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| ULGX > SEC Filings for ULGX > Form 10-K on 24-Sep-2012 | All Recent SEC Filings |
24-Sep-2012
Annual Report
The following discussion should be read in conjunction with our financial statements and related notes contained elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of risks and uncertainties, including those set forth under "Risk Factors" in Item 1A. 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.
OVERVIEW
Urologix develops, manufactures, and markets non-surgical, office-based therapies for the treatment of the symptoms and obstruction resulting from non-cancerous prostate enlargement also known as benign prostatic hyperplasia (BPH). These therapies use proprietary technology in the treatment of BPH, a disease that affects more than 30 million men worldwide and is the most common prostate problem for men over 50. We market both the Cooled ThermoTherapy™ (CTT) product line and the Prostiva® Radio Frequency (RF) Therapy System. We acquired the exclusive worldwide license to the Prostiva® RF Therapy System in September 2011. These two technologies are designed to be used by urologists in their offices without placing their patients under general anesthesia. CTT uses a flexible catheter to deliver targeted microwave energy combined with a unique cooling mechanism that protects healthy urethral tissue and enhances patient comfort to provide safe, effective, lasting relief from BPH voiding symptoms by the thermal ablation of hyperplastic prostatic tissue surrounding the urethra. The proprietary Prostiva® RF Therapy System delivers radio frequency energy directly into the prostate through the use of insulated electrodes deployed from a transurethral scope, ablating targeted prostatic tissue under the direct visualization of the urologist. These focal ablations reduce constriction of the urethra, thereby relieving BPH voiding symptoms. These two proven technologies have slightly different, yet complementary, patient indications and providing them to our urologist customers enables them to treat a wide range of patients in their office. We believe that these office-based BPH therapies are efficacious, safe and cost-effective solutions for BPH as they have shown results clinically superior to those of medication based treatments and without the complications and side effect profile inherent with surgical procedures.
Our goal is to establish Cooled ThermoTherapy and Prostiva RF Therapy as the preferred therapeutic options considered by urologists for their BPH patients in the earlier stages of disease progression who do not want to take chronic BPH medication or are unhappy with the side effects, costs or results. A urologist can choose between our two therapies based upon clinical criteria specific to the BPH patient's presentation. Our business strategy to achieve this goal is to:
• Educate patients and urologists on the benefits of Cooled ThermoTherapy and Prostiva RF Therapy through the Company's "Think Outside the Pillbox!" and other market development efforts,
• Increase utilization of Cooled ThermoTherapy and Prostiva RF Therapy by urologists who already have access to a Cooled ThermoTherapy and/or Prostiva RF Therapy system,
• Increase the number of urologists who utilize one or both of our therapy treatment options for their patients,
• Continue to partner with our European distributors to support the customers outside the United States, and
• Pursue other technologies to add to our portfolio that fit our brand, distribution channels and clinical standards through acquisition or other partnering structures.
We continue to invest in research, development, and clinical trials to build upon our intellectual property, and our scientific and clinical knowledge to develop innovative future generations of BPH products and services. These investments are intended to improve our product offerings and expand the clinical evidence supporting each of our therapies for BPH. Our research and development efforts and goals are currently focused primarily on improving the features and functions of the technologies used in our Cooled ThermoTherapy and Prostiva RF Therapy procedures; improving the ease of use, patient comfort and clinical response to treatment; and also reducing the manufacturing cost of our products.
We have incurred net losses of $4.7 million in fiscal year 2012, and $3.7 million and $2.2 million in the fiscal years ended 2011 and 2010, respectively. In addition, we have accumulated aggregate net losses since the inception of business through June 30, 2012 of $114.7 million. In the first quarter of this fiscal year we entered into a license agreement with Medtronic and paid Medtronic $500,000 of the $1,000,000 initial license fee on September 6, 2011. As part of the licensing agreement, royalty payments for Prostiva products are paid one year in arrears based on the contract year, with the first payment of royalties due October 6, 2012. In addition, inventory payments were deferred on both inventory transferred following the close of the agreement and on shipments of products purchased. Deferred payments to be made on inventory received through June 30, 2012, which are due in fiscal year 2013, approximate $3.8 million.
Subsequent to our fiscal year end we completed a secondary offering which contributed approximately $3.8 million of net proceeds. However, as a result of the Company's history of operating losses and negative cash flows from operations, and the licensing fee, royalties and inventory payments related to the Prostiva acquisition, there is substantial doubt about our ability to continue as a going concern. Our cash, cash generated from operations, if any, and available borrowings under our agreement with Silicon Valley Bank, may not be sufficient to sustain day-to-day operations for the next 12 months and our ability to continue as a going concern is dependent upon improving our liquidity.
Our financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary as a result of this uncertainty.
As stated in our press release of August 23, 2012, we expect revenues in fiscal year 2013 to be in the range of $17.5 to $19 million. Our actual revenue results could differ materially from our expectation as a result of risks and uncertainties, including those set forth in Item 1A "Risks Factors" of this Form 10-K.
Critical Accounting Policies and Estimates:
In accordance with Securities and Exchange Commission guidance, we set forth below those material accounting policies that we believe are the most critical to an investor's understanding of our financial results and condition, and require complex management judgment.
Revenue Recognition
We recognize revenue from the sale of Cooled ThermoTherapy control units upon delivery to the customer, which include urologists, urology practices, mobile units, clinics and hospitals. We recognize revenue from the sale of Prostiva generators upon shipment to the customer. In addition to our sales of Cooled ThermoTherapy control units and Prostiva generators, we place our control units and generators with customers free of charge under a variety of programs for both evaluation and long-term use, and also provide access to Cooled ThermoTherapy and Prostiva RF Therapy treatments via our Urologix mobile service. We retain title to the control units and generators placed with our customers for evaluation and longer-term use. These programs, as well as our Urologix mobile service, are designed to expand access to our technology, and thus expand the market for our single-use treatment catheters and Prostiva handpieces. The free use of our Cooled ThermoTherapy control units and Prostiva generators are bundled with the sale of single-use treatment catheters or Prostiva handpieces and scopes, respectively, and are considered a single unit of accounting. Revenue from the bundled sales is recognized when the single-use treatment catheters or handpieces and scopes are shipped to our customers. Revenue from our mobile service is recognized upon treatment of the patient. Revenue for extended warranty service contracts is deferred and recognized over the contract period. We record a provision for estimated sales returns on product sales in the same period as the related revenue is recorded. The provision for estimated sales returns is based on historical sales returns, analysis of credit memo data and specific customer-based circumstances. Should actual sales returns differ from our estimates, revisions to the sales return reserve would be required. Sales and use taxes are reported on a net basis, excluding them from revenue.
Inventories
We value our inventories, consisting primarily of control units, single-use
treatment catheters, and raw materials to produce the control units and
treatment catheters, at the lower of cost or market value on a first-in,
first-out ("FIFO") basis. The inventory cost includes merchandise, labor,
overhead and freight. A periodic review of the inventory on hand is performed to
determine if the inventory is properly stated at the lower of cost or market. In
performing this analysis we consider, at a minimum, the following factors:
average selling prices, reimbursement changes, and changes in demand for our
products due to competitive conditions or market acceptance. Each type of
inventory is analyzed to determine net realizable values. A provision is
recorded to reduce the cost of inventories to the estimated net realizable
values, if required.
We also analyze the level of inventory on hand on a periodic basis, in relation to estimated customer requirements to determine whether write-downs for excess, obsolete, or slow-moving inventory are required. Any significant or unanticipated change in the factors noted above could have a significant impact on the value of our inventories and on our reported operating results.
Valuation of Long-Lived Assets and Goodwill
We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset or asset group is considered impaired if its carrying amount exceeds the undiscounted future net cash flows the asset or asset group is expected to generate. If an asset or asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. If estimated fair value is less than the book value, the asset is written down to the estimated fair value and an impairment loss is recognized.
Goodwill is tested for impairment annually on April 30th or more frequently if changes in circumstance or the occurrence of events suggests an impairment may exist. To determine if there is goodwill impairment, the fair value of the reporting unit is compared to its carrying amount. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill is less than the carrying value of the goodwill. The test for impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows.
Considerable management judgment is necessary in estimating future cash flows and other factors affecting the valuation of long-lived assets and goodwill, including the operating and macroeconomic factors that may affect them. We use historical financial information, internal plans and projections and industry information in making such estimates
Income Taxes
We utilize the asset and liability method of accounting for income taxes. We recognize deferred tax liabilities or assets for the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities. We regularly assess the likelihood that our deferred tax assets will be recovered from future taxable income. We consider projected future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance necessary to offset our deferred tax assets that will not be recoverable. We have recorded and continue to carry a full valuation allowance against our gross deferred tax assets that will not reverse against deferred tax liabilities within the scheduled reversal period. If we determine in the future that it is more likely than not that we will realize all or a portion of our deferred tax assets, we will adjust our valuation allowance in the period we make the determination. We expect to provide a full valuation allowance on our future tax benefits until we can sustain a level of profitability that demonstrates our ability to realize these assets. At June 30, 2012, we carried a valuation allowance of $34.3 million against our net deferred tax assets.
Stock-Based Compensation
The Company uses the fair value recognition provisions of the revised authoritative guidance for equity-based compensation and applies the modified prospective method in determining stock compensation expense. Stock compensation expense is based on the fair value of the award at the date of grant and is recognized over the requisite service period which corresponds to the vesting period. Options and restricted stock awards typically vest 25 percent after the first year of service with the remaining vesting 1/36th each month thereafter. Generally, options granted to non-employee directors are immediately exercisable at the date of grant while restricted stock awards generally vest after one year. Options are priced based on the closing price of a share of our common stock at the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. To determine the inputs for the Black-Scholes option pricing model, we use historical data to estimate expected volatility and the period of time that option grants are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The range of these assumptions and the range of option pricing and number of options granted at the different grant dates will impact our calculation of the fair value of the awards and will therefore impact the amount of expense reflected in our statement of operations for any given period. Fair value for restricted stock is based on the market price on the day of grant.
Results of Operations
Fiscal Years Ended June 30, 2012 and 2011
Net Sales
Net sales increased 35 percent to $17.0 million in fiscal year 2012 from $12.6 million in fiscal year 2011. The increase in sales from fiscal year 2011 is due to the addition of Prostiva product sales after the completion of the acquisition on September 6, 2011.
During fiscal year 2012, revenue derived from sales to direct accounts constituted 57 percent of sales compared to 37 percent in the prior fiscal year, while sales to third party mobiles constituted 11 percent of revenue in the current fiscal year compared to 14 percent in fiscal year 2011. Revenue derived from the Urologix mobile service constituted 31 percent of total sales in fiscal year 2012 compared to 46 percent in the prior fiscal year. The remaining one percent of our sales in fiscal year 2012 were from sales of our control units, generators, scopes, warranty service contracts, and non-kit items. The increase in direct sales as a percentage of total sales is a result of the newly acquired Prostiva product being sold through the direct channel.
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, amortization related to developed technologies, costs associated with the delivery of our Cooled ThermoTherapy mobile service, as well as costs for the newly acquired Prostiva products. Cost of goods sold for fiscal year 2012 increased to $8.6 million, or 43 percent, from $6.0 million in fiscal year 2011. This increase in cost of goods sold is attributed to the increase in sales year over year, as well as an additional $268,000 of non-cash expenses, such as amortization and depreciation expense, related to the acquired Prostiva assets.
Gross profit as a percentage of sales decreased to 49% in fiscal year 2012 from 52% in the prior fiscal year. The three percentage point decrease in fiscal year 2012 as compared to fiscal year 2011 is primarily the result of the addition to the product mix of the lower margin Prostiva product line.
Sales and Marketing
Sales and marketing expenses in fiscal year 2012 increased $1.8 million, or 35 percent, to $7.0. million from $5.2 million in fiscal year 2011. The increase in sales and marketing expense is the result of a $1.3 million increase in wages and benefits, including commissions, as a result of the expansion of the sales force from the Prostiva acquisition. In addition, conventions and meetings increased by approximately $486,000 as a result of increased American Urological Association (AUA) meeting expenses and the expansion of our patient seminars program.
General & Administrative
General and administrative expense in fiscal year 2012 increased $585,000, or 21 percent, to $3.4 million from $2.8 million in fiscal year 2011. The increase in general and administrative expense is mainly a result of an increase in legal and audit fees of $206,000 as a result of one-time expenses related to the Prostiva transaction, as well as non-cash accretion expense on the contingent deferred acquisition payments of $161,000, and a $88,000 increase in investor relations as a result of hiring an investment relations firm.
Research and Development
Research and development expenses, which include expenditures for product development, regulatory compliance and clinical studies, remained relatively consistent at $2.2 million for fiscal year 2012, decreasing slightly 2 percent from fiscal year 2011. The decrease in research and development is due to a decrease in product testing and project materials of $112,000 as well as a decrease in recruiting fees of $37,000, partially offset by an increase in consulting and professional fees of $95,000.
Amortization of Identifiable Intangible Assets
Amortization of identifiable intangible assets was approximately $90,000 in fiscal years 2012 compared to $24,000 in fiscal year 2011. The increase in the amortization expense of $66,000 is a result of the amortization on the newly acquired intangible assets resulting from the Prostiva acquisition. The prior year amortization expense relates to the amortization of our remaining customer base intangible asset from the EDAP acquisition.
Net Interest Income/(Expense)
Net interest expense of approximately $482,000 for the fiscal year ended June 30, 2012, is due to non-cash interest accretion on the non-contingent deferred acquisition payments, partially offset by minor amounts of interest income on our cash and cash equivalents balance. This compares to interest income of approximately $1,000 for the fiscal year ended June 30, 2011.
Provision for Income Taxes
We recorded $55,000 of income tax expense for the fiscal year ended June 30, 2012 compared to income tax expense of $8,000 for the fiscal year ended June 30, 2011. The increase in income tax expense of $47,000 is mainly the result of recording a deferred tax liability resulting from the amortization of goodwill for tax purposes created in the Prostiva acquisition. The deferred tax liability related to the goodwill which is considered an indefinite lived intangible asset cannot be offset against deferred tax assets with finite lives. The $8,000 of income tax for the fiscal year ended June 30, 2011 was the result of recording $11,000 of state income tax expense partially offset by a small federal tax benefit of $3,000.
Fiscal Years Ended June 30, 2011 and 2010
Net Sales
Net sales decreased 15 percent to $12.6 million in fiscal year 2011 from $14.8 million in fiscal year 2010. The decrease in sales from fiscal year 2010 is primarily due to decreased orders in all sales channels: direct, mobile and third-party mobile.
During fiscal year 2011, revenue from catheter sales to direct accounts constituted 37 percent of sales compared to 36 percent in the prior fiscal year, while catheter sales to third party mobiles constituted 14 percent of revenue in the current fiscal year compared to 15 percent in fiscal year 2010. Revenue derived from the Urologix mobile service constituted 46 percent of total sales in fiscal year 2011 compared to 47 percent in the prior fiscal year. The remaining three percent of our sales in fiscal year 2011 were from sales of our control units, warranty service contracts, and non-kit items.
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 control units and single-use treatment catheters, as well as costs associated with the delivery of our Urologix mobile service. Cost of goods sold for fiscal year 2011 decreased to $6.0 million, or 8 percent, from $6.6 million in fiscal year 2010. This decrease in cost of goods sold is attributed to the 15 percent decrease in sales year over year, partially offset by higher manufacturing expense per unit.
Gross profit as a percentage of sales decreased to 52% in fiscal year 2011 from 56% in the prior fiscal year. The four percentage point decrease in fiscal year 2011 as compared to fiscal year 2010 is a result of higher manufacturing expense per unit due to lower production volume of our treatment catheters, which provided a smaller base to absorb our fixed manufacturing overhead costs.
Sales and Marketing
Sales and marketing expenses in fiscal year 2011 decreased $460,000, or 8 percent, to $5.2 million from $5.7 million in fiscal 2010. The decrease in sales and marketing expense is due to the $489,000 decrease in commission expense resulting from the lower sales volume.
General & Administrative
General and administrative expenses decreased by $136,000, or 5 percent, to $2.8 million from $2.9 million in fiscal 2010. The decrease in general and administrative expense is due to a $96,000 decrease in bonus expense and a $45,000 decrease in legal and audit expenses.
Research and Development
Research and development expenses, which include expenditures for product development, regulatory compliance and clinical studies, increased to $2.2 million for fiscal year 2011, an increase of 22 percent from $1.8 million in fiscal year 2010. The increase in research and development is due to a $371,000 increase in wages as a result of an increase in headcount, as well as an $89,000 increase in product testing and project materials as we continue to invest in research and development activities. These increases were partially offset by a $51,000 decrease in the bonus accrual.
Amortization of Identifiable Intangible Assets
Amortization of identifiable intangible assets remained consistent at $24,000 in fiscal years 2011 and 2010. This amortization expense relates to the amortization of our remaining customer base intangible asset over its remaining useful life of 3.25 years.
Net Interest Income
Interest income remained relatively consistent between fiscal years 2011 and 2010 at approximately $1,000.
Provision for Income Taxes
We recorded $8,000 of income tax expense for the fiscal year ended June 30, 2011 compared to an $88,000 income tax benefit for the fiscal year ended June 30, 2010. The $8,000 of income tax for the fiscal year ended June 30, 2011 was the result of recording $11,000 of state income tax expense partially offset by a small federal benefit of $3,000. The $88,000 income tax benefit for the fiscal year ended June 30, 2010 was the result of recording an income tax benefit of $84,000 related to a net operating loss carry back claim to recapture alternative minimum tax paid during fiscal years 2005 and 2006 and $23,000 related to research and development credits. This income tax benefit was partially offset by the recording of $21,000 of state income tax expense.
Liquidity and Capital Resources
We have financed our operations since inception through sales of equity securities and, to a lesser extent, sales of our Cooled ThermoTherapy products and, beginning September 6, 2011, sales of the Prostiva RF Therapy System product. As of June 30, 2012, we had total cash and cash equivalents of $1.9 million compared to cash and cash equivalents of $3.1 million as of June 30, 2011. The decrease in cash and cash equivalents resulted primarily from our net operating loss of $4.7 million in fiscal year 2012.
During the first quarter of fiscal 2012, the Company entered into a license agreement with Medtronic for the Prostiva RF Therapy System. The Company paid Medtronic $500,000 on September 6, 2011 for half of the $1,000,000 initial license fee, with the remaining $500,000 payable on the one-year anniversary of this date, September 6, 2012. As part of the licensing agreement, royalty payments for Prostiva products are paid one year in arrears based on the contract year, with the first payment of royalties due October 6, 2012. In addition, inventory payments were deferred on both inventory transferred following the close of the agreement and on shipments of products purchased. Deferred payments to be made on inventory received through June 30, 2012, which are due in fiscal year 2013, approximate $3.8 million.
The Company completed a secondary offering in the first quarter of fiscal year 2013 which contributed approximately $3.8 million of net proceeds. However, as a result of the Company's history of operating losses and negative cash flows from operations, and the licensing fee, royalties and inventory payments related to the Prostiva acquisition, there is substantial doubt about our ability to continue as a going concern. The Company's cash and cash equivalents may not be sufficient to sustain day-to-day operations for the next 12 months and the Company's ability to continue as a going concern is dependent upon our ability to generate positive cash flows from our business, as well as available borrowing under our line of credit with Silicon Valley Bank entered into on January 11, 2012. The line of credit allows borrowing by the Company of up to the lesser of $2.0 million or the defined borrowing base consisting of 80% of eligible accounts receivable. As of June 30, 2012 the Company has not borrowed against this facility.
There is no assurance that our cash, cash generated from operations, if any, and available borrowing under our agreement with Silicon Valley Bank will be sufficient to fund our anticipated capital needs and operating expenses, particularly if product sales do not generate revenues in the amounts currently . . .
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