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 MARCH 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.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1697237
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14405 21st Avenue North, Minneapolis, MN 55447
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(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 May 13, 1999, the Company had outstanding 11,424,100 shares of common
stock, $.01 par value.
UROLOGIX, INC.
BALANCE SHEETS
March 31, 1999 June 30, 1998
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,111,536 $ 882,801
Available-for-sale securities 28,950,674 35,616,726
Accounts receivable, net 1,195,423 4,013,533
Inventories, net 2,973,967 4,313,895
Prepaids and other current assets 694,518 691,102
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Total current assets 34,926,118 45,518,057
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Property and equipment:
Machinery, equipment and furniture 4,436,619 4,902,773
Less - accumulated depreciation (2,252,529) (1,703,293)
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Property and equipment, net 2,184,090 3,199,480
Other assets, net 4,526,540 4,771,222
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$ 41,636,748 $ 53,488,759
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of capitalized lease obligations $ 16,432 $ 28,138
Accounts payable 891,251 1,960,768
Accrued liabilities 2,686,458 2,154,078
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Total current liabilities 3,594,141 4,142,984
Capitalized lease obligations, less current maturities 3,770 8,871
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Total liabilities 3,597,911 4,151,855
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Commitments and contingencies
Shareholders' equity
Common stock, $.01 par value, 25,000,000 shares 114,236 112,399
authorized; 11,423,580 and 11,239,892 shares issued and
outstanding
Additional paid-in capital 91,110,556 91,016,366
Accumulated deficit (53,276,205) (41,780,353)
Cumulative other comprehensive income (loss) 90,250 (11,508)
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Total shareholders' equity 38,038,837 49,336,904
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$ 41,636,748 $ 53,488,759
============ ============
The accompanying notes to financial statements are an integral part of these
balance sheets.
UROLOGIX, INC.
STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended March 31, Nine Months Ended March 31,
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1999 1998 1999 1998
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Sales $ 1,341,892 $ 2,508,515 $ 4,200,444 $ 8,311,495
Cost of goods sold 956,368 2,601,553 4,699,070 6,479,980
----------- ----------- ------------ -----------
Gross profit (loss) 385,524 (93,038) (498,626) 1,831,515
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Costs and expenses:
Research and development 1,264,244 1,913,307 3,790,084 4,731,713
Sales and marketing 1,342,045 1,671,194 5,036,407 4,525,025
General and administrative 558,142 567,320 3,515,295 1,699,326
----------- ----------- ------------ -----------
Total costs and expenses 3,164,431 4,151,821 12,341,786 10,956,064
----------- ----------- ------------ -----------
Operating loss (2,778,907) (4,244,859) (12,840,412) (9,124,549)
Interest income, net 418,309 743,256 1,344,560 1,466,980
----------- ----------- ------------ -----------
Net loss $(2,360,598) $(3,501,603) $(11,495,852) $(7,657,569)
=========== =========== ============ ===========
Basic and diluted net loss per common share $ (0.21) $ (0.32) $ (1.01) $ (0.75)
=========== =========== ============ ===========
Basic and diluted weighted average number
of common shares outstanding 11,423,575 11,102,222 11,346,467 10,184,104
The accompanying notes to financial statements are an integral part of these
statements.
UROLOGIX, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For The Nine Months
Ended March 31,
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1999 1998
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Operating Activities:
Net loss $(11,495,852) $ (7,657,569)
Adjustments to reconcile net loss to net cash
used for operating activities -
Loss on impairment of assets 771,362 -
Depreciation and Amortization 1,151,997 1,160,888
Change in operating items:
Accounts receivable 2,818,110 (1,570,861)
Inventories 1,339,928 (1,750,215)
Prepaids and other current assets (3,415) 75,950
Accounts payable and accrued liabilities (537,137) (219,889)
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Net cash used for operating activities (5,955,007) (9,961,696)
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Investing Activities:
Purchases of property and equipment, net (663,288) (1,214,627)
Purchase of available-for-sale securities (58,255,264) (449,494,901)
Proceeds from sale of available-for-sale securities 65,023,074 429,193,953
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Net cash provided by (used in) investing activities 6,104,522 (21,515,575)
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Financing Activities:
Proceeds from the sale of common stock, net - 31,659,351
Proceeds from exercise of stock awards 96,027 131,014
Payments made on capital lease obligations (16,807) (14,964)
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Net cash provided by financing activities 79,220 31,775,401
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Net increase in Cash and Cash Equivalents 228,735 298,130
Cash and Cash Equivalents:
Beginning of period 882,801 275,571
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End of Period $ 1,111,536 $ 573,701
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Supplemental cash flow disclosure:
Cash paid for interest $ 707 $ 6,530
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The accompanying notes to financial statements are an integral part of these
statements.
UROLOGIX, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
1. Basis of presentation
The accompanying unaudited condensed financial statements of Urologix, Inc. (the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions for Form
10-Q and Article 10 of Regulation S-X. The balance sheet as of March 31, 1999
and the statements of operations for the three and nine-month periods ended
March 31, 1999 and 1998, and the statements of cash flows for the nine-month
periods ended March 31, 1999 and 1998, are unaudited but include all adjustments
(consisting of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the financial position at such dates and
the operating results and cash flows for those periods. Although the Company
believes that the disclosures in these financial statements are adequate to make
the information presented not misleading, certain information normally included
in financial statements and related footnotes prepared in accordance with
generally-accepted accounting principles has been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission. The
accompanying financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended June 30, 1998.
Results for any interim period are not necessarily indicative of results for any
other interim period or for the entire year.
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. Inventories
Inventories consisted of the following as of:
March 31, 1999 June 30, 1998
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Raw materials 1,114,452 2,349,717
Work in process 1,359,228 132,559
Finished goods 500,287 1,831,619
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2,973,967 4,313,895
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4. Recently Issued Accounting Standards
The Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting in the financial statements all changes in
equity during a period, except those resulting from investments by and
distributions to owners. For the Company, comprehensive income represents net
income adjusted for unrealized gains/losses on available for sale securities.
Comprehensive income (loss) as defined by SFAS No. 130, was $(2,409,177) and
$(11,394,094) for the three and nine-month periods ended March 31, 1999 and
$(3,592,523) and $(7,621,013) for the three and nine-month periods ended March
31, 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Urologix develops, manufactures and markets minimally invasive medical
devices for the treatment of urological diseases. The Company's initial product,
the Targis System, is designed to treat 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.
The 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 therapy that
uses a proprietary microwave technology that preferentially heats 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, a
Targis procedure can be performed without general or regional anesthesia or
intravenous sedation. Accordingly, the procedure can be performed in a low cost
setting such as a physician's office or an outpatient clinic. The Company
believes that the Targis System provides an efficacious, safe and cost effective
procedure for the treatment of BPH without the complications and side effects
inherent in most current treatments, 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 the Targis therapy 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 submitted results of its clinical studies to the United States Food and
Drug Administration (the "FDA") in its premarket approval application ("PMA") in
February 1997 and subsequently 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 and its co-marketing partner, Boston Scientific Corporation
("Boston Scientific"), a world wide developer, manufacturer and marketer of
medical devices. Urologix' direct sales force has sole responsibility for
completing and transacting the sales of the Targis system, while Boston
Scientific, through its Microvasive Urology sales force, assists in the
promotion and marketing of the Targis System among urologists throughout the
United States. The Company has developed a sales and marketing team consisting
of sales and marketing management, product managers, communication specialists
and direct sales representatives, who are all dedicated to marketing the Targis
System.
Outside the United States, the Company has a broad based distribution
agreement 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 has an International
Distribution Agreement with Boston Scientific covering all countries outside the
United States, except Japan. Under the agreement, which was amended in February
of 1999, Urologix has responsibility for market development of the Targis System
and works with Boston 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
Sales decreased to $1.3 million and $4.2 million for the three and
nine-month periods ended March 31, 1999 from $2.5 million and $8.3 million for
the same periods in the prior fiscal year due to a decrease in international
sales as a result of adequate inventory levels of the Targis System at
international distributors. Sales in the United States represented approximately
92% of revenue during the first nine months of 1999, compared to 27% of revenue
in the first nine months of 1998. The Company expects United States sales of the
Targis System
to increase in fiscal year 1999 compared to fiscal year 1998; however,
international sales are expected to be minimal due to existing inventory levels
of Targis Systems at the Company's international distributors.
Cost of goods sold includes raw materials, labor and royalties, as well
as costs incurred in connection with the production of the Targis Systems. Cost
of goods sold decreased to $956,000 during the three months ended March 31, 1999
compared to $2.6 million for the same period in 1998. The decrease in cost of
goods sold is attributable primarily to decreases in sales volume. Excluding the
impact of a $700,000 inventory write down in the three months ended March 31,
1998, gross profit as a percentage of sales increased by 5% to 29% of sales
during the three months ended March 31, 1999 when compared to the same period in
the prior year. The increase in gross margin as a percent of sales is
attributable to a reduction in operating costs and improvements in the
manufacturing process.
Cost of goods sold decreased to $4.7 million during the first nine-
months of 1999 compared to $6.5 million during the first nine months of 1998.
The decrease in cost of goods sold is attributable to decreases in sales volume.
Excluding the impact of a $1.3 million reserve established in 1999 and a
$700,000 reserve established in 1998, gross profit as a percentage of sales
during the first nine months of 1999 decreased by 11% to 19% compared to the
same period in 1998. Apart from these adjustments, gross margin decreased in the
nine months ended March 31, 1999 when compared to the same period in 1998 as a
result of lower sales and manufacturing volume resulting in the allocation of
overhead over a lower production volume resulting in a higher product cost.
Research and development expenses include those costs associated with
product development, protection of the Company's intellectual property,
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 $1.3 million and $3.8 million for the three and nine-month periods
ended March 31, 1999 from $1.9 million and $4.7 million for the same periods in
the prior fiscal year, due primarily to the conclusion of several clinical
studies, lower regulatory expenses and the settlement of litigation.
Sales and marketing expenses for the three months ended March 31, 1999
decreased to $1.3 from $1.7 million during the same period in the prior fiscal
year. The decrease in sales and marketing expense is primarily attributable to
payments received from Boston Scientific for international market development
services provided by Urologix. These payments were recorded as a reduction to
sales and marketing expense. Sales and marketing expenses for the nine months
ended March 31, 1999 increased to $5.0 from $4.5 million during the same period
in the prior fiscal year due primarily to costs associated with the Company's
November 1997 marketing launch of the Targis System in the United States and
costs associated with supporting the marketing of the Targis System in Europe
and Japan. These costs included the hiring of sales and marketing management,
preparation of promotional materials, recruitment of field sales representatives
and efforts related to obtaining third-party reimbursement for the Targis
System. The Company expects sales and marketing expenses to increase as it
expands its sales efforts in the United States and continues supporting its
international distributors' sales efforts.
General and administrative expenses decreased to $558,000 for the
three-month period ended March 31, 1999 from $567,000 for the same period in the
prior fiscal year. General and administrative expenses increased to $3.5 million
for the nine month period ended March 31, 1999 from $1.7 million for the same
period in the prior fiscal year. General and Administrative expenses for the
nine month period ended March 31, 1999 reflect a non-recurring charge of $1.6
million incurred in connection with a reduction in workforce in October 1998
that resulted from the downward revision of the Company's sales forecast. The
charge includes severance costs paid to employees, future lease costs related to
facilities no longer occupied and the impairment of assets no longer used as a
result of the reduction in work force.
Interest income decreased to $418,000 and $1.3 million for the three
and nine-month periods ended March 31, 1999 from $743,000 and $1.5 million for
the same periods 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 primarily
through sales of equity securities and, to a lesser extent, sales of the Targis
System. As of March 31, 1999, the Company had total cash, cash equivalents and
available-for-sale securities of $30.1 million and working capital of $31.3
million. During the nine months ended March 31, 1999 the Company used
approximately $6.6 million of cash for operating activities and property and
equipment purchases, which amounts were funded primarily by proceeds from
available-for-sale securities.
The Company expects to continue to incur additional losses, and will
use its working capital as it incurs substantial expenses related to the
marketing and sale of the Targis System, clinical trials and research and
development activities. In addition, should the Company choose to rent Targis
System control units to customers in the future, substantial capital could be
required. Although the Company believes that existing cash, cash equivalents and
available-for-sale securities will be sufficient to fund its operations for 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.
YEAR 2000 ISSUE
The Company is evaluating the potential impact of what is commonly
referred to as the Year 2000 issue, concerning the inability of certain
information systems to properly recognize and process dates containing the year
2000 and beyond. The Company has established a dedicated Year 2000 team working
with every operational area throughout the Company, and this team has worked
with management to commence the following steps: (i) implementing a Year 2000
Assessment and Testing Plan for all internal information systems and other
systems that contain microcontrollers that may be affected by the Year 2000 date
change; (ii) implementing a Year 2000 Assessment and Testing Plan for all
Company products, (iii) communicating with third parties that supply product to
the Company to ensure they are addressing the Year 2000 issue; and (iv)
contingency and disaster recovery planning to ensure Year 2000 problem
resolution.
The Company has completed testing and established compliance with
respect to all of its systems and products, subject to possible equipment
upgrades during 1999 and ongoing communications with third parties. Regardless
of the Year 2000 compliance of the Company's systems and products, there can be
no assurance that the Company will not be adversely affected by the failure of
others to become Year 2000 compliant.
The Company estimates that its direct costs for Year 2000 compliance
will consist of costs related to the staff time devoted to Year 2000 compliance.
The Company does not expect capital expenditures will be necessary related to
Year 2000 compliance. Costs and capital expenditures in these areas have not
been material for historical periods.
As noted below under "Forward-Looking Statements," statements in this
section that are not historical or current facts are forward-looking statements
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, including statements regarding the timetable for Year 2000
compliance, the Company's costs and capital expenditures, the success of the
Company's efforts and others' efforts to achieve compliance, and the effects of
the Year 2000 issue on the Company's future financial condition and results of
operations. These statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results and
those presently anticipated or projected. The following important factors, among
others, could affect the accuracy of these statements: (i) the inherent
uncertainty of the costs and timing of achieving compliance on the wide variety
of systems used by the Company, (ii) the reliance on the efforts of vendors,
customers, government agencies and other third parties to achieve adequate
compliance and avoid disruption of the Company's business in early 2000 and
(iii) the uncertainty of the ultimate costs and consequences of any
unanticipated disruption in the Company's business resulting from the failure of
one of the Company's applications or of a third party's systems. The foregoing
list is not exhaustive, and the Company
disclaims any obligation subsequently to revise any forward-looking statements
to reflect events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events.
FORWARD-LOOKING STATEMENTS
Statements included in this Form 10-Q that are not historical or
current facts are "forward-looking statements" made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and are
subject to certain risks and uncertainties that could cause actual results to
differ materially. These factors include (i) competition from other existing or
new BPH treatments; (ii) the Company's ability to successfully market its
product in the United States through sales representatives; (iii) the ability of
the Company's distributors to successfully market and sell the Company's
products in markets outside the United States; (iv) the Company's ability to
successfully manufacture the Targis System in sufficient quantities to meet
future demand for the products; and (v) the extent to which the physicians
performing the Targis System procedures are able to obtain third party
reimbursement. A detailed discussion of risks and uncertainties may be found in
the Section entitled "Business - Forward Looking Statements" in Urologix Form
10-K for the year ended June 30, 1998.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
On January 14, 1999 the Company held its Annual Shareholders' Meeting.
The results of the meeting were disclosed in our previous quarterly
filing for the quarter ended December 31, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment to the International Distribution Agreement between
Urologix, Inc. and Boston Scientific Corporation (1)
27.1 Financial Data Schedule
(1) Certain information has been deleted from this exhibit and filed
separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment under Rule 24b-2.
(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.
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.
May 14, 1999
Urologix, Inc.
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(Registrant)
/s/ Michael M. Selzer, Jr.
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Michael M. Selzer, Jr.
President and Chief Executive Officer
(Duly Authorized Officer)
/s/ Wesley E. Johnson, Jr.
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Wesley E. Johnson, Jr.
Vice President/Finance and Chief
Financial Officer
(Principal Financial Officer)