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| ULGX > SEC Filings for ULGX > Form 10-Q on 13-Feb-2009 | All Recent SEC Filings |
13-Feb-2009
Quarterly Report
This Management's Discussion and Analysis of Financial Condition and Results of Operations contains, in addition to historical information, forward-looking statements that are based on our current expectations, beliefs, intentions or future strategies. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements as a result of certain factors, including those set forth under Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended June 30, 2008, as well as in other filings we make with the Securities and Exchange Commission and include factors such as: the impact of competitive treatments, products and pricing; our ability to develop and market new products and services, including the Urologix-owned Cooled ThermoTherapy™ mobile service and the CoolWave™ control unit and our ability to generate revenue from new products such as CTC Advance™; our dependence upon third-party reimbursement for our products and reimbursement rates for Cooled ThermoTherapy; our dependence on Cooled ThermoTherapy for all of our revenues; approval by the FDA of our products, and compliance with FDA requirements for the manufacture, labeling, marketing and sale of our products; the rate of adoption by the medical community of Cooled ThermoTherapy products and the effectiveness of our sales organization and marketing efforts to the medical and patient community; our limited experience in manufacturing some of our products and our dependence upon third-party suppliers to produce and supply products; our ability to successfully defend our intellectual property against infringement and the expense associated with that effort; product liability claims inherent in the testing, production, marketing and sale of medical devices; product recalls which could harm our reputation and business; and our ability to obtain additional financing if needed on reasonable terms. 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.
The following is a discussion and analysis of Urologix' financial condition and results of operations as of and for the three and six month periods ended December 31, 2008 and 2007. This section should be read in conjunction with the condensed financial statements and related notes in Item 1 of this report and Urologix' Annual Report on Form 10-K for the year ended June 30, 2008.
OVERVIEW
Urologix develops, manufactures, and markets non-surgical, catheter-based therapies that use a proprietary cooled microwave technology for the treatment of benign prostatic hyperplasia (BPH), a disease that affects more than 23 million men worldwide. We market our control units under the Targis ® and CoolWave® names and our procedure kits under the recently approved CTC Advance™, CTC™, Targis and Prostaprobe™ names. All systems utilize the Company's Cooled ThermoTherapy™ technology, a targeted microwave energy combined with a unique cooling mechanism that protects healthy tissue and enhances patient comfort while providing safe, effective, lasting relief from the symptoms of BPH. Cooled ThermoTherapy can be performed without general anesthesia or intravenous sedation and can be performed in a physician's office or an outpatient clinic. We believe that Cooled ThermoTherapy provides an efficacious, safe and cost-effective solution for BPH with results clinically superior to medication and without the complications and side effects inherent in surgical procedures.
We believe that third-party reimbursement is essential to the continued adoption of Cooled ThermoTherapy, and that clinical efficacy, overall cost-effectiveness and physician advocacy will be keys to maintaining such reimbursement. We estimate that 60% to 80% of patients who receive Cooled ThermoTherapy treatment in the United States will be eligible for Medicare coverage. The remaining patients will either be covered by private insurers, including traditional indemnity health insurers and managed care organizations, or they will be private-paying patients. As a result, Medicare reimbursement is particularly critical for widespread market adoption of Cooled ThermoTherapy in the United States.
The level of Medicare reimbursement for Cooled ThermoTherapy is dependent on the site of service. Beginning on August 1, 2000, the Centers for Medicare and Medicaid Services (CMS) replaced the reasonable cost
In January 2001, CMS began to reimburse for Cooled ThermoTherapy treatments performed in the urologist's office. The reimbursement rate (inclusive of the physician's fee) in calendar year 2009 for Cooled ThermoTherapy procedures performed in the urologist's office is $2,551 compared to $3,118 in calendar 2008, which is subject to geographic adjustment. The urologist's office is where the majority of Urologix Cooled ThermoTherapy treatments are performed today.
In January 2008, the CPT Code covering Cooled ThermoTherapy was once again added to the Ambulatory Surgical Centers (ASC) list of Medicare approved procedures. Effective with this change, urologists who perform Cooled ThermoTherapy procedures in an ASC are reimbursed under the two-part system in which the ASC receives a fixed fee of $1,849 for calendar year 2009, as compared to $1,872 in calendar 2008, while the urologist performing the treatment is reimbursed approximately $587 for calendar year 2009.
We have an active reimbursement strategy, and have retained consultative experts to assist us with reimbursement matters, including the reimbursement rate reductions for calendar year 2009.
Private insurance companies and HMOs make their own determinations regarding coverage and reimbursement based upon "usual and customary" fees. To date, we have received coverage and reimbursement in various geographies from private insurance companies and HMOs throughout the United States. We intend to continue our efforts to gain coverage and reimbursement across the United States. There can be no assurance that we will receive favorable coverage or reimbursement determinations for Cooled ThermoTherapy from these payers or that amounts reimbursed to physicians for performing Cooled ThermoTherapy procedures will be sufficient to encourage physicians to use Cooled ThermoTherapy.
Our goal is to grow Cooled ThermoTherapy as a standard of care for the treatment
of BPH. Our business strategy to achieve this goal is to (i) educate both
patients and physicians on the benefits of Cooled ThermoTherapy compared to
other treatment options, (ii) increase the use of Cooled ThermoTherapy by
physicians who already have access to a Cooled ThermoTherapy system,
(iii) increase the number of physicians who provide Cooled ThermoTherapy to
their patients, and (iv) provide more physicians with access to Cooled
ThermoTherapy through the use of third party mobile providers and our own Cooled
ThermoTherapy mobile service in the United States.
We expect to continue to invest in research and development and clinical trials, sales and marketing programs and our Cooled ThermoTherapy mobile service as we focus on growing revenues and continuing to improve our therapy. Our future growth will be dependent upon, among other factors, our success in achieving increased treatment volume and market adoption of the Cooled ThermoTherapy procedures in the physician's office, including treatments delivered through our Cooled ThermoTherapy mobile service, our success in obtaining and maintaining necessary regulatory clearances, as well as the risk of FDA mandated recall of our products, our ability to manufacture at the volumes and quantities the market requires, the fact that our products may be subject to product recalls even after receiving FDA clearance or approval, the extent to which Medicare and other health care payers continue to reimburse costs of Cooled ThermoTherapy procedures performed in physicians' offices, hospitals, and ambulatory surgery centers and the amount of reimbursement provided.
Critical Accounting Policies:
A description of our critical accounting policies was provided in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended June 30, 2008. At December 31, 2008, our critical accounting policies and estimates continue to include revenue recognition, allowance for doubtful accounts, product warranty, inventories, sales tax accrual, income taxes, and stock-based compensation.
Net Sales
Net sales for the three and six month periods ended December 31, 2008 were $3.4 million and $6.0 million, respectively, compared to $3.8 million and $8.2 million, respectively, during the same periods of the prior fiscal year. The $416,000 or 11 percent decrease in net sales and the $2.1 million or 26 percent decrease in net sales for the three and six-month periods, respectively, ended December 31, 2008, is primarily attributable to reduced orders for procedure kits as well as a reduction in the number of treatments performed by our Urologix-owned Cooled ThermoTherapy mobile service.
During the second quarter of fiscal 2009, 37 percent of sales were derived from treatment catheter sales to direct accounts, compared to 41 percent in the prior fiscal year, while third party mobile revenue represented 16 percent of overall revenue compared to 9 percent in the prior year. Revenue derived from the Urologix-owned Cooled ThermoTherapy mobile service constituted 44 percent of overall revenue in the current quarter compared to 47 percent of revenues in the second quarter of fiscal 2008.
Cost of Goods Sold and Asset Impairments 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, as well as costs associated with the delivery of our Cooled ThermoTherapy mobile service. Cost of goods sold for the three and six month periods ended December 31, 2008 decreased $356,000 or 18 percent to $1.6 million and $502,000 or 14 percent to $3.1 million, respectively, from $1.9 million and $3.6 million during the same respective periods of the prior year. The decrease in costs of goods sold for the three and six-month periods ended December 31, 2008 is a result of lower sales, as well as second quarter fiscal 2008 non-recurring charges related to the write-off of the developed technology asset of $65,000 and provision for Prostatron inventories, purchase commitments and warranties of $131,000 as a result of end-of-life projections for this product line. These decreases were partially offset by under absorbed manufacturing expenses of approximately $123,000 and $333,000, respectively, for the three and six-month periods ended December 31, 2008.
Gross profit as a percentage of sales increased to 54 percent from 49 percent for the three month period ended December 31, 2008, but decreased to 49 percent from 56 percent in the six-month period ended December 31, 2008 compared to the corresponding period of the preceding year. The five percent point increase in gross margin for the three-month period ended December 31, 2008 is primarily due to the write-off of the remaining developed technology intangible asset, as well as an increase in the provision for Prostaprobe inventories, purchase commitments and warranties related to a decrease in the projected end-of-life revenue for the Prostatron product line in the second quarter of fiscal 2008. The seven percentage point decrease in gross margin for the six-month period ended December 31, 2008 is due to approximately $333,000 of under absorbed manufacturing expenses, as well as higher fixed costs per unit due to lower sales volume, partially offset by the non-recurring charges related to Prostatron previously mentioned.
Selling, General & Administrative
Selling, general and administrative expenses decreased to $2.2 million and $4.1 million, respectively, for the three and six-month periods ended December 31, 2008 from $2.6 million and $5.1 million in the same periods of fiscal year 2008. The $373,000 or 14 percent decrease in expense for the three-month period ended December 31, 2008 is primarily the result of a decrease in consulting fees of $126,000 and legal and audit fees of $105,000 as a result of special projects during fiscal 2008. Also contributing to this decrease was a decrease in credit card fees and service charges of $99,000, and a $33,000 decrease in stock option expense. These decreases were partially offset by an increase in travel and entertainment expense of $59,000 due to increased sales activity. The $1.0 million or 20 percent decrease in selling, general and administrative expense for the six-month period ended December 31, 2008 is primarily the result of the reversal of $396,000 of the sales tax reserve in the first quarter of fiscal 2009 as a result of new information obtained which indicated that we would not owe as much sales tax as previously estimated, as well as a $155,000 decrease in consulting fees and a $151,000 decrease in legal and audit fees, a $108,000 decrease in bank fees, a $90,000 decrease in commissions, and a $57,000 decrease in shipping fees due to reduced sales, partially offset by a $126,000 increase in travel and entertainment.
Research and development expenses, which include expenditures for product development, regulatory compliance and clinical studies, decreased to $631,000 and $1.3 million, respectively, for the three and six-month periods ended December 31, 2008 from $835,000 and $1.5 million in the same periods of fiscal year 2008. The decrease in expenses of $204,000 or 24 percent, and $261,000 or 17 percent for both the three and six-month periods ended December 31, 2008, respectively, resulted primarily from decreases in product testing and project materials of $299,000 and $439,000, respectively, partially offset by an increase in consulting expenses of $129,000 and $323,000, respectively, as a result of turnover in the area. In addition, also contributing to the decline in the six-month period ended December 31, 2008, wages decreased by approximately $40,000 due to lower headcount, as well as a decrease in stock option expense of approximately $30,000.
Amortization of Identifiable Intangible Assets
Amortization of identifiable intangible assets decreased to $6,000 and $12,000, respectively, for the three and six-month periods ended December 31, 2008 from $50,000 and $59,000 in the same periods of fiscal year 2008. The decrease in amortization expense is due to the write-off of our trademark intangible asset of $16,800 and the further impairment of our customer base intangible asset of $24,000 during the second quarter of fiscal 2008 as a result of reduced sales projections for the Prostatron product line. The current quarter amortization expense relates only to the amortization of the customer base intangible asset over its remaining useful life of 6 years.
Net Interest Income
Net interest income for the three and six-month periods ended December 31, 2008 decreased to $6,000 and $52,000, respectively, from $124,000 and $267,000 in the same periods of the prior fiscal year. The decrease is due to lower interest rates as well as a decrease in our cash and cash equivalents.
Provision for Income Taxes
We recognized income tax expense of $12,000 and $46,000, respectively for the three and six-month periods ended December 31, 2008 primarily related to state taxes. In the prior year periods we recognized an income tax benefit of $1.6 million and $1.5 million, respectively, as a result of a $1.6 million reversal of the deferred tax liability balance related to goodwill which was no longer necessary after the impairment of goodwill in the second quarter of fiscal 2008. At December 31, 2008, we continued to carry a full valuation allowance of $40.6 million against our net deferred tax assets. The decrease in working capital is primarily due to the $2.5 million decrease in the cash balance, partially offset by the $902,000 decrease in other current liabilities.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception through sales of equity securities and sales of our Cooled ThermoTherapy system control units, single-use treatment catheters and mobile service offerings. As of December 31, 2008, we had total cash and cash equivalents of $8.5 million compared to $11.0 million as of June 30, 2008. Working capital decreased to $9.5 million at December 31, 2008 from $11.3 million at June 30, 2008.
During the six months ended December 31, 2008, we used $2.5 million of cash for operating activities. The net loss of $2.3 million included non-cash charges of $532,000 of depreciation and amortization expense, and $263,000 of stock-based compensation expense. Changes in operating items resulted in the use of $919,000 of operating cash flow for the period with lower accrued expense and deferred income of $951,000, increase in inventories of $192,000 and decrease in accounts payable of $43,000, partially offset by a decrease in accounts receivable of $284,000. The decrease in accrued expenses and deferred income resulted mainly from the reduction in the sales tax accrual of $400,000, the payment of severance accruals and the payment of fiscal 2008 year-end sales commissions during fiscal 2009 which were based primarily on higher sales volumes in the period ended June 30, 2008 compared to the period ended December 31, 2008, as well as a decrease in the payroll accrual due to timing. The increase in inventories is a result of an increase in finished goods. The decrease in accounts payable is due to the timing of purchases versus payments. The decrease in accounts receivable is due to decreased sales and an improvement in days sales outstanding from 44 days as of June 30, 2008 to 40 days at December 31, 2008.
During the six months ended December 31, 2008, we generated $8,000 from financing activities as a result of the exercise of stock options.
We plan to continue offering customers a variety of programs for both evaluation and longer-term use of our Cooled ThermoTherapy system control units in addition to purchase options, as well as grow our mobile service which provides physicians and patients with efficient access to our Cooled ThermoTherapy system control units on a pre-scheduled basis. As of December 31, 2008, our property and equipment, net, included approximately $1.2 million of control units 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.
We believe our $8.5 million in cash and cash equivalents at December 31, 2008 will be sufficient to fund our working capital and capital resources needs through fiscal 2009. In addition, we believe the majority of our cash equivalents are secure as they are backed by United States Government Treasuries. There can be no assurance, however, that we will not require additional financing in the future or that any additional financing will be available to us on satisfactory terms, if at all.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
Recently Issued Accounting Standards
In September 2006, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 157, "Fair Value Measurements." SFAS No. 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair-value measurements. This Statement applies only to fair value measurements that are already required or permitted by other accounting standards, except for measurements of share-based payments and measurements that are similar to, but not intended to be, fair value. This statement is expected to increase the consistency of fair value measurements, but imposes no requirements for additional fair value measures in financial statements. The provisions under SFAS No. 157 was effective for us beginning on July 1, 2008. The adoption of this statement had no impact on our financial statements.
In February 2007, the FASB issued SFAS No.159, "The Fair Value Option for Financial Assets and Financial Liabilities." SFAS No. 159 amends SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 was effective for us beginning on July 1, 2008. The adoption of this statement had no impact on our financial statements.
In December 2007, the FASB issued SFAS No. 141(R) (revised 2007), "Business Combinations" ("SFAS 141R"). SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired in the business combination. SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) will impact financial statements at the acquisition date and in subsequent periods. We will be required to apply the new guidance to any business combinations completed on or after July 1, 2009.
In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3, "Determination of the Useful Life of Intangible Assets." FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets." FSP No. 142-3 is effective for us beginning July 1, 2009. We do not expect the adoption of this statement to have any impact on our financial statements.
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