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UPI > SEC Filings for UPI > Form 10-Q on 7-Nov-2013All Recent SEC Filings

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Form 10-Q for UROPLASTY INC


7-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We recommend that you read this Report on Form 10-Q in conjunction with our Annual Report on Form 10-K for the year ended March 31, 2013 as amended by Form 10-K/A.

Forward-looking Statements

This Form 10-Q contains "forward-looking statements" relating to projections, plans, objectives, estimates, and other statements of future economic performance. These forward-looking statements are subject to known and unknown risks and uncertainties relating to our future performance that may cause our actual results, performance, or achievements, or industry results, to differ materially from those expressed or implied in any such forward-looking statements. Our business operates in highly competitive markets and our ability to achieve the results implied by our forward looking statements is subject to changes in general economic conditions, competition, reimbursement levels, customer and market preferences, government regulation, the impact of tax regulation, foreign exchange rate fluctuations, the degree of market acceptance of products, the uncertainties of potential litigation, as well as other risks and uncertainties detailed elsewhere herein and in our Annual Report filed on Form 10-K for the year ended March 31, 2013 as amended by Form 10-K/A.

We do not undertake, nor assume any obligation, to update any forward-looking statement that we may make from time to time.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles, which require us to make estimates and assumptions in certain circumstances that affect amounts reported. In preparing these consolidated financial statements, we have made our best estimates and judgments of certain amounts, giving due consideration to materiality.

We have identified in our Annual Report on Form 10-K for the year ended March 31, 2013 as amended by Form 10-K/A as "critical accounting policies," certain accounting policies that we consider important to the portrayal of our results of operations and financial position and which may require the application of a higher level of judgment by our management, and as a result are subject to an inherent level of uncertainty. Management made no significant changes to the Company's critical accounting policies during the six months ended September 30, 2013.

Overview

We are a medical device company that develops, manufactures and markets innovative, proprietary products for the treatment of voiding dysfunctions. Our primary focus is on two products: the Urgent PC® Neuromodulation System, which we believe is the only FDA-cleared, minimally invasive, office-based neuromodulation therapy for the treatment of overactive bladder (OAB) and associated symptoms of urinary urgency, urinary frequency, and urge incontinence; and Macroplastique® Implants, a urethral bulking agent for the treatment of adult female stress urinary incontinence primarily due to intrinsic sphincter deficiency (ISD). Outside of the U.S., our Urgent PC System is also approved for treatment of fecal incontinence, and Macroplastique is also approved for treatment of male stress incontinence and vesicoureteral reflux.

Our results of operations during the three and six months ended September 30, 2013 reflect growth in our Urgent® PC sales due to new sales strategies, a refocused sales organization, the administrative costs of a detailed review of our internal control over financial reporting, and of significant changes in executive management. As disclosed in our Annual Report on Form 10-K for the year ended March 31, 2013, and although there were no material errors in the amounts reported in our financial statements, we concluded that that we had a material weakness in our internal controls over financial reporting as of March 31, 2013, and devoted significant resources to identifying and remediating those weaknesses during the quarter. Further in April, our Chief Executive Officer resigned, and we appointed Robert Kill as our interim Chief Executive Office in April and as CEO and President in July. In July 2013, our Chief Financial Officer retired, and in August 2013, Brett Reynolds became our new Senior VP and CFO.

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As of October 31, 2013, we had Medicare coverage for Urgent PC in 40 states covering approximately 40 million lives, and we estimate private payers insuring approximately 106 million lives provide coverage for Urgent PC.

Effective September 9, 2013, three states (MN, WI, IL with approximately 3.7 million covered lives) that were under the jurisdiction of Wisconsin Physician Services transitioned to National Government Services (or "NGS"). NGS is currently the only Medicare Administrative Contractor (MAC) out of the nine MAC's that declines reimbursement coverage for Urgent PC. Until a new coverage policy is available, patients in the three Midwest states that transitioned to NGS during the quarter who have already started active treatment will be "grandfathered" so they may continue to receive up to 12 treatments, but new patients utilizing Urgent PC will not have reimbursement. NGS is expected to make a decision on coverage for PTNS by the end of the calendar year.

Effective October 25, 2013, five New England states (Massachusetts, Maine, Rhode Island, New Hampshire and Vermont with approximately 1.9 million covered lives) that were under the jurisdiction of National Heritage Insurance Company transitioned to NGS. Patients in the five New England states that transitioned to NGS in October who have already started active treatment will be "grandfathered" so they may continue to receive up to 12 treatments, but new patients utilizing Urgent PC will not have reimbursement.

It is expected that the Centers for Medicare and Medicaid Services (CMS) will continue to consolidate the regional Medicare Administrative Contractors and there is no guarantee that Medicare beneficiaries in a region with reimbursement coverage will continue to be reimbursed when consolidated into a regional Medicare carrier with a negative reimbursement policy, or, if reimbursed, that coverage will remain unchanged.

Humana, Inc., the sixth largest private insurer in the US with approximately 12 million covered lives nationwide, implemented a positive coverage policy for OAB treatment using Urgent PC in starting in late October, 2013. Humana is also the administrator for Tricare South and several Medicare Advantage plans.

We have a comprehensive program to educate the medical directors of both Medicare and private payers regarding the clinical effectiveness, cost effectiveness and patient benefits of using our Urgent PC System. We continue to work with the medical directors to expand coverage of Urgent PC, and to ensure that coverage continues after the number of Medicare regions are consolidated and regional Medicare administrators are transitioned.

Results of Operations

Three and six months ended September 30, 2013 compared to three and six months ended September 30, 2012 (dollars in thousands except for per share data)

Net Sales: During the three months ended September 30, 2013, consolidated net sales of $5,977 represented a $267, or a 5% increase, over net sales of $5,710 for the three months ended September 30, 2012. During the six months ended September 30, 2013, consolidated net sales of $11,818 represented a $531, or a 5% increase, over net sales of $11,287 for the six months ended September 30, 2012.

The increase in consolidated net sales for the three and six months ended September 30, 2013 is mainly attributed to the sales growth of our Urgent PC product, partially offset by a decrease in sales of our Macroplastique product.

Net sales to customers in the U.S. of $4,478 during the three months ended September 30, 2013, represented an increase of $258, or 6%, over net sales of $4,219 for the three months ended September 30, 2012. Net sales to customers in the U.S. of $8,763 during the six months ended September 30, 2013, represented an increase of $483, or 6%, over net sales of $8,280 for the six months ended September 30, 2012.

Net sales in the U.S. of our Urgent PC product increased 11% to $3,051 for the three months ended September 30, 2013, from $2,746 for the same period last year. Net sales in the U.S. of our Urgent PC product increased 10% to $5,825 for the six months ended September 30, 2013, from $5,275 for the same period last year. Net sales increased as a result of overall improved sales execution of our Urgent PC products within the U.S. and the impact of new account conversions in states that now have positive Medicare reimbursement coverage.

Net sales in the U.S. of our Macroplastique product decreased 6%, or $81, to $1,355 for the three months ended September 30, 2013, compared to the same period last year. Net sales in the U.S. of our Macroplastique product decreased 3%, or $94, to $2,843 for the six months ended September 30, 2013, compared to the same period last year. The sales decrease is attributed primarily to the shift in sales focus from Macroplastique to Urgent PC.

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Net sales to customers outside the U.S. for the three months ended September 30, 2013 remained flat at $1,499. Net sales to customers outside the U.S. for the six months ended September 30, 2013 increased 2% to $3,055 compared to $3,007 for the six months ended September 30, 2012.

Urgent PC sales to customers outside of the U.S. of $567 for the three months ended September 30, 2013 increased 11% from $510 for the same period last year.
Urgent PC sales to customers outside of the U.S. of $1,194 for the six months ended September 30, 2013 increased 12% from $1,066 for the same period last year. The increase in sales is due to higher sales in the U.K. where we have our direct sales force.

Macroplastique sales to customers outside of the U.S. declined 2% to $648 in the second fiscal quarter over the corresponding year ago period, and declined 6% to $1,335 for the six months ended September 30, 2013, over the corresponding year ago period. The sales decrease is attributed primarily to the shift in sales focus from Macroplastique to Urgent PC.

Gross Profit: Gross profit was $5,235, or 87.6% of net sales during the three months ended September 30, 2013, and $4,935, or 86.4% of net sales for the three months ended September 30, 2012. Gross profit was $10,328, or 87.4% of net sales during the six months ended September 30, 2013, and $9,756, or 86.4% of net sales for the six months ended September 30, 2012. The increase in gross profit percentage of 1.2% and 1.0% for the three and six month periods, respectively, is attributed primarily to the favorable impact from a change in product mix and reduced royalty payments. Starting with fiscal year 2014, we no longer pay royalties on sales of our bulking agent products in markets outside of the U.S.

General and Administrative Expenses (G&A): G&A expenses of $2,391 during the three months ended September 30, 2013, increased $1,363 from $1,028 during the same period in 2012. $801 of this increase is attributed to changes in executive management, of which $725 is non-cash, share-based compensation expense. Further, we incurred $430 in legal and accounting fees pertaining to the review of certain internal control issues.

G&A expenses of $3,971 during the six months ended September 30, 2013, increased $1,852 from $2,120 during the same period in 2012. $930 of this increase is attributed to changes in executive management, of which $561 is non-cash, share based compensation expense. Further, we incurred $1,100 in legal and accounting fees pertaining to the review of certain internal control issues.

Research and Development Expenses (R&D): R&D expenses of $429 during the three months ended September 30, 2013, decreased $170 from $599 during the same period in 2012. The decrease for the three-month period is attributed primarily to a $200 expense in the prior fiscal year for costs incurred for product testing and validation of the planned replacement of components for one of our products.

R&D expenses of $908 during the six months ended September 30, 2013, decreased $254 from $1,162 during the same period in 2012. The decrease is attributed primarily to a $300 expense in the prior fiscal year six-month period for product testing and validation of the planned replacement of components for one of our products, offset by a $40 increase in costs attributed to clinical studies, and a $36 increase in personnel costs.

Selling and Marketing Expenses (S&M): S&M expenses of $4,323 during the three months ended September 30, 2013, increased $589, from $3,734, during the same period in 2012. The increase is attributed primarily to a $411 increase in personnel and travel costs due to the expansion and reorganization of our selling and marketing team, and $74 for the newly introduced Medical Device Tax.

S&M expenses of $8,950 during the six months ended September 30, 2013, increased $1,252 from $7,699 during the same period in 2012. The increase is attributed primarily to an $800 increase in personnel and travel costs due to the expansion and reorganization of our selling and marketing team, $146 for the newly introduced Medical Device Tax, and a $109 increase in marketing costs related to product promotion and education, advertising, trade shows and conventions.

Amortization of Intangibles: Amortization of intangibles was $8 and $216 for the three months ended September 30, 2013 and 2012, respectively. Amortization of intangibles was $14 and $431 for the six months ended September 30, 2013 and 2012, respectively. In April 2007, we acquired from CystoMedix, Inc., certain intellectual property assets related to the Urgent PC system for $4,700, which became fully amortized in fiscal 2013.

Other Income (Expense): Other income (expense) includes interest income and foreign currency exchange gains and losses. Net other income was $4 and $17 for the three months ended September 30, 2013 and 2012, respectively. Net other income was $11 and $20 for the six months ended September 30, 2013 and 2012, respectively. Other income decreased primarily as the result of a decrease in interest income on lower cash and investment balances and interest rates.

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Income Tax Expense: During the three months ended September 30, 2013 and 2012, we recorded income tax expense of $16 and $15, respectively. During the six months ended September 30, 2013 and 2012, we recorded income tax expense of $31 and $23, respectively. Income tax expense is attributed to our Netherlands subsidiary and to the payment of minimum state taxes in the U.S.

Non-GAAP Financial Measures: The following table reconciles our operating loss calculated in accordance with accounting principles generally accepted in the U.S. (GAAP) to non-GAAP financial measures that exclude non-cash charges for share-based compensation, and depreciation and amortization expenses from gross profit, operating expenses and operating loss. The non-GAAP financial measures used by management and disclosed by us are not a substitute for, nor superior to, financial measures and consolidated financial results calculated in accordance with GAAP, and you should carefully evaluate our reconciliations to non-GAAP. We may calculate our non-GAAP financial measures differently from similarly titled measures used by other companies. Therefore, our non-GAAP financial measures may not be comparable to those used by other companies. We have described the reconciliations of each of our non-GAAP financial measures described above to the most directly comparable GAAP financial measures.

We use these non-GAAP financial measures, and in particular non-GAAP operating loss, for internal managerial purposes because we believe such measures are important indicators of the strength and the operating performance of our business. Analysts and investors frequently ask us for this information. We believe that they use these measures to evaluate the overall operating performance of companies in our industry, including as a means of comparing period-to-period results and as a means of evaluating our results with those of other companies.

Our non-GAAP operating loss during the three months ended September 30, 2013 and 2012 was approximately $917 and $163, respectively. The increase in non-GAAP operating loss for the three months ended September 30, 2013 over the corresponding period a year ago is attributed to the increase in operating expenses, offset slightly by the increase in net sales and gross profit percent.
Our non-GAAP operating loss during the six months ended September 30, 2013 and 2012 was approximately $2,417 and $724, respectively. The increase in non-GAAP operating loss for the six months ended September 30, 2013 over the corresponding period a year ago is attributed to the increase in operating expenses, offset slightly by the increase in net sales and gross profit percent.

                                                                     Expense Adjustments
                                                                                             Amortization of
Three-Months Ended                  GAAP         Share-based Expense      Depreciation         Intangibles         Non-GAAP
September 30, 2013
Gross profit                      $   5,235     $                   6     $           9                           $    5,250
% of net sales                         87.6 %                                                                           87.8 %
Operating expenses
General and administrative            2,390                      (834 )             (53 )                              1,503
Research and development                429                       (11 )              (1 )                                417
Selling and marketing                 4,323                       (54 )             (22 )                              4,247
Amortization                              8                                                 $              (8 )            -
                                      7,150                      (899 )             (76 )                  (8 )        6,167

Operating loss                    $  (1,915 )   $                 905     $          85     $               8     $     (917 )

September 30, 2012
Gross profit                      $   4,935     $                   8     $           9                           $    4,952
% of net sales                         86.4 %                                                                           86.7 %
Operating expenses
General and administrative            1,028                      (108 )             (50 )                                870
Research and development                599                       (14 )              (1 )                                584
Selling and marketing                 3,734                       (60 )             (13 )                              3,661
Amortization                            216                                                 $            (216 )            -
                                      5,577                      (182 )             (64 )                (216 )        5,115

Operating loss                    $    (642 )   $                 190     $          73     $             216     $     (163 )

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Expense Adjustments Share-based Amortization of Six-Months Ended GAAP Expense Depreciation Intangibles Non-GAAP September 30, 2013
Gross profit $ 10,328 $ 14 $ 18 $ 10,360 % of net sales 87.4 % 87.7 % Operating expenses
General and administrative 3,971 (755 ) (103 ) 3,113 Research and development 908 (25 ) (2 ) 881 Selling and marketing 8,951 (127 ) (41 ) 8,783 Amortization 15 $ (15 ) - 13,845 (907 ) (146 ) (15 ) 12,777

Operating loss $ (3,517 ) $ 921 $ 164 $ 15 $ (2,417 )

September 30, 2012
Gross profit $ 9,756 $ 15 $ 18 $ 9,789 % of net sales 86.4 % 86.7 % Operating expenses
General and administrative 2,120 (194 ) (96 ) 1,830 Research and development 1,162 (26 ) (2 ) 1,134 Selling and marketing 7,699 (120 ) (30 ) 7,549 Amortization 431 $ (431 ) - 11,412 (340 ) (128 ) (431 ) 10,513

Operating loss $ (1,656 ) $ 355 $ 146 $ 431 $ (724 )

Liquidity and Capital Resources

Cash Flows.

At September 30, 2013, our cash and cash equivalents and short-term investments balances totaled $12,537.

At September 30, 2013, we had working capital of approximately $13,389.

For the six months ended September 30, 2013, we used $2,243 of cash in operating activities, compared to $892 of cash used during the six months ended September 30, 2012. We used this cash primarily to fund the operating loss, net of non-cash charges for depreciation, amortization of intangibles and share-based compensation, of $2,417 during the six months ended September 30, 2013, and $724 during the six months ended September 30, 2012. The six-month net loss for our current fiscal year includes nonrecurring cash expenses of $369 attributed to changes in executive management and $1,100 for legal and audit fees pertaining to the review of certain internal control issues.

During the six months ended September 30, 2013, and 2012, we generated $5,940, and $802, respectively, of net cash from the maturity of marketable securities.

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For the six months ended September 30, 2013, we used $209 to purchase property, plant and equipment compared with approximately $94 for the same period a year ago. The increase is related to the purchase of new computer equipment for our sales force.

Sources of Liquidity.

We believe the $12,537 of cash and short-term investments we maintained at September 30, 2013, is adequate to meet our needs for the next twelve months, and depending upon our profitability, substantially longer. Although we have historically not generated cash from operations because we have yet to achieve profitability, we anticipate that we will become profitable and generate excess cash from operations prior to the full use of the current available cash and investments. To achieve this however, we must generate substantially more revenue than we have this quarter or in prior years.

Our ability to achieve significant revenue growth will depend, in large part, on our ability to achieve widespread market acceptance for our products and successfully expand our business in the U.S. We cannot guarantee that we will be entirely successful at this. If we fail to meet our projections of profitability and cash flow, or determine to use cash for matters we have not currently projected, we may need to again seek financing to meet our cash needs.
We cannot assure you that such financing, if needed, will be available to us on acceptable terms, or at all.

Commitments and Contingencies.

We discuss our commitments and contingencies in our Annual Report on Form 10-K for the year ended March 31, 2013. There have been no significant changes in our commitments for capital expenditure and contractual obligations since March 31, 2013.

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