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| ULGX > SEC Filings for ULGX > Form 10-Q on 12-Nov-2009 | All Recent SEC Filings |
12-Nov-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, 2009, as well as in other filings we make with the Securities and Exchange Commission and include factors such as: we are faced with intense competition and rapid technological and industry change; third party reimbursement is critical to market acceptance of our products; we depend upon our Cooled ThermoTherapy products for all of our revenues; we have a history of unprofitability; we may not have additional financing available to us; government regulation has a significant impact on our business; we lack experience manufacturing our products at high volumes and are dependent upon a limited number of third-party suppliers to manufacture our products; our business of the manufacturing, marketing, and sale of medical devices involves the risk of liability claims and such claims could seriously harm our business, particularly if our insurance coverage is inadequate; we are dependent on adequate protection of our patent and proprietary rights; our products may be subject to product recalls even after receiving FDA clearance or approval, which would harm our reputation and our business; we are dependent on key personnel; fluctuations in our future operating results may negatively affect the market price of our common stock; our stock price may be volatile and a shareholder's investment could decline in value; future sales of shares of our common stock may negatively affect our stock price; and provisions of Minnesota law, our governing documents and other agreements may deter a change of control of us and have a possible negative effect on our stock price. 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 month periods ended September 30, 2009 and 2008. 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, 2009.
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 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.
CMS published the Physician Fee Schedule (PFS) Final Rule for calendar 2010 on October 30, 2009. The average reimbursement in the hospital outpatient setting in the PFS Final Rule for 2010 will be $3,147. Urologists who perform Cooled ThermoTherapy procedures in an ASC are reimbursed under the two-part system in which the ASC will receive a fixed fee of $1,569, while the urologist performing the treatment will receive $461 for calendar year 2010. Under the new rule, the average level of Medicare reimbursement in the physician office setting will be $1,869. The majority of the decline from the 2009 amount for office based reimbursement is the result of a 21 percent reduction in the Conversion Factor, which affects the reimbursement for all procedures in the Physician Fee Schedule. Each of the last several years, Congress has acted to adjust the Conversion Factor to reduce this cut to all physician fees. At this time, adjusting the Conversion Factor is one of the elements of the Healthcare Reform Legislation currently in the legislative process. We do not know, what if any adjustment to the Conversion Factor will be made for calendar 2010. If the Conversion Factor is adjusted to remain flat with 2009 levels, our reimbursement in the office setting for 2010 will be approximately $2,381, or a reduction of 7 percent from 2009 levels. If there is no adjustment to the Conversion Factor by Congress, under the new rule, the level of Medicare reimbursement in the physicians' office setting will be 27 percent less than in 2009. We are monitoring these developments closely and will continue to execute on our active reimbursement strategy.
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 our own Cooled ThermoTherapy mobile service or
third party mobile providers in the United States.
We expect to continue to invest in research and development and clinical trials to improve our products and our therapy, while focusing on growing revenues through our sales and marketing teams and our Cooled ThermoTherapy mobile service. These investments are intended to broaden our product offering and expand the clinical evidence supporting our proprietary Cooled ThermoTherapy treatment for BPH. In April 2009 at the American Urological Association annual meeting, we launched our newest Cooled ThermoTherapy treatment catheter, the CTC Advance Short (short antenna length), and had two separate presentations of our clinical data. The presentations highlighted our 5 year durability data and the ability of physicians to customize the treatment for patients with our system.
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, 2009. At September 30, 2009, 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-month period ended September 30, 2009 were $3.9 million, compared to $2.7 million during the same period of the prior fiscal year. The $1.2 million, or 45 percent increase in net sales in the three-month period ended September 30, 2009, as compared to the same period of the prior year, is primarily attributable to increased volume. The increase in volume was due to an increase in the number of accounts ordering, as well as an increase in the average amount of revenue generated from each account as compared to the prior year period. The increase in volume was also in part due to the interruption in supply of a competitor's product. In addition, there was a slight increase in average selling prices (ASPs) in all distribution channels: Urologix mobile service, direct and third-party mobile services.
During the first quarter of fiscal 2010, revenue derived from the Urologix-owned Cooled ThermoTherapy mobile service constituted 45 percent of overall revenue in the current quarter compared to 50 percent of revenues in the first quarter of fiscal 2009. Revenue derived from treatment catheter sales to direct accounts constituted 33 percent of sales compared to 32 percent in the prior fiscal year. Third party mobile revenue represented 19 percent of overall revenue compared to 14 percent in the prior year period.
Cost of Goods Sold and Gross Profit
Cost of goods sold includes raw materials, labor, overhead, and royalties incurred in connection with the production of our Cooled ThermoTherapy system control units and single-use treatment catheters, as well as costs associated with the delivery of our Cooled ThermoTherapy mobile service. Cost of goods sold for the three-month period ended September 30, 2009 increased by $231,000 or 16 percent to $1.7 million from $1.5 million during the three-month period ended September 30, 2008. The increase in costs of goods sold is a result of the 45 percent increase in sales period over period partially offset by a reduction in our under absorbed manufacturing expenses of $167,000.
Gross profit as a percentage of sales for the three-month period ended September 30, 2009 increased to 55 percent from 44 percent in the three month period ended September 30, 2008. The 11 percent increase in gross margin is primarily due to increased production volumes in response to increased demand, a decrease in the Urologix mobile service delivery cost per treatment due to improved efficiencies, as well as the increase in the ASPs mentioned above.
Selling, General & Administrative
Selling, general and administrative expenses increased $542,000 or 30 percent to $2.4 million for the three-month period ended September 30, 2009 from $1.8 million in the same period of fiscal year 2009. The increase in expense 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. Also contributing to this increase is approximately $210,000 relating to increased commissions and bonuses to our sales force as a result of increased sales.
Research and Development
Research and development expenses, which include expenditures for product development, regulatory compliance and clinical studies, decreased $180,000 or 29 percent to $442,000 from $622,000 for the three-month period ended September 30, 2009 compared to the same period of the prior fiscal year. This decrease is primarily the result of a decrease in consulting and professional fees.
Net Interest Income
Net interest income for the three-month period ended September 30, 2009 decreased to less than $1,000 from $46,000 in the same period of the prior fiscal year. The decrease is primarily due to lower interest rates and lower cash balances.
We recorded $3,500 of tax benefit in the first quarter of fiscal 2010 compared to a $34,000 expense in the first quarter of fiscal 2009. The first quarter tax benefit relates to an estimate for research and development credits of $9,500, partially offset by a provision for state taxes of $6,000. The prior year income tax expense relates to the provision for state taxes.
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 September 30, 2009, we had total cash and cash equivalents of $6.0 million compared to $7.0 million as of June 30, 2009. Working capital decreased to $7.5 million at September 30, 2009 from $8.0 million at June 30, 2009. The decrease in working capital is primarily due to the $1.0 million decrease in the cash balance, offset by the $504,000 increase in accounts receivable.
During the three months ended September 30, 2009, we used $1.0 million of cash for operating activities. The net loss of $677,000 included non-cash charges of $218,000 of depreciation and amortization expense, and $126,000 of stock-based compensation expense. Changes in operating items resulted in the use of $691,000 of operating cash flow for the period with an increase in accounts receivable of $504,000, an increase in prepaid expenses and other assets of $160,000, lower accrued expense and deferred income of $187,000, partially offset by an increase in accounts payable of $118,000. The increase in accounts receivable is the result of the 45 percent increase in sales for the three months ended September 30, 2009 compared with September 30, 2008. The increase in prepaid and other assets is largely due to the prepayment of insurance premiums for fiscal 2010 at the beginning of the first quarter. The decrease in accrued expenses and deferred income is a result of a decrease in our payroll accrual due to timing and the bonus accrual as a result of the payout of fiscal 2009 bonuses during the quarter. The increase in accounts payable is due to the timing of purchases versus payments. The year-over-year improvement in our cash flows used in operations of $805,000 is largely due to our net loss being lower by $597,000, as well as the decrease in accrued expenses and deferred income.
During the three months ended September 30, 2009, we used $38,000 for investing activities to purchase property and equipment to support our operations.
During the three months ended September 30, 2009, we received $8,000 for financing activities from 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. We also will continue to provide physicians and patients with efficient access to our Cooled ThermoTherapy system control units on a pre-scheduled basis through our mobile service. As of September 30, 2009, our property and equipment, net, included approximately $1.0 million of control units used in evaluation or longer-term use programs and 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 $6.0 million in cash and cash equivalents at September 30, 2009 will be sufficient to fund our operations, working capital and capital resource needs beyond the next twelve months. In addition, we believe the majority of our cash equivalents are secure as they are backed by United States Government Treasuries.
Our business plan and financing needs are subject to change depending on, among other things, success of our efforts to continue to effectively manage expenses, market conditions, business opportunities and cash flow from operations, if any. We may require additional financing to continue our business, the receipt of which cannot be assured. Such additional financing could be sought from a number of sources, including possible sales of equity or debt securities or loans from banks or other financial institutions. We may not be able to obtain additional financing from any source on reasonable terms, if at all. Any future capital that is available may be raised on terms that are dilutive to our shareholders.
We do not have any off balance sheet arrangements.
Recently Issued Accounting Standards
In December 2007, the FASB issued new accounting guidance on business combinations and non-controlling interests in consolidated financial statements. The new guidance establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired in the business combination. The new guidance also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. The adoption of this guidance had no impact on the current period financial statements. We are required to apply the new guidance to any business combinations completed on or after July 1, 2009.
In April 2008, the FASB issued new guidance regarding determining the useful life of intangible assets. The new guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The new guidance was effective for us beginning July 1, 2009. The adoption of this guidance did not have any impact on our financial statements.
In June 2008, the FASB issued new guidance to help determine whether instruments granted in share-based payment transactions are participating securities. The new guidance requires all outstanding unvested share-based payment awards that contain no forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) to be considered participating securities and to be included in the computation of basic and diluted earnings per share using the two-class method. All prior period earnings per share data should be adjusted retrospectively. The Company adopted this new guidance effective July 1, 2009. The adoption of this statement resulted in the Company having to adjust prior and current weighted average shares outstanding to include outstanding unvested restricted stock which contains non-forfeitable rights to dividends of 60,000 shares and 80,000 shares at September 30, 2009 and September 30, 2008, respectively. This change in weighted average shares outstanding resulted in no change to our earnings per share amounts for the periods presented.
In November 2008, the FASB issued new guidance related to defensive intangible assets, which are acquired intangible assets that an entity does not intend to actively use but does intend to prevent others from obtaining access to the asset. The new guidance requires an entity to account for defensive intangible assets as a separate unit of accounting. Defensive intangible assets should not be included as part of the cost of an entity's existing intangible assets because the defensive intangible assets are separately identifiable. Defensive intangible assets must be recognized at fair value. The Company currently does not have any defensive intangible assets; however, we are required to apply the new guidance to any defensible intangible assets acquired on or after July 1, 2009.
In April 2009, the FASB issued new guidance which amends and clarifies the initial recognition and measurement, subsequent measurement and accounting, and related disclosures arising from contingencies in a business combination. The adoption of this guidance had no impact on the current period financial statements. We are required to apply the new guidance to any business combinations completed on or after July 1, 2009.
In May 2009, the FASB issued new guidance regarding subsequent events that provide additional evidence about conditions that existed at the balance-sheet date as "recognized subsequent events". Subsequent events which provide evidence about conditions that arose after the balance-sheet date but prior to the issuance of the financial statements are referred to as "non-recognized subsequent events". It also requires companies to disclose the date through which subsequent events have been evaluated and whether this date is the date the financial statements were issued or the date the financial statements were available to be issued. We adopted this standard during the quarter ended June 30, 2009. See Note 1 "Basis of Presentation" for the related disclosures.
In September 2009, the FASB issued new revenue guidance that requires an entity to apply the relative selling price allocation method in order to estimate a selling price for all units of accounting, including delivered items when vendor-specific objective evidence or acceptable third-party evidence does not exist, as well as new guidance addressing the accounting for revenue transactions involving software. The new guidance is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and shall be applied on a prospective basis. Earlier application is permitted as of the beginning of an entity's fiscal year. We are still evaluating what affect, if any, the implementation of the new guidance will have on our financial statements.
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