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UPI > SEC Filings for UPI > Form 10-Q on 6-Feb-2014All Recent SEC Filings

Show all filings for UROPLASTY INC

Form 10-Q for UROPLASTY INC


6-Feb-2014

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 our products, 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, our "critical accounting policies," which are 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 nine months ended December 31, 2013.

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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 commercially available 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 nine months ended December 31, 2013 reflect growth in our Urgent® PC sales due to new sales strategies, and a refocused sales organization. In addition, our results of operations for the nine months ended December 31, 2013 reflect 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 we had material weaknesses 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 ended June 30, 2013. In April 2013, our Chief Executive Officer resigned and we appointed Robert Kill as our interim Chief Executive Officer. Mr. Kill became our permanent 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.

As of January 31, 2014, we had Medicare coverage for Urgent PC in 40 states covering approximately 40 million lives, and we estimate private payers insuring approximately 107 million lives provide coverage for Urgent PC.

Medicare reimbursement coverage for PTNS is determined by regional Medicare Administrative Contractors (MAC), each of which cover certain states. Currently, there are eight MACs with seven providing reimbursement coverage for PTNS. National Government Services (NGS) is the lone MAC that does not provide coverage. NGS had jurisdiction over two states at April 1, 2013, but due to consolidation of certain MACs, now has jurisdiction over ten states. In November 2013, NGS re-affirmed its non-coverage policy for PTNS. We plan to continue to educate NGS Medical Directors about the benefits and positive outcomes of PTNS therapy.

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.

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.

In November 2013, CMS released the final 2014 Physician Fee Schedule, and the Relative Value Units (RVUs) for PTNS reimbursement are substantially the same as the proposed reimbursement published in July. The RVUs are multiplied by a standard conversion factor to arrive at the dollar amount of reimbursement. The conversion factor for 2014 has temporarily been set at $35.82 by Congress, but this conversion factor is in effect only through March 31, 2014. At that time the final reimbursement amount for 2014 is subject to any potential Congressional action as it relates to the Medicare Sustainable Growth Rate (SGR) formula.

The code under which PTNS is reimbursed was one of several hundred codes that CMS noted as a potentially misvalued code earlier this year. In November 2013, CMS indicated further review of PTNS is warranted, and as a result, CMS will be gathering additional feedback before a final decision is made. The final decision could result in an increase, a decrease or no change in the reimbursement rate for PTNS. Any change to the reimbursement rate due to this review is not expected to be published until November 2014 and will become effective beginning in January 2015.

In December, the Blue Cross and Blue Shield Association Medical Advisory Panel concluded that use of PTNS for the treatment of voiding dysfunction meets their Technology Evaluation Center criteria. This panel is responsible for assessing medical technologies through a comprehensive review of clinical evidence. This positive assessment concluded that PTNS improves net health outcomes as much as, or more than, other established therapies and is strong validation of the acceptance of Urgent PC as an important treatment option for OAB. Currently, there are approximately 100 million lives covered by the 37 BCBS companies across the United States, with 21 million lives currently having access to PTNS through positive coverage from their local plan. This decision can now be used by the remaining BCBS companies as an important tool in assessing positive coverage for PTNS for the treatment of overactive bladder.

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Results of Operations

Three and nine months ended December 31, 2013 compared to three and nine months ended December 31, 2012 (dollars in thousands except for per share data)

Net Sales: During the three months ended December 31, 2013, consolidated net sales of $6,399 represented a $808, or a 14% increase, over net sales of $5,590 for the three months ended December 31, 2012. During the nine months ended December 31, 2013, consolidated net sales of $18,216 represented a $1,339, or a 8% increase, over net sales of $16,877 for the nine months ended December 31, 2012.

The increase in consolidated net sales for the three and nine months ended December 31, 2013 is mainly attributed to the sales growth of our Urgent PC product.

Net sales to customers in the U.S. of $4,753 during the three months ended December 31, 2013, represented an increase of $649, or 16%, over net sales of $4,105 for the three months ended December 31, 2012. Net sales to customers in the U.S. of $13,516 during the nine months ended December 31, 2013, represented an increase of $1,132, or 9%, over net sales of $12,384 for the nine months ended December 31, 2012.

Net sales in the U.S. of our Urgent PC product increased 19% to $3,184 for the three months ended December 31, 2013, from $2,684 for the same period last year. Net sales in the U.S. of our Urgent PC product increased 13% to $9,009 for the nine months ended December 31, 2013, from $7,959 for the same period last year. Net sales increased as a result of improved sales execution of our Urgent PC products within the U.S. in addition to new account conversions and improved customer retention rates.

Net sales in the U.S. of our Macroplastique product increased 11%, or $152, to $1,539 for the three months ended December 31, 2013, compared to the same period last year. Net sales in the U.S. of our Macroplastique product increased 1%, or $59 to $4,382 for the nine months ended December 31, 2013, compared to the same period last year.

Net sales to customers outside the U.S. for the three months ended December 31, 2013 increased 11% to $1,645, compared to $1,486 for the three months ended December 31, 2012. Net sales to customers outside the U.S. for the nine months ended December 31, 2013 increased 5% to $4,700 compared to $4,493 for the nine months ended December 31, 2012. The increase in sales is attributed to the increase in adoption of the Urgent PC product by our customers, primarily in the United Kingdom.

Urgent PC sales to customers outside of the U.S. of $677 for the three months ended December 31, 2013 increased 22% from $556 for the same period last year. Urgent PC sales to customers outside of the U.S. of $1,870 for the nine months ended December 31, 2013 increased 15% from $1,622 for the same period last year. The increase in sales is attributed to the increase in adoption of the product by our customers, primarily in the United Kingdom.

Macroplastique sales to customers outside of the U.S. increased 12% to $755 in the third fiscal quarter over the corresponding year ago period, and declined $8 for the nine months ended December 31, 2013, over the corresponding year ago period.

Gross Profit: Gross profit was $5,620, or 87.8% of net sales during the three months ended December 31, 2013, and $4,856, or 86.9% of net sales for the three months ended December 31, 2012. Gross profit was $15,948, or 87.5% of net sales during the nine months ended December 31, 2013, and $14,613, or 86.6% of net sales for the nine months ended December 31, 2012. The increase in gross profit percentage of 0.9% for the three and nine month periods is attributed primarily to the favorable impact from product mix, capacity utilization, 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 $1,195 during the three months ended December 31, 2013, increased $136 from $1,059 during the same period in 2012. This change is primarily due to increased personnel costs.

G&A expenses of $5,166 during the nine months ended December 31, 2013, increased $1,988 from $3,178 during the same period in 2012. $1,069 of this increase is attributed to changes in executive management, of which $696 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 in the first and second quarter of this fiscal year.

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Research and Development Expenses (R&D): R&D expenses of $527 during the three months ended December 31, 2013, decreased $8 from $533 during the same period in 2012. The decrease for the three-month period is attributed primarily to 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 $1,436 during the nine months ended December 31, 2013, decreased $260 from $1,696 during the same period in 2012. The decrease is attributed primarily to a $389 expense in the prior fiscal year for product testing and validation of the planned replacement of components for one of our products, offset by a $137 increase in costs attributed to clinical studies, and a $32 increase in personnel costs.

Selling and Marketing Expenses (S&M): S&M expenses of $4,546 during the three months ended December 31, 2013, increased $821, from $3,726, during the same period in 2012. The increase is attributed primarily to a $627 increase in personnel and travel costs due to the expansion and reorganization of our selling and marketing team, an $89 increase in marketing costs related to product promotion and education, advertising, trade shows and conventions, $80 for the newly introduced Medical Device Tax, and an increase of $20 for computer support, maintenance and depreciation for the purchase of tablets.

S&M expenses of $13,497 during the nine months ended December 31, 2013, increased $2,072 from $11,424 during the same period in 2012. The increase is attributed primarily to an $1,526 increase in personnel and travel costs due to the expansion and reorganization of our selling and marketing team, $225 for the newly introduced Medical Device Tax, a $196 increase in marketing costs related to product promotion and education, advertising, trade shows and conventions, and an increase of $41 for computer support, maintenance and depreciation for the purchase of tablets.

Amortization of Intangibles: Amortization of intangibles was $8 and $216 for the three months ended December 31, 2013 and 2012, respectively. Amortization of intangibles was $22 and $647 for the nine months ended December 31, 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 $3 and $13 for the three months ended December 31, 2013 and 2012, respectively. Net other income was $14 and $32 for the nine months ended December 31, 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.

Income Tax Expense: During the three months ended December 31, 2013 and 2012, we recorded income tax expense of $19 and $13, respectively. During the nine months ended December 31, 2013 and 2012, we recorded income tax expense of $50 and $36, respectively. Income tax expense is attributed to our European subsidiaries 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.

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Our non-GAAP operating loss during the three months ended December 31, 2013 and 2012 was approximately $277 and $135, respectively. The increase in non-GAAP operating loss for the three months ended December 31, 2013 over the corresponding period a year ago is attributed to the increase in operating spending, offset slightly by the increase in net sales and gross profit percent. Our non-GAAP operating loss during the nine months ended December 31, 2013 and 2012 was approximately $2,695 and $858, respectively. The increase in non-GAAP operating loss for the nine months ended December 31, 2013 over the corresponding period a year ago is attributed to the increase in operating spending (including $1.4 million of cash costs related to our review of internal control over financial reporting and executive management changes), 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
December 31, 2013
Gross profit                      $   5,620     $                   6     $           8                           $    5,634
% of net sales                         87.8 %                                                                           88.1 %
Operating expenses
General and administrative            1,195                      (197 )             (50 )                                948
Research and development                526                       (11 )              (1 )                                514
Selling and marketing                 4,546                       (75 )             (22 )                              4,449
Amortization                              8                                                 $              (8 )            -
                                      6,275                      (283 )             (73 )                  (8 )        5,911

Operating loss                    $    (655 )   $                 289     $          81     $               8     $     (277 )

December 31, 2012
Gross profit                      $   4,856     $                   8     $           8                           $    4,872
% of net sales                         86.9 %                                                                           87.2 %
Operating expenses
General and administrative            1,059                      (146 )             (50 )                                863
Research and development                534                       (14 )              (1 )                                519
Selling and marketing                 3,725                       (87 )             (13 )                              3,625
Amortization                            216                                                 $            (216 )            -
                                      5,534                      (247 )             (64 )                (216 )        5,007

Operating loss                    $    (678 )   $                 255     $          72     $             216     $     (135 )



                                                                  Expense Adjustments
                                                 Share-based                           Amortization of
Nine-Months Ended                   GAAP           Expense          Depreciation         Intangibles         Non-GAAP
December 31, 2013
Gross profit                      $  15,948     $           20     $           26                           $   15,994
% of net sales                         87.5 %                                                                     87.8 %
Operating expenses
General and administrative            5,166               (952 )             (153 )                              4,061
Research and development              1,435                (36 )               (3 )                              1,396
Selling and marketing                13,497               (202 )              (63 )                             13,232
Amortization                             22                                           $             (22 )            -
                                     20,120             (1,190 )             (219 )                 (22 )       18,689

Operating loss                    $  (4,172 )   $        1,210     $          245     $              22     $   (2,695 )

December 31, 2012
Gross profit                      $  14,613     $           23     $           26                           $   14,662
% of net sales                         86.6 %                                                                     86.9 %
Operating expenses
General and administrative            3,178               (340 )             (146 )                              2,692
Research and development              1,696                (40 )               (2 )                              1,654
Selling and marketing                11,425               (208 )              (43 )                             11,174
Amortization                            647                                           $            (647 )            -
                                     16,946               (588 )             (191 )                (647 )       15,520

Operating loss                    $  (2,333 )   $          611     $          217     $             647     $     (858 )

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Liquidity and Capital Resources

Cash Flows.

At December 31, 2013, our cash and cash equivalents and short-term investments balances totaled $12,616.

At December 31, 2013, we had working capital of approximately $13,308.

For the nine months ended December 31, 2013, we used $2,265 of cash in operating activities, compared to $632 of cash used during the nine months ended December 31, 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 $2,695 during the nine months ended December 31, 2013, and $858 during the nine months ended December 31, 2012. The nine-month net loss for our current fiscal year includes nonrecurring cash expenses of $348 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 nine months ended December 31, 2013, and 2012, we generated $6,930, and $5,779 respectively of net cash from the maturity of marketable securities.

For the nine months ended December 31, 2013, we used $222 to purchase property, plant and equipment compared with approximately $137 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 $12,616 of cash and short-term investments we maintained at December 31, 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. Our operating lease commitments include a long-term lease with Liberty Property Limited Partnership for an 18,258 square foot facility for our U.S. headquarters located at 5420 Feltl Road, Minnetonka, Minnesota. The lease, effective May 1, 2006, has a term of 96 months and expires on April 1, 2014. On January 24, 2014 we signed a 62 month lease extension which includes minimum annual lease payments ranging from $153,000 to $169,000 over the course of the lease.

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