net operating loss carryforwards are subject to a Section 382 limitation. Net operating losses generated since February 1, 2006 have not been analyzed for any Section 382 limitations and therefore may or may not be fully realizable in the future.
As of June 30, 2013, the Company had approximately $14,000 of unrecognized tax benefits related to state tax liabilities which would favorably impact the effective income tax rate in any future period, if recognized. During the year ended June 30, 2013, there were no significant changes to the total gross unrecognized tax benefits. It is expected that the amount of unrecognized tax benefits for positions which we have identified will not change significantly in the next twelve months.
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UROLOGIX, INC.
Notes to Financial Statements
We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. We file income tax returns in the United States (U.S.) federal jurisdiction as well as various state jurisdictions. We are subject to U.S. federal income tax examinations by tax authorities for fiscal years after 1998 due to unexpired net operating loss carryforwards originating in and subsequent to that fiscal year. Income tax examinations we may be subject to for the various state taxing authorities vary by jurisdiction.
Deferred income as of June 30, 2013 and 2012 consists of deferred warranty service income of $5,000 and $7,000, respectively. Deferred warranty service income is for prepayments made to us for warranty service contracts and is recognized over the contract period ranging from 12 to 24 months.
The Company had approximately $3,036,000 and $3,115,000 of goodwill as of June 30, 2013 and 2012, respectively, related to the acquisition of the Prostiva RF Therapy System on September 6, 2011. Please refer to Note 4 to the Notes to the Condensed Financial Statements for further information regarding this acquisition. The change in the goodwill balance from June 30, 2012 to June 30, 2013 is due to the Company obtaining additional information that existed at the acquisition date which resulted in changes to the fair value of assets acquired during the measurement period. Goodwill will be tested for impairment annually on April 30th or more frequently if changes in circumstance or the occurrence of events suggests an impairment may exist.
As a result of the delisting of our common stock from the NASDAQ exchange at the start of trading on June 7, 2013 and the continued decline of our stock price, we tested goodwill for impairment as of June 30, 2013. Based on this impairment testing it was determined that there was no impairment of goodwill as the fair value of the reporting unit exceeded its carrying amount as of June 30, 2013.
Intangible assets as of June 30, 2013 and 2012 consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2013 | | June 30, 2012 | |
| | Carrying
Value | | Accumulated
Amortization | | Impairment | | Net
Carrying
Value | | Carrying
Value | | Accumulated
Amortization | | Net
Carrying
Value | |
Prostiva Acquisition | | | | | | | | | | | | | | | | | | | | | | |
Patents and Technology | | $ | 1,529 | | $ | (311 | ) | $ | (274 | ) | $ | 944 | | $ | 1,529 | | $ | (142 | ) | $ | 1,387 | |
Customer Base | | | 531 | | | (108 | ) | | (95 | ) | | 328 | | | 531 | | | (49 | ) | | 482 | |
Trademarks | | | 325 | | | (37 | ) | | (65 | ) | | 223 | | | 325 | | | (17 | ) | | 308 | |
EDAP Acquisition | | | | | | | | | | | | | | | | | | | | | | |
Customer Base | | | 2,300 | | | (2,270 | ) | | - | | | 30 | | | 2,300 | | | (2,246 | ) | | 54 | |
Other | | | 64 | | | (2 | ) | | - | | | 62 | | | 32 | | | (1 | ) | | 31 | |
Total intangible assets | | $ | 4,749 | | | (2,728 | ) | $ | (434 | ) | $ | 1,587 | | $ | 4,717 | | $ | (2,455 | ) | $ | 2,262 | |
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UROLOGIX, INC.
Notes to Financial Statements
Amortization expense associated with intangible assets for the fiscal years ended June 30, 2013 and 2012 was $274,000 and $233,000, respectively and includes amortization expense recorded in cost of goods sold. Please refer to Note 4 of the Condensed Financial Statements for further information regarding this acquisition. As a result of the delisting of our common stock from the NASDAQ exchange at the start of trading on June 7, 2013 and the continued decline of our stock price, we tested our long-lived assets and goodwill for impairment as of June 30, 2013. Based on this impairment testing it was determined that our intangible assets acquired as part of the Prostiva acquisition were impaired. As a result, we recorded an impairment charge of $274,000 on our developed technology asset which was recorded in cost of goods sold, a $95,000 impairment charge on our customer base asset and a $65,000 impairment charge on trademarks both of which were recorded in operating expense. The fair value of patents and technology, customer base and trademark intangible assets was determined based on a discounted cash flow analysis of forecasted future operating results.
All intangible assets are amortized using the straight-line method over their estimated remaining useful lives. Patents and technology, customer base and trademarks related to the Prostiva acquisition are being amortized over 9 years, 9 years, and 16 years, respectively. The customer base related to the EDAP acquisition is being amortized over its remaining useful life of 1.25 years, and other intangible assets related to patent costs are amortized upon issuance over their estimated useful lives.
Future amortization expense related to the net carrying amount of intangible assets is estimated to be as follows (in thousands):
| | | | |
Fiscal Years | | | | |
2014 | | $ | 218 | |
2015 | | | 200 | |
2016 | | | 194 | |
2017 | | | 194 | |
2018 | | | 194 | |
| |
12. | Financing Arrangements |
Line of Credit
On January 11, 2012, the Company entered into a Loan and Security Agreement with Silicon Valley Bank (“SVB”). Under the Loan Agreement, SVB will make revolving advances to the Company of the lesser of $2.0 million or the defined borrowing base consisting of 80% of eligible accounts. The principal amount outstanding under the revolving line of credit will accrue interest at a floating per annum rate equal to either the prime rate plus 2.75% if the Company is Streamline Eligible, or the prime rate plus 3.75% if the Company is not Streamline Eligible. Interest is payable monthly. In order to be “Streamline Eligible,” the Company’s unrestricted cash maintained at SVB for the immediately preceding month has to be greater than the outstanding obligations as well as no event of default continuing. Pursuant to an amendment to the Loan and Security Agreement dated November 30, 2012, the Company also must meet a financial covenant that requires the Company’s maximum loss (defined as net loss adding back interest expense, depreciation and amortization, income tax expense and stock-based compensation expense), on a trailing three month period beginning with the three month period ended October 31, 2012, not be greater than $1.5 million, tested on the last day of each month. In connection with the Loan Agreement, the Company granted SVB a first priority security interest in certain properties, rights and assets of the Company, specifically excluding intellectual property. All amounts borrowed by the Company under this revolving line of credit with SVB will be due January 11, 2014. As of June 30, 2013, the Company had no borrowings outstanding on this credit line and was in compliance with all covenants.
Promissory Note
On June 28, 2013, the Company entered into a promissory note (the “Note”) with Medtronic for $5.3 million for the remaining amounts owed on Prostiva inventory acquired as part of the acquisition and purchased subsequent to the acquisition. Interest on the principal amount of the Note will accrue at the annual rate of 6%, compounded annually. The Note requires that the Company make five equal annual payments of principal and accrued interest on March 31 of each year beginning March 31, 2015. All amounts under the Note are due and payable on March 31, 2019 or earlier upon a Change of Control (as defined in the Note). The Company may prepay the Note without penalty at any time. The Note is junior to the indebtedness of Urologix to Silicon Valley Bank (the “Senior Lender”) pursuant to the Loan and Security Agreement dated January 11, 2012, as amended, on November 30, 2012, to successors and assigns of the Senior Lender under certain other loan agreements, and to a new lender that provides certain refinancing, but is senior in all respects (including right of payment) to all other existing or future indebtedness. The Note also specifies certain customary events of default that will entitle Medtronic, after any required notice, to declare the outstanding obligations immediately due and payable. The Note contains customary representations, warranties and covenants by the Company.
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UROLOGIX, INC.
Notes to Financial Statements
Pursuant to the terms of a Security Agreement dated as of June 28, 2013 by and between Urologix and Medtronic, the Company’s obligations under the Note are secured by a security interest in all of the Company’s assets, specifically excluding intellectual property (but including accounts receivable and proceeds of intellectual property).
Medtronic’s rights under the Note and Security Agreement are subordinate to the rights of the Senior Lender as set forth in a Subordination Agreement dated as of June 28, 2013 by and between Medtronic and the Senior Lender. We are not a party to the Subordination Agreement. Under the Subordination Agreement, all debt of Urologix to Medtronic is subordinate in right of payment to debt of Urologix to the Senior Lender. Until any debt to the Senior Lender is paid in full, the Senior Lender has no commitment or obligation to lend any further funds to us, and all financing agreements between the Senior Lender and us are terminated, Medtronic may not demand or receive payments on the Note or bring any action against us relating to the Note, except that so long as no event of default exists under the Loan Agreement, Medtronic may receive regularly scheduled payments of principal and interest. Further, pursuant to the Subordination Agreement, Medtronic subordinates any security interest it may have in the Company’s property to the Senior Lender’s security interest in our property, which will at all times be senior to the security interest of Medtronic. Each of Medtronic and the Senior Lender agreed on the respective maximum principal amount of our indebtedness to it, which may not be increased without the consent of the other.
| |
13. | Commitments and Contingencies |
Leases
The Company leases its facility and certain equipment under non-cancelable operating leases that expire at various dates through fiscal year 2016. Rent expense related to operating leases was approximately $227,000, $216,000, and $197,000 for the years ended June 30, 2013, 2012 and 2011, respectively. On September 9, 2010, the Company entered into a new lease agreement with our current landlord, covering the same square footage, for a period of seventy-two months, effective August 1, 2010. Future minimum annual lease commitments under non-cancelable operating leases with initial terms of one year or more are as follows:
| | | | | | | | | | | | | | | | |
| | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | |
Building and equipment leases | | $ | 224 | | $ | 225 | | $ | 228 | | $ | 31 | | $ | 5 | |
Prostiva Payments
Prostiva payments are commitments related to the acquisition of the Prostiva RF Therapy product line from Medtronic on September 6, 2011 (see Note 4 for more details). In addition, on June 28, 2013, we entered into a promissory note (the “Note”) with Medtronic for $5.3 million for the remaining amounts owed on Prostiva inventory acquired as part of the acquisition and purchased subsequent to the acquisition (see Footnote 12 for more details).
| | | | | | | | | | | | | | | | |
| | Fiscal Years | |
| | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | |
|
Prostiva Payments | | | | | | | | | | | | | | | | |
Annual license maintenance fee | | $ | 65 | | | 65 | | | 65 | | | 65 | | | 65 | |
Note payments, including interest | | | - | | | 1,342 | | | 1,342 | | | 1,342 | | | 1,342 | |
| | $ | 65 | | $ | 1,407 | | $ | 1,407 | | $ | 1,407 | | $ | 1,407 | |
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UROLOGIX, INC.
Notes to Financial Statements
Contingencies
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. The ultimate liabilities, if any, cannot be determined at this time. However, based upon currently available information, we believe that the ultimate resolution of these matters will not have a material effect on the financial position, liquidity or results of operations of the Company.
The Company provides a 401(k) savings plan to which eligible employees may make pretax payroll contributions up to the allowed limit of the Internal Revenue Service. Company matching contributions are discretionary, and none have been made to date.
| |
15. | Gain on Demutualization |
Urologix’s primary product liability insurance carrier since July 1, 2006 has been Medmarc Mutual Insurance Company (“Medmarc”). On June 27, 2012, Medmarc announced that it would become part of ProAssurance Corporation (“PRA”). In order for Medmarc to be acquired by PRA, it was required to convert from a mutual insurance company to a stock insurance company through a demutualization process. Concurrently, upon demutualization, PRA would purchase the newly-issued shares of Medmarc common stock. Under the terms of the demutualization, Urologix’s calculated portion of the cash consideration to be received was approximately $321,000. The receipt of the consideration has no direct effect on the Company’s existing insurance policy or coverage. On December 4, 2012, the majority of eligible members voted to approve the demutualization of Medmarc, and in accordance with the Plan of Conversion agreement, Urologix was eligible to receive the cash consideration upon the completion of the acquisition, or January 1, 2013. Urologix received the cash consideration of $321,000 for the demutualization in January, 2013 and recognized a gain from the demutualization in fiscal year 2013.
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| |
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| |
ITEM 9A. | CONTROLS AND PROCEDURES |
(a) Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer, Gregory J. Fluet and Chief Financial Officer, Brian J. Smrdel, have evaluated the Company’s disclosure controls and procedures as of June 30, 2013. Based upon their review, they have concluded that these controls and procedures are effective.
The Company’s Chief Executive Officer and Chief Financial Officer used the definition of “disclosure controls and procedures” as set forth in Rule 13a-15(e) under the Exchange Act in making their conclusion as to the effectiveness of such controls and procedures.
(b)Changes in Internal Controls over Financial Reporting
There have been no changes in internal control over financial reporting that occurred during the fourth quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company’s internal control report is included in this report under Item 8, under the caption “Management’s Report on Internal Control over Financial Reporting.”
| |
ITEM 9B. | OTHER INFORMATION |
None.
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PART III
| |
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Information required under this item is contained in the following sections of the Company’s Proxy Statement for the 2013 Annual Meeting of Shareholders (the “2013 Proxy Statement”), a definitive copy of which will be filed with the Commission within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K and is incorporated herein by reference: Election of Directors, Information Regarding Executive Officers, Section 16(a) Beneficial Ownership Reporting Compliance, Corporate Governance, and Code of Ethics.
| |
ITEM 11. | EXECUTIVE COMPENSATION |
Information required under this item is contained in the following sections of the Company’s 2013 Proxy Statement and is incorporated herein by reference: Executive Compensation, Compensation of Directors, and Employment and Change in Control Arrangements.
| |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required under this item with respect to Item 403 of Regulation S-K is contained in the following sections of the Company’s 2013 Proxy Statement and is incorporated herein by reference: Security Ownership of Principal Shareholders and Management. The information required under this item with respect to Item 201(d) of Regulation S-K is contained in Item 5 of this Annual Report on Form 10-K.
| |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Information required under this item is contained in the following sections of the Company’s 2013 Proxy Statement and is incorporated herein by reference: Certain Relationships and Related Persons Transactions, Policy Regarding Transactions with Related Persons, and Corporate Governance.
| |
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Information required under this item is contained in the following sections of the Company’s 2013 Proxy Statement and is incorporated herein by reference: Independent Registered Public Accountants.
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PART IV
| |
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES |
| | |
(a) | Documents filed as part of this report. |
| (1) | Financial Statements. |
| | The financial statements of the Company are set forth at Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. |
| |
| (2) | Financial Statement Schedules for fiscal years ended June 30, 2013, 2012 and 2011. |
| | None. |
| |
(b) | Exhibits. |
| | | | |
Exhibit Number | | Document | | Incorporated by Reference To: |
| | | | |
3.1 | | Amended and Restated Articles of Incorporation. | | Exhibit 3.1 of the Company’s Registration Statement on Form S-1 (File No. 333-03304) filed on May 28, 1996 (the “1996 Registration Statement”). |
| | | | |
3.2 | | Amended and Restated Bylaws of Urologix, Inc., as amended on December 5, 2006. | | Exhibit 3.2 of the Company’s Form 8-K dated December 5, 2006. |
| | | | |
4.1 | | Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock | | Exhibit 1 of the Company’s Registration Statement on Form 8-A (File No. 000-28414) filed January 16, 1997. |
| | | | |
10.1 | | * Amended and Restated Urologix, Inc. 1991 Stock Option Plan, as amended through June 21, 2008 | | Exhibit 10.1 of the Company’s Form 10-K for the year ended June 30, 2009. |
| | | | |
10.2 | | Letter Agreement Regarding Offer of Employment between Urologix, Inc. and Gregory Fluet dated July 14, 2008. | | Exhibit 10.1 to Current Report on Form 8-K dated July 14, 2008. |
| | | | |
10.3 | | Amended and Restated Letter Agreement Regarding Change In Control Benefits between Urologix, Inc. and Certain Executive Officers dated April 23, 2012. | | Exhibit 10.1 to Current Report on Form 8-K dated April 19, 2012. |
| | | | |
10.4 | | Letter Agreement dated April 27, 2010 regarding Offer of Employment entered into effective April 29, 2010 between Urologix, Inc. and Brian J. Smrdel | | Exhibit 10.1 to Current Report on Form 8-K dated April 29, 2010. |
| | | | |
10.5 | | First Amended and Restated Lease by and between Parkers Lake I Realty LLC and Urologix, Inc. dated as of August 1, 2010 | | Exhibit 10.1 to Current Report on Form 8-K dated September 9, 2010. |
| | | | |
10.6 | | Loan and Security Agreement dated January 11, 2012 by and between Silicon Valley Bank and Urologix, Inc. | | Exhibit 10.1 to Current Report on Form 8-K dated January 11, 2012 |
| | | | |
10.7 | | Letter Agreement regarding Offer of Employment entered into effective June 3, 2011 between Urologix, Inc. and Lisa Ackermann | | Exhibit 10.1 to Current Report on Form 8-K dated June 3, 2011 |
| | | | |
10.8 | | License Agreement dated as of September 6, 2011 by and among Medtronic, Inc., Medtronic VidaMed, Inc., and Urologix, Inc. ** | | Exhibit 10.1 to Current Report on Form 8-K dated September 6, 2011 |
| | | | |
10.9 | | Transition Services and Supply Agreement dated as of September 6, 2011 by and among Medtronic, Inc. and Urologix, Inc. ** | | Exhibit 10.2 to Current Report on Form 8-K dated September 6, 2011 |
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| | | | |
Exhibit Number | | Document | | Incorporated by Reference To: |
| | | | |
10.10 | | Acquisition Option Agreement dated as of September 6, 2011 by and among Medtronic VidaMed, Inc., Medtronic, Inc., and Urologix, Inc. | | Exhibit 10.3 to Current Report on Form 8-K dated September 6, 2011 |
| | | | |
10.11 | | Asset Purchase Agreement dated as of September 6, 2011 by and among Medtronic VidaMed, Inc., Medtronic, Inc., and Urologix, Inc. | | Exhibit 10.4 to Current Report on Form 8-K dated September 6, 2011 |
| | | | |
10.12 | | Underwriting Agreement dated June 29, 2012 by and between Dougherty & Company LLC and Urologix, Inc. | | Exhibit 1.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-181716) filed on June 22, 2012 |
| | | | |
10.13 | | Urologix, Inc. 2012 Stock Incentive Plan | | Appendix A to the Company’s Proxy Statement for the 2012 Annual Meeting of Shareholders held on November 16, 2012 |
| | | | |
10.14 | | Letter Agreement between Urologix, Inc. and Stryker Warren, Jr. dated November 20, 2012 | | Exhibit 10.1 to Current Report on Form 8-K dated November 20, 2012 |
| | | | |
10.15 | | First Amendment to Loan and Security Agreement dated November 30, 2012 by and between Silicon Valley Bank and Urologix, Inc. | | Exhibit 10.1 to Current Report on Form 8-K dated November 30, 2012 |
| | | | |
10.16 | | Restructuring Agreement and Amendment to Transaction Documents dated June 28, 2013 by and among Urologix, Inc., Medtronic, Inc. and Medtronic VidaMed, Inc. | | Exhibit 10.1 to Current Report on Form 8-K dated June 28, 2013 |
| | | | |
10.17 | | Promissory Note dated June 28, 2013 by Urologix, Inc. as borrower to Medtronic, Inc. as holder in principal amount of $5,332,537.72 | | Exhibit 10.2 to Current Report on Form 8-K dated June 28, 2013 |
| | | | |
10.18 | | Security Agreement dated as of June 28, 2013 by and between Urologix, Inc. and Medtronic, Inc. | | Exhibit 10.3 to Current Report on Form 8-K dated June 28, 2013 |
| | | | |
10.19 | | First Amendment of the Transition Services and Supply Agreement effective as of March 1, 2013 by and between Urologix, Inc. and Medtronic, Inc. | | Exhibit 10.4 to Current Report on Form 8-K dated June 28, 2013 |
| | | | |
10.20 | | First Amendment of the License Agreement effective as of March 1, 2013 by and among Urologix, Inc., Medtronic, Inc. and Medtronic VidaMed, Inc. ** | | Exhibit 10.5 to Current Report on Form 8-K dated June 28, 2013 |
| | | | |
23.1 | | Consent of KPMG, LLP, Independent Registered Public Accounting Firm | | Attached hereto. |
| | | | |
23.2 | | Consent of Baker Tilly Virchow Krause, LLP, Independent Registered Public Accounting Firm | | Attached hereto. |
| | | | |
31.1 | | Certification of Chief Executive Officer (principal executive officer) pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act. | | Attached hereto. |
| | | | |
31.2 | | Certification of Chief Financial Officer (principal financial officer and principal accounting officer) pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act. | | Attached hereto. |
| | | | |
32 | | Certification pursuant to 18 U.S.C. §1350. | | Attached hereto. |
| |
| * Indicates a management contract or compensatory plan or arrangement. |
| ** Certain portions of this exhibit have been deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2. Spaces corresponding to the deleted portions are represented by brackets with asterisks. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: September 20, 2013
| | | |
| UROLOGIX, INC. | |
| | | |
| By: | /s/ Gregory J. Fluet | |
| Gregory J. Fluet, Chief Executive Officer |
| (principal executive officer) |
Each person whose signature appears below hereby constitutes and appoints Gregory J. Fluet and Brian J. Smrdel, and each of them, as his true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his behalf, individually and in each capacity stated below, all amendments and post-effective amendments to this Form 10-K and to file the same, with all exhibits thereto and any other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as each might or could do in person, hereby ratifying and confirming each act that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on behalf of the registrant by the following persons in the capacities indicated on September 20, 2013.
| | |
Signature | | Title |
| | |
/s/ Gregory J. Fluet | | Chief Executive Officer and Director |
Gregory J. Fluet | | (principal executive officer) |
| | |
/s/ Brian J. Smrdel | | Chief Financial Officer |
Brian J. Smrdel | | (principal financial officer and principal accounting officer) |
| | |
/s/ Mitchell Dann | | Director |
Mitchell Dann | | |
| | |
/s/ Sidney W. Emery, Jr. | | Director |
Sidney W. Emery, Jr. | | |
| | |
/s/ Christopher R. Barys | | Director |
Christopher R. Barys | | |
| | |
/s/ Patrick D. Spangler | | Director |
Patrick Spangler | | |
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