UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
Or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from ____________ to _______________
Commission File Number 0-28414
UROLOGIX, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1697237
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14405 21st Avenue North, Minneapolis, MN 55447
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 475-1400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [_]
As of January 28, 2000, the Company had outstanding 11,505,457 shares of common
stock, $.01 par value.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UROLOGIX, INC.
BALANCE SHEETS
December 31, 1999 June 30, 1999
- ---------------------------------------------------------------- ------------------------- -----------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 211,621 $ 657,596
Available-for-sale securities 24,595,381 27,378,692
Accounts receivable, net 1,261,305 1,260,810
Inventories, net 1,236,864 2,436,418
Prepaids and other current assets 632,364 588,355
- ---------------------------------------------------------------- ------------------------- -----------------------
Total current assets 27,937,535 32,321,871
- ---------------------------------------------------------------- ------------------------- -----------------------
Property and equipment:
Machinery, equipment and furniture 5,200,985 4,772,666
Less - accumulated depreciation (3,182,800) (2,521,479)
- ---------------------------------------------------------------- ------------------------- -----------------------
Property and equipment, net 2,018,185 2,251,187
Other assets, net 4,198,688 4,414,974
- ---------------------------------------------------------------- ------------------------- -----------------------
$ 34,154,408 $ 38,988,032
================================================================ ========================= =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 526,146 $ 836,999
Accrued liabilities 1,946,315 2,684,390
- ---------------------------------------------------------------- ------------------------- -----------------------
Total liabilities 2,472,461 3,521,389
- ---------------------------------------------------------------- ------------------------- -----------------------
Commitments and contingencies
Shareholders' equity
Common stock, $.01 par value, 25,000,000 shares 114,952 114,289
authorized; 11,495,150 and 11,428,937 shares issued and
outstanding
Additional paid-in capital 91,247,493 91,149,858
Accumulated deficit (59,640,046) (55,796,123)
Accumulated other comprehensive loss (40,452) (1,381)
- ---------------------------------------------------------------- ------------------------- -----------------------
Total shareholders' equity 31,681,947 35,466,643
- ---------------------------------------------------------------- ------------------------- -----------------------
$ 34,154,408 $ 38,988,032
================================================================ ========================= =======================
The accompanying notes to financial statements are an integral part of these
balance sheets.
1
UROLOGIX, INC.
STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended December 31, Six Months Ended December 31,
-------------------------------------------------------------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Sales $ 1,921,166 $ 1,233,947 $ 3,831,654 $ 2,858,552
Cost of goods sold 1,112,443 896,291 2,265,249 3,742,702
- -------------------------------------------------------------------------------------------------------------------------
Gross profit (loss) 808,723 337,656 1,566,405 (884,150)
- -------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Research and development 932,397 1,028,937 1,991,935 2,525,840
Sales and marketing 1,590,420 2,037,712 3,112,678 3,694,362
General and administrative 457,383 658,724 1,038,096 2,957,153
- -------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 2,980,200 3,725,373 6,142,709 9,177,355
- -------------------------------------------------------------------------------------------------------------------------
Operating loss (2,171,477) (3,387,717) (4,576,304) (10,061,505)
Interest income, net 358,712 451,011 732,381 926,251
- -------------------------------------------------------------------------------------------------------------------------
Net loss $ (1,812,765) $ (2,936,706) $ (3,843,923) $ (9,135,254)
=========================================================================================================================
=========================================================================================================================
Basic and diluted net loss per common share $ (0.16) $ (0.26) $ (0.33) $ (0.81)
=========================================================================================================================
Basic and diluted weighted 11,495,150 11,357,694 11,484,839 11,307,914
average number of common
shares outstanding
The accompanying notes to financial statements are an integral part of these
statements.
2
UROLOGIX, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31 1999,
---------------------------------------------------
1999 1998
- ------------------------------------------------------------- ----------------------- ---------------------------
Operating Activities:
Net loss ($3,843,923) ($9,135,254)
Adjustments to reconcile net loss to net cash used for
operating activities -
Loss on impairment of assets - 771,362
Depreciation and amortization 877,607 775,875
Change in operating items:
Accounts receivable (495) 2,667,454
Inventories 1,199,554 1,400,898
Prepaids and other current assets (44,009) (55,919)
Accounts payable and accrued liabilities (1,048,928) (888,982)
- ------------------------------------------------------------- ----------------------- ---------------------------
Net cash used for operating activities (2,860,194) (4,464,566)
- ------------------------------------------------------------- ----------------------- ---------------------------
Investing Activities:
Purchases of property and equipment, net (428,319) (576,484)
Proceeds from sale of securities 2,744,240 5,194,124
- ------------------------------------------------------------- ----------------------- ---------------------------
Net cash provided by investing activities 2,315,921 4,617,640
- ------------------------------------------------------------- ----------------------- ---------------------------
Financing Activities:
Proceeds from exercise of stock options 98,298 51,668
- ------------------------------------------------------------- ----------------------- ---------------------------
Net cash provided by
financing activities 98,298 51,688
- ------------------------------------------------------------- ----------------------- ---------------------------
Net increase (decrease) in Cash and Cash Equivalents (445,975) 204,742
Cash and Cash Equivalents:
Beginning of period 657,596 882,801
- ------------------------------------------------------------- ----------------------- ---------------------------
End of Period $ 211,621 $ 1,087,543
============================================================= ======================= ===========================
Supplemental cash flow disclosure:
Cash paid for interest $ 629 $ 1,909
The accompanying notes to financial statements are an integral part of these
statements.
3
UROLOGIX, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 1999
(Unaudited)
1. Basis of presentation
The accompanying unaudited consolidated financial statements reflect
all adjustments, consisting solely of normal recurring adjustments, needed to
present the financial results for these interim periods fairly. These financial
statements include certain amounts that are based on estimates and judgments.
These estimates may be adjusted as more current information becomes available,
and any adjustment could be significant. Results for any interim period are not
necessarily indicative of results for any other interim period or for the entire
year.
Following the rules and regulations of the Securities and Exchange
Commission, footnote disclosures that would substantially duplicate the
disclosures contained in Urologix' annual audited financial statements have been
omitted. Read together with the disclosures below, the Company believes the
interim financial statements are presented fairly. However, these unaudited
consolidated financial statements should be read together with the consolidated
financial statements and the notes included in Urologix Annual Report on Form
10-K, for the year ended June 30, 1999.
2. Basic and diluted net loss per share
Basic and diluted net loss per common share was computed by dividing
basic and diluted net loss by the weighted average number of shares of common
stock outstanding during each period. The impact of common stock equivalents has
been excluded from the computation of weighted average common shares
outstanding, as the effect would be antidilutive.
3. Revenue recognition
Generally, revenue from product sales is recognized at the time of
shipment, net of estimated returns, which is also provided for at the time of
shipment. Deferred revenue for warranty service contracts are recognized over
the contract period. Revenue from equipment rental through the Company's per
procedure fee program is recognized at the time of equipment use.
4. Inventories
December 31, 1999 June 30, 1999
- -------------------------------------------------------------------
Raw materials $ 358,642 $ 783,091
Work in process 310,604 1,180,443
Finished goods 567,618 472,884
- -------------------------------------------------------------------
$ 1,236,864 $ 2,436,418
===================================================================
4
UROLOGIX, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 1999
(Unaudited)
5. Operational Realignment and Other Charges
As a result of a downward revision to the Company's sales forecast in the first
quarter of fiscal 1999, the Company consolidated facilities and reduced the
workforce in an effort to decrease operating expenses. As a result of this
operational realignment, the Company recorded a charge to general and
administrative expenses for $1.6 million, reflecting severance costs paid to
employees, future lease costs related to facilities no longer occupied and the
impairment of assets no longer used. Additionally, the Company established a
$1.3 million dollar reserve for inventory that existed in excess quantities as a
result of the downward revision to sales forecast. The impact of the operational
realignment produced reductions to operating expense beginning in the second
quarter of fiscal 1999.
The charges described above were recorded in the quarter ended September 30,
1998. The elements of the total charge as of December 31, 1999 are as follows:
Cash Outlays
----------------------------
Total Charges Asset Write-down Change in Estimate Completed Future
-----------------------------------------------------------------------------------
Inventory $ 1,300,000 $ 1,300,000 $ - $ - $ -
Fixed assets 722,000 722,000 - - -
Facility shut down 548,000 - (130,000) 328,000 90,000
Employee severance 309,000 - - 309,000 -
-----------------------------------------------------------------------------------
$ 2,879,000 $ 2,022,000 $ (130,000) $ 637,000 $ 90,000
-----------------------------------------------------------------------------------
6. Comprehensive Income (Loss)
The table below presents comprehensive income (loss). Comprehensive income
(loss) includes all changes in equity during a period except those resulting
from investments by and distributions to shareholders. For the Company,
comprehensive income represents net loss adjusted for unrealized gains (losses)
on available-for-sale securities.
Six Months Ending December 31,
1999 1998
- ------------------------------------------------------------------------------------------------------------------
Net loss $ (3,843,923) $ (9,135,254)
Change in net unrealized gains (losses) on
available-for-sale securities (39,071) 150,337
- ------------------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss) $ (3,882,994) $ (8,984,917)
==================================================================================================================
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains, in addition to historical information,
forward-looking statements. These statements are subject to risks and
uncertainties that could cause actual results to differ materially from the
statements, including the extent to which the physicians performing the Targis
System procedures are able to obtain third-party reimbursement, market
acceptance and the rate of adoption of the Targis treatment by the medical
community, the impact of competitive treatments, products and pricing, the
approval of a shortened treatment time for the Targis System and the
effectiveness of the Company's sales and marketing organization. The Company
does not undertake responsibility to update such forward-looking statements to
reflect events that arise after the date of this report. A detailed discussion
of risks and uncertainties may be found in the section entitled "Business-Risk
Factors" in the Company's Form 10-K for the year ended June 30, 1999.
OVERVIEW
Urologix develops, manufactures and markets a minimally invasive
medical device for the treatment of benign prostatic hyperplasia ("BPH"),
commonly known as "enlarged prostate." BPH dramatically affects the quality of
life of millions of men by causing adverse changes in urinary voiding patterns.
Urologix' Targis System has been approved for marketing in the United States,
the 15 European Union countries, Japan and Canada.
The Targis procedure is a non-surgical, catheter-based treatment that
uses a proprietary microwave technology to preferentially heat diseased areas of
the prostate to a temperature sufficient to cause cell death, while
simultaneously cooling and protecting the pain-sensitive urethral tissue.
Because the urethra is protected from heat and is not punctured or penetrated,
Targis treatment can be performed without general or regional anesthesia or
intravenous sedation. Accordingly, Targis treatment can be performed in a low
cost setting such as a physician's office or an outpatient clinic. The Company
believes Targis treatment provides an efficacious, safe and cost effective
solution for BPH without the complications and side effects inherent in most
current procedures, and as such, is well positioned to address the needs of
physicians, patients and payors.
The Company's clinical studies demonstrated that most patients who
received Targis treatment experienced a significant improvement in BPH symptoms
and urine flow rates, minimal complications and post-treatment discomfort, and
were able to return to normal activities within a few days. The Company received
FDA approval to market the Targis System in August 1997.
The Company markets the Targis System in the United States through a
direct sales force. The Company intends to continue to expand the direct sales
force and enhance its direct sales capabilities. The Company has also developed
a co-marketing relationship with Boston Scientific Corporation ("Boston
Scientific"). Under this co-marketing agreement, which currently expires on
March 31, 2000, selected members of Boston Scientific's Microvasive Urology
sales force assist in the promotion and marketing of the Targis System
procedure among urologists in selected regions throughout the United States.
Outside the United States, the Company has developed a relationship
with Nihon Kohden Corporation ("Nihon Kohden"), a major Japanese developer,
manufacturer and marketer of medical devices, for market development and sales
of the Targis System in Japan. The Company also has a distribution agreement
with Boston Scientific covering all countries outside the United States, except
Japan. Under the agreement, Urologix has responsibility for market development
of the Targis System and works with Boston
6
Scientific to sell Targis Systems from Boston Scientific's inventory through
Urologix' direct sales force in Europe. Boston Scientific compensates Urologix
for Urologix' market development services.
RESULTS OF OPERATIONS
Three months ended December 31, 1999 and 1998
Sales increased to $1.9 million and $3.8 million for the three and
six-month periods ended December 31, 1999 from $1.2 million and $2.9 million
during the same periods in the prior fiscal year. The increase in revenue during
the three and six-month periods is due primarily to increased sales of Targis
System procedure kits. During the same period, sales of Targis System control
units decreased slightly as a result of the per procedure fee program. The per
procedure fee program allows customers to rent the Targis System on a procedural
basis, eliminating the need to purchase the Targis System. The change in sales
mix from Targis Systems to procedure kits is a result of a focused effort to
increase procedure-based revenue.
Cost of goods sold increased to $1.1 million during the three months
ended December 31, 1999 compared to $896,000 for the same period in 1998. Cost
of goods sold increased as a result of higher sales volume. Gross margin as a
percentage of sales increased to 42% from 27% in the same period in the prior
fiscal year due primarily to a decrease in manufacturing expense and an increase
in manufacturing efficiency.
Cost of goods sold decreased to $2.3 million during the six-months
ended December 31, 1999 compared to $3.7 million for the same period in 1998.
Cost of goods sold was affected by two events in the six-months ended December
31, 1998. First, as a result of a downward revision to forecasted sales, the
Company established a reserve of $1.3 million for excess inventory. Second, the
Company operated under a reduced production schedule, as production was
transitioned to a new catheter design, resulting in the allocation of overhead
over a lower production volume. Gross margin as a percentage of sales increased
to 41% from -31% in the same period in the prior fiscal year due to a decrease
in manufacturing expense and an increase in manufacturing efficiency in 1999.
Research and development expenses include those costs associated with
product development, treatment of patients participating in clinical trials, the
accumulation of outcome data to substantiate clinical results and the
preparation and submission of applications for regulatory approvals. Research
and development expenses decreased to $932,000 and $2.0 million for the three
and six-month periods ended December 31, 1999 from $1.0 million and $2.5 million
for the same periods in the prior fiscal year, due primarily to reductions in
staffing, the conclusion of several clinical studies and lower regulatory and
development expenses. The Company expects research and development expenses to
decrease due to decreased staffing levels and lower clinical expenses following
the conclusion of the shortened treatment time clinical study that the Company
submitted to the FDA in December of 1999 for commercial marketing approval.
Sales and marketing expenses decreased to $1.6 million and $3.1 million
for the three and six-month periods ended December 31, 1999 from $2.0 million
and $3.7 million during the same period in the prior fiscal year. Sales and
marketing costs incurred during the three and six-months ended December 31, 1999
were offset by payments received from Boston Scientific for international market
development services provided by Urologix. These payments were recorded as a
reduction to sales and marketing expenses. The Company expects sales and
marketing expenses to increase as the Company hires additional direct sales
representatives and intensifies its efforts to generate awareness and acceptance
of the Targis treatment.
General and administrative expenses decreased to $457,000 and $1.0
million for the three and six-month period ended December 31, 1999 from $659,000
and $3.0 million during the same period in the prior
7
fiscal year. General and administrative expense decreased due to reductions in
staffing and other administrative expenses. General and administrative expenses
for the three and six-months ended December 1998 includes the impact of a $1.6
infrequent charge incurred in connection with the operational realignment.
Interest income decreased to $359,000 and $732,000 for the three and
six-months ended December 31, 1999 from $451,000 and $926,000 for the same
period in the prior fiscal year. Interest income decreased due primarily to
lower cash and investment balances.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception through sales
of equity securities and, to a lesser extent, sales of the Targis System and
Targis System procedure kits. As of December 31, 1999, the Company had total
cash, cash equivalents and available-for-sale securities of $24.8 million and
working capital of $25.5 million.
During the six-months ended December 31, 1999, the Company used $2.9
million in operating activities, primarily as a result of the Company's net
loss. The Company generated $2.3 million in investing activities, primarily
reflecting the sale of $2.7 million of investment securities less purchases of
$400,000 of property and equipment. The Company is financing its fiscal 2000
operating and investing activities primarily through a November 1997 secondary
offering that raised net proceeds of $31.5 million.
The Company expects to continue to incur additional losses and will use
its working capital as it incurs substantial expenses related to the Targis
System market and research and development activities. In addition, the Company
has commenced a program to rent Targis System control units to customers on a
per procedure basis. Depending on the outcome of this program, the Company may
use substantial capital to finance the units rented by customers.
Although the Company believes that existing cash, cash equivalents and
available-for-sale securities will be sufficient to fund its operations for at
least the next 24 months, there can be no assurance that the Company will not
require additional financing in the future or that any additional financing will
be available to the Company on satisfactory terms, if at all.
INTEREST RATE RISK
The fair value of the Company's investment portfolio at December 31,
1999 approximated carrying value. Increases and decreases in prevailing interest
rates generally translate into decreases and increases in the fair value of
these instruments. Also, fair values of interest rate sensitive instruments may
be affected by the credit worthiness of the issuer, prepayment options, relative
values of alternative instruments, the liquidity of the instrument and other
general market conditions.
Market risk was estimated as the potential decrease in fair value
resulting from a hypothetical 10% increase in interest rates for the issues
contained in the investment portfolio and was not materially different from the
year-end carrying value.
YEAR 2000 ISSUE
The Year 2000 problem, which is common to most corporations, concerns
the inability of information systems, including computer software programs as
well as other systems dependent on computerized information such as phones,
voicemail and security systems (collectively, "Non-IT Systems"), to properly
recognize and process date sensitive information related to the year 2000 and
beyond.
8
All Year 2000 efforts with respect to the Company and its computer
software programs were made through internal resources and through routine
software upgrades provided by the Company's software vendors. The Company did
not incur significant separately identifiable costs related to Year 2000 issues
through January 1, 2000 and does not expect to incur significant additional
costs related to Year 2000 issues. The Company did not hire additional
employees, either full-time or contract, in order to address Year 2000 issues.
The Company's Non-IT Systems were also determined to be Year 2000
compliant prior to January 1, 2000. The Company utilized internal resources to
address the Year 2000 compliance of its Non-IT Systems and did not incur
significant separately identifiable costs related to Year 2000 issues through
January 1, 2000 and does not expect to incur significant additional Year 2000
costs. In addition to reviewing its internal systems, the Company polled its
significant outside software and other vendors, customers and freight carriers
to determine whether they are Year 2000 compliant and to attempt to identify any
potential issues. The Company's outside software vendors confirmed that they
were Year 2000 compliant, including the products utilized by the Company.
As of this date, the Company has experienced no material Year 2000
related failures. The Company is also not aware of any Year 2000 related
problems at any of its customers or critical suppliers that could adversely
affect its business operations. However, there are now assurances that the
Company will not be impacted by Year 2000 related failures of its own systems or
those of it business partners.The Company will continue to monitor its own
systems and those of its business partners to identify and address any potential
risk situation related to the Year 2000.
Item 3. Qualitative and Quantitative Disclosure about Market Risk
See Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Interest Rate Risk"
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment to the Co-marketing Agreement between Urologix,
Inc. and Boston Scientific Corporation
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter for which this Quarterly Report is filed, the
Company filed no Reports on form 8-K.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date February 10, 2000
Urologix, Inc.
- --------------
(Registrant)
/s/ Michael M. Selzer, Jr.
- --------------------------
Michael M. Selzer, Jr.
President and Chief Executive Officer
(Duly Authorized Officer)
/s/ Christopher R. Geyen
- ------------------------
Christopher R. Geyen
Vice President Finance
(Principal Financial Officer)
II-1