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 SEPTEMBER 30, 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 November 1, 1999, the Company had outstanding 11,489,545 shares of common
stock, $.01 par value.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UROLOGIX, INC.
BALANCE SHEETS
September 30, 1999 June 30, 1999
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Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 681,473 $ 657,596
Available-for-sale securities 25,414,535 27,378,692
Accounts receivable, net 1,027,394 1,260,810
Inventories, net 1,979,096 2,436,418
Prepaids and other current assets 939,760 588,355
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Total current assets 30,042,258 32,321,871
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Property and equipment:
Machinery, equipment and furniture 4,973,143 4,772,666
Less - accumulated depreciation (2,850,740) (2,521,479)
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Property and equipment, net 2,122,403 2,251,187
Other assets, net 4,307,625 4,414,974
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$ 36,472,286 $ 38,988,032
======================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 858,559 $ 836,999
Accrued liabilities 2,154,779 2,684,390
Total liabilities 3,013,338 3,521,389
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Commitments and contingencies
Shareholders' equity
Common stock, $.01 par value, 25,000,000 shares 114,856 114,289
authorized; 11,485,638 and 11,428,937 shares issued
and outstanding
Additional paid-in capital 91,209,253 91,149,858
Accumulated deficit (57,827,281) (55,796,123)
Cumulative other comprehensive loss (37,880) (1,381)
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Total shareholders' equity 33,458,948 35,466,643
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$ 36,472,286 $ 38,988,032
======================================================================================================
The accompanying notes to financial statements are an integral part of these
balance sheets.
UROLOGIX, INC.
STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended September 30,
---------------------------------------
1999 1998
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Sales $ 1,910,488 $ 1,624,605
Cost of goods sold 1,152,806 2,846,411
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Gross profit (loss) 757,682 (1,221,806)
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Costs and expenses:
Research and development 1,059,538 1,496,903
Sales and marketing 1,522,258 1,656,650
General and administrative 580,713 2,298,429
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Total costs and expenses 3,162,509 5,451,982
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Operating loss (2,404,827) (6,673,788)
Interest income, net 373,669 475,240
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Net loss $(2,031,158) $(6,198,548)
====================================================================================================
====================================================================================================
Basic and diluted net loss per common share $ (0.18) $ (0.55)
====================================================================================================
Basic and diluted weighted average number of common
shares outstanding 11,478,312 11,256,842
The accompanying notes to financial statements are an integral part of these
statements.
UROLOGIX, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended September 30,
----------------------------------------------
1999 1998
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Operating Activities:
Net loss ($2,031,158) ($6,198,548)
Adjustments to reconcile net loss to net cash
used for operating activities -
Loss on impairment of assets - 721,880
Depreciation and amortization 436,610 409,178
Change in operating items:
Accounts receivable 233,416 2,318,412
Inventories 457,322 1,283,206
Prepaids and other current assets (351,405) (328,368)
Accounts payable and accrued liabilities (508,051) (662,459)
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Net cash used for operating activities (1,763,266) (2,456,699)
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Investing Activities:
Purchases of property and equipment, net (200,477) (465,202)
Proceeds from sale of securities 1,927,658 2,851,975
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Net cash provided by investing activities 1,727,181 2,386,773
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Financing Activities:
Proceeds from exercise of stock options 59,962 7,857
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Net cash provided by
financing activities 59,962 7,857
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Net increase (decrease) in Cash and Cash 23,877 (62,069)
Equivalents
Cash and Cash Equivalents:
Beginning of period 657,596 882,801
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End of Period $ 681,473 $ 820,732
=====================================================================================================
Supplemental cash flow disclosure:
Cash paid for interest $ 436 $ 1,035
========== ==========
The accompanying notes to financial statements are an integral part of these
statements.
UROLOGIX, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
1. Basis of presentation
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:
September 30, 1999 June 30, 1999
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Raw materials $ 580,730 $ 783,091
Work in process 432,277 1,180,443
Finished goods 966,089 472,884
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$1,979,096 $2,436,418
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4. Comprehensive Income
The table below presents comprehensive income. Comprehensive income includes 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.
Three Months Ending September 30,
1999 1998
- ----------------------------------------------------------------------------------------------------------
Net loss $(2,031,158) $(6,198,548)
Change in net unrealized gains / (losses) on
available-for-sale securities (36,499) 120,848
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Comprehensive Income $(2,067,657) $(6,077,700)
===========================================================================================================
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 10K
for the year ended June 30, 1999.
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 treatment 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,
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 and its co-marketing partner, Boston Scientific Corporation ("Boston
Scientific"). Urologix' direct sales force has responsibility for completing and
transacting the sales of the Targis System and Targis System procedure kits,
while Boston Scientific, through selected members of its Microvasive Urology
sales force, assist in the promotion and marketing of the Targis System
procedure among urologists 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
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 September 30, 1999 and 1998
Sales increased to $1.9 million for the three months ended September 30,
1999 from $1.6 million for the same period in the prior fiscal year due to
increased domestic sales. Domestic sales increased 38% from the same period in
the prior fiscal year due primarily to increased sales of Targis System
procedure kits. International sales decreased slightly as a result of decreased
purchases from international distributors who had sufficient inventory of Targis
Systems.
Cost of goods sold decreased to $1.2 million during the three months ended
September 30, 1999 compared to $2.8 million for the same period in 1998. Cost of
goods sold was affected by two events in the three months ended September 30,
1998. First, as a result of a downward revision to forecasted sales and design
changes to the Targis System, 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. Excluding the impact
of the $1.3 million reserve, gross margin as a percentage of sales increased to
40% from 6% in the same period in the prior fiscal year. The increase in gross
margin is attributable to reductions in overhead expenses and improvement in
manufacturing efficiencies.
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 $1.1 million for the three month period ended September 30, 1999
from $1.5 million for the same period in the prior fiscal year, due primarily to
reductions in wages and benefits, the conclusion of several clinical studies and
lower regulatory and development expenses. The Company expects research and
development expenses to decrease following the conclusion of the shortened
treatment time clinical study that the Company expects to submit to the FDA
later in 1999 for commercial marketing approval.
Sales and marketing expenses for the three months ended September 30, 1999
decreased to $1.5 million from $1.7 million during the same period in the prior
fiscal year. Additional sales and marketing costs incurred during the three
months ended September 30, 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 $581,000 for the three-
months ended September 30, 1999 from $2.3 million for the same period in the
prior fiscal year. Excluding the impact of a $1.6 million non-recurring charge
incurred in connection with a reduction in workforce in the three months ended
September 30, 1998, general and administrative expense decreased due to
reductions in staffing and other administrative expenses.
Interest income decreased to $374,000 for the three months ended September
30, 1999 from $475,000 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 September 30, 1999, the Company had total cash,
cash equivalents and available-for-sale securities of $26.1 million and working
capital of $27.0 million.
During the three months ended September 30, 1999, the Company used $1.8
million in operating activities, primarily as a result of the Company's net
loss. The Company generated $1.7 million in investing activities, primarily
reflecting the sale of $1.9 million of investment securities less purchases of
$200,000 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 development and research and development activities. In addition, the
Company has commenced a program to rent Targis System control units on a per
procedure basis to customers. Depending on the success 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 September 30,
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
Many currently installed computer systems and software products are coded
to accept, store or report only two-digit year entries in date code fields.
Beginning in the Year 2000 (Y2K), these date code fields will need to accept
four-digit entries to distinguish 21st century dates from 20th century dates.
The Y2K issue is a result of these programs being written with two digits
instead of four. As a result, computer systems and software used by companies,
including Urologix and its vendors and customers, will need to comply with the
Y2K requirements.
The Company is aware of the Y2K issue and has been proactive in addressing
the issue internally and externally. The Company's primary manufacturing and
accounting software has been certified Y2K compliant by the vendor. The Company
does not depend on in-house custom systems and generally purchases off-the-shelf
software from reputable vendors who have tested their software for Y2K
compliance. The Y2K
issue is being considered for all future software purchases. Although the
Company believes the Y2K issue will not pose material operational problems for
its computer systems, there can be no assurance that problems arising from the
Y2K issue will be completely eliminated.
The Company has initiated communication with significant suppliers and
customers to determine the extent to which the Company's operations are
vulnerable to a failure of any of those third parties to remediate their own Y2K
issues. This effort is in progress and should be completed prior to 2000. Even
where assurances are received from third parties, however, there remains a risk
that failure of systems and products of other companies on which the Company
relies could have a material adverse effect on the Company's operations.
Urologix products are Y2K compliant and are able to operate in the Year
2000 and beyond. The Company believes it has an effective program in place to
resolve Y2K issues in a timely manner. The Company also has contingency plans
for certain critical applications and is working on such plans for others. These
contingency plans involve, among other actions, manual workarounds, increasing
inventories and adjusting staffing strategies. In the event that the Company
does not completely resolve all of the Y2K issues, the Company's business
operations could be adversely affected, although the resulting costs and loss of
business cannot be reasonably estimated at this time.
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
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.
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 November 8, 1999
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)