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| ULGX > SEC Filings for ULGX > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-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™ treatment catheter; 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 nine-month periods ended March 31, 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, 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 CTC™, Targis, Prostaprobe™ and the recently approved CTC Advance™ 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. A majority of the remaining patients will be covered by either private insurers, including traditional indemnity health insurers, or by managed care organizations. As a result, Medicare reimbursement is particularly critical for widespread market adoption of Cooled ThermoTherapy in the United States.
Each calendar year the Medicare reimbursement rate for Cooled ThermoTherapy is determined by the Centers for Medicare and Medicaid Services (CMS). The Medicare reimbursement rate for physicians varies depending on the site of service, wage indexes and geographic location. The national average reimbursement rate is the fixed rate for the year without any geographic adjustments. Cooled ThermoTherapy can be performed in a physician's office, a hospital as an outpatient procedure, or an Ambulatory Surgery Center (ASC).
Beginning on August 1, 2000, CMS replaced the reasonable cost basis of reimbursement for outpatient hospital-based procedures, including Cooled ThermoTherapy, with a fixed rate or prospective payment system. Under this method of reimbursement, a hospital receives a fixed reimbursement for each Cooled ThermoTherapy treatment performed in its outpatient facility. The national average reimbursement rate for the calendar year 2009 is $3,026 compared to $2,879 in calendar year 2008. Separate from the hospital's reimbursement noted above, the urologist performing the Cooled ThermoTherapy treatment receives reimbursement of approximately $587 per procedure when done in the hospital setting.
In January 2008, the CPT Code covering Cooled ThermoTherapy was once again added to the ASC list of Medicare approved procedures. Effective with this change, urologists who perform Cooled ThermoTherapy procedures in an ASC are reimbursed under a two-part system in which the ASC receives a fixed fee in calendar year 2009 and 2008 of $1,849 and $1,872, respectively, while the urologist performing the treatment in the ASC is reimbursed approximately $587 and $547 per treatment for the same respective periods.
We have an active reimbursement strategy, and have retained consultative experts to assist us with reimbursement matters.
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 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.
Our future growth will be predicated upon, among other factors, our success in achieving increased treatment volume and market adoption of the Cooled ThermoTherapy procedures in the physician's office, our success in obtaining and maintaining necessary regulatory clearances, 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.
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 March 31, 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.
RESULTS OF OPERATIONS
Net Sales
Net sales for the three and nine-month periods ended March 31, 2009 were $3.3 million and $9.4 million, compared to $3.1 million and $11.2 million, respectively, during the same periods of the prior fiscal year. The $236,000, or 8 percent increase in net sales, for the three-month period ended March 31, 2009 as compared to the three-month period ended March 31, 2008 is due to an increase in our direct sales orders for our procedure kits, partially offset by a decrease in the Urologix mobile service sales. The $1.9 million, or 17 percent decrease in net sales, for the nine-month period ended March 31, 2009 as compared to the nine-month period ended March 31, 2008 is primarily attributable to reduced orders for procedure kits, as well as, a reduction in the number of treatments performed by the Urologix-owned Cooled ThermoTherapy mobile service.
During the third quarter of fiscal 2009, 35 percent of sales were derived from treatment catheter sales to direct accounts as compared to 39 percent in the third quarter of the prior fiscal year, while third party mobile revenue represented 14 percent of overall revenue during the third quarter of fiscal 2009 as compared to 5 percent in the third quarter of the prior fiscal year. Revenue derived from the Urologix-owned Cooled ThermoTherapy mobile service constituted 48 percent of overall revenue in the current quarter compared to 54 percent of revenues in the third 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 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 nine-month periods ended March 31, 2009 decreased $15,000 or one percent to $1.7 million, and $516,000 or 10 percent to $4.7 million, respectively, from $1.7 million and $5.2 million during the same respective periods of the prior fiscal year. The decrease in costs of goods sold for the three-month period ended March 31, 2009 is due primarily to a decrease in unabsorbed manufacturing expenses from approximately $238,000 for the quarter ended March 31, 2008 to $154,000 at March 31, 2009, as well as, a decrease in the provision for the inventory obsolescence reserve from approximately $29,000 for the quarter ended March 31, 2008 to $19,000 for the quarter ended March 31, 2009, offset by increases in material and overhead costs for the same periods. The decrease in cost of goods sold for the nine-month period ended March 31, 2009 is a result of lower sales, as well as non-recurring charges in the second quarter fiscal 2008 of $65,000 related to the write-off of the developed technology asset and a provision for Prostatron inventories, purchase commitments and warranties of $131,000 as a result of end-of-life plans for this product line.
Gross profit as a percentage of sales increased to 50 percent from 46 percent for the three-month period ended March 31, 2009 but decreased to 50 percent from 53 percent in the nine-month period ended March 31, 2009 compared to the corresponding period of the preceding year. The four percentage point increase in gross margin for the three-month period ended March 31, 2009 is primarily due to a decrease in unabsorbed manufacturing expenses when compared to the prior year period. The three percentage point decrease in gross margin for the nine-month period ended March 31, 2009 is due to approximately $486,000 of unabsorbed manufacturing expenses, as compared to $417,000 for the same period ended March 31, 2008, higher costs per unit, and an increase in the
Selling, General & Administrative
Selling, general and administrative expenses decreased to $2.3 million and $6.3 million for the three and nine-month periods ended March 31, 2009, respectively, from $3.0 million and $8.1 million in the same periods of fiscal year 2008. The $692,000 or 23 percent decrease in expense for the three-month period ended March 31, 2009 is primarily the result of a decrease in wages and benefits of $277,000 resulting from the severance accruals recorded in the third quarter of fiscal 2008; decreases in legal, audit and project consulting fees of $350,000; and a decrease in advertising and promotions of $106,000. The $1.7 million or 22 percent decrease in selling, general and administrative expense for the nine-month period ended March 31, 2009 is primarily due to 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 the overall decrease in selling, general and administrative expenses for the nine-month period ended March 31, 2009 was a decrease in the severance accrual, commissions and stock option expense of $384,000; a decrease in legal, audit, and project consulting fees of $656,000; and a decrease in advertising and promotions of $138,000.
Research and Development
Research and development expenses, which include expenditures for product development, regulatory compliance and clinical studies, decreased to $587,000 and $1.8 million, for the three and nine-month periods ended March 31, 2009, respectively, from $668,000 and $2.2 million in the same periods of fiscal year 2008. The decrease in expenses of $81,000 or 12 percent and $341,000 or 16 percent for both the three and nine-month periods ended March 31, 2009, respectively, is primarily the result of decreases in product testing and project materials of $106,000 and $545,000, respectively, and wages and benefits of $45,000 and $131,000, respectively, due to lower headcount. These decreases were partially offset by increases in consulting expenses of $56,000 and $378,000 for the three and nine-month periods ended March 31, 2009, respectively, and increases in expenses associated with additional clinical studies initiated in fiscal year 2009 of $30,000 and $39,000, respectively.
Amortization of Identifiable Intangible Assets
Amortization of identifiable intangible assets stayed constant at $6,000 for the three-month periods ended March 31, 2009 and 2008. Amortization of identifiable intangible assets decreased by $38,000 for the nine-month period ended March 31, 2009 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 5.75 years.
Net Interest Income
Net interest income for the three and nine-month periods ended March 31, 2009 decreased to $1,000 and $52,000, respectively, from $82,000 and $349,000 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 $3,000 and $49,000, respectively, for the three and nine-month periods ended March 31, 2009 primarily related to state taxes. In the prior year periods, we recognized no income tax expense and an income tax benefit of $1.5 million, respectively, for the three and nine-month periods ended March 31, 2008 as a result of a $1.6 million reversal of the deferred tax liability balance related to goodwill that was no longer necessary after the impairment of goodwill in the second quarter of fiscal 2008. At March 31, 2009, we continued to carry a full valuation allowance of $40.9 million against our net deferred tax assets.
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 March 31, 2009, we had total cash and cash equivalents of $7.6 million compared to $11.0 million as of June 30, 2008. Working capital decreased to $8.7 million at March 31, 2009 from $11.3 million at June 30, 2008.
During the nine-months ended March 31, 2009, we used $3.3 million of cash for operating activities. The net loss of $3.5 million included non-cash charges of $759,000 of depreciation and amortization expense and $377,000 of stock-based compensation expense. Changes in operating items resulted in the use of $977,000 of operating cash flow for the period with lower accrued expense and deferred income of $941,000 and a decrease in accounts payable of $244,000, partially offset by a decrease in accounts receivable of $200,000. The decrease in accrued expenses and deferred income resulted mainly from the reduction in the sales tax accrual of $446,000 and the payment of severance accruals of approximately $241,000. 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 42 days at March 31, 2009.
During the nine-months ended March 31, 2009, we used $55,000 for investing activities to purchase property and equipment to support our operations.
During the nine-months ended March 31, 2009, 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 growing 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 March 31, 2009, our property and equipment, net, included approximately $1.1 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 $7.6 million in cash and cash equivalents at March 31, 2009 will be sufficient to fund our working capital and capital resources needs for the next 12 months. In addition, we believe the majority of our cash equivalents are secure as they are backed by United States Government Treasuries.
We may require additional financing in the future and may seek additional capital from an offering of our securities or by incurring indebtedness, or both. No assurance can be given that additional capital will be obtained in an amount that is sufficient for our needs, in a timely manner or that any additional capital will be available to us on satisfactory terms, if at all. Our business plan and our financing needs are subject to change based on, among other factors, competition in our industry, reimbursement changes, our ability to increase cash flow from operations, continued recessionary conditions and our ability to control expenses.
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 were 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 non-controlling 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.
In October 2008, the FASB issued FSP no. FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active" which clarifies the application of SFAS 157 in an inactive market and illustrates how an entity would determine fair value when the market for a financial asset is not active. The Staff Position is effective immediately and applies to prior periods for which financial statements have not been issued, including interim or annual periods ending on or before September 28, 2008. The implementation of FAS 157-3 had no impact on our financial statements.
In November 2008, the FASB ratified EITF Issue No. 08-7, "Accounting for Defensive Intangible Assets" (EITF No. 08-7). EITF No. 08-7 applies 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. EITF No. 08-7 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 in accordance with SFAS No. 141(R) and SFAS No. 157. The Company currently does not have any defensive intangible assets; however, we will be required to apply the new provisions of EITF Issue No. 08-7 to any defensible intangible assets acquired on or after July 1, 2009.
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