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UPI > SEC Filings for UPI > Form 10-K on 9-Jun-2014All Recent SEC Filings

Show all filings for UROPLASTY INC

Form 10-K for UROPLASTY INC


9-Jun-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read this discussion of our financial condition and results of operations in conjunction with, and we qualify our discussion in its entirety by, the consolidated financial statements and notes thereto included elsewhere within this report, the material contained under Part 1, Item 1. "Description of Business" and Part I, Item 1A. "Risk Factors" of this report, and the cautionary disclosure about forward-looking statements at the front of Part I of this report.

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: our Urgent PC® System, which we believe is the only FDA-cleared minimally invasive, office-based neuromodulation therapy for the treatment of OAB and associated symptoms of urinary urgency, urinary frequency, and urge incontinence; and Macroplastique® a urethral bulking agent for the treatment of adult female stress urinary incontinence primarily due to 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, vocal cord rehabilitation and vesicoureteral reflux.

Our sales have been significantly influenced by the availability of third-party reimbursement for PTNS treatments. Sales of our Urgent PC System in the U.S. grew rapidly during fiscal 2007 and 2008 with rapid market acceptance of PTNS treatments that were reimbursed under a Category 1 CPT code. Sales declined from the first quarter of fiscal 2009 through the third quarter of fiscal 2011, because of lower or unavailable reimbursement when the AMA advised the providers that reimbursement for PTNS treatments should be requested under an unlisted CPT code.


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We responded by sponsoring several clinical studies over the following two years that were published in U.S. peer-review journals. With favorable results from these studies, we applied for, and effective January 2011 the AMA granted, a new Category 1 CPT code for PTNS treatments. As a result, we expanded our U.S. field sales and support organization from 15 employed sales representatives and six independent manufacturer's representatives on April 1, 2010 to 43 employed sales representatives on March 31, 2014, and sales of our Urgent PC System began to increase. As of March 31, 2014, we also employed 6 field based clinical support specialists and 5 Regional Sales Directors.

We have focused our efforts on expanding reimbursement coverage with Medicare carriers and private payers by instituting a comprehensive program to educate their medical directors regarding the clinical effectiveness, cost effectiveness and patient benefits of PTNS treatments using our Urgent PC System. As of May 1, 2014, regional Medicare carriers covering 40 states and the District of Columbia, with approximately 40 million covered lives, provide coverage for PTNS treatments. In addition, we estimate that private payers insuring approximately 119 million lives provide coverage for PTNS treatments. As of May 1, 2014, one regional Medicare carrier representing 10 states, with approximately 10 million covered lives, continued to decline reimbursement coverage for PTNS treatments. Increasing coverage from private payers, as well as obtaining reimbursement from the sole regional Medicare carrier not to provide coverage for PTNS, is a key element of our strategy.

We expect to continue to emphasize sales of our Urgent PC System in the United States and internationally. In fiscal 2014, we implemented new sales strategies and refocused the sales organization. We will continue to emphasize generating greater patient and physician awareness of our Urgent PC system, and on training physicians in the proper use and clinical benefits of our Urgent PC System for OAB. As part of this process, we intend to hire additional clinical support specialists in some of our markets during fiscal 2015 and plan to expand our call point beyond our historical focus on urologists. Specifically, we will expand our call point to include gynecologists, urogynecologists and a highly targeted group for primary care physicians who are high prescribers of OAB medications as we look to accelerate the growth of our Urgent PC System. We do not expect to see significant growth in our Macroplastique business, because we believe it is a small, mature market that is more competitively penetrated than the market for OAB treatment using PTNS.

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 believe that of our significant accounting policies, the following can be characterized as "critical accounting policies" and are particularly important to the portrayal of our results of operations and financial position. These critical policies may require the application of a higher level of judgment by us, and as a result are subject to an inherent degree of uncertainty.

Reclassifications: Certain amounts in the fiscal 2013 consolidated financial statements have been reclassified to conform with the fiscal 2014 presentation. These reclassifications had no effect on net income or stockholder's equity as previously reported.

Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, title and risk of ownership have passed, the sales price is fixed or determinable and collectability is reasonably assured. Generally, these criteria are met at the time the product is shipped to the customer. We include shipping and handling charges billed to customers in net sales, and include such costs incurred by us in cost of goods sold. Typically our agreements contain no customer acceptance provisions or clauses. We sell our products to end users and to distributors. Payment terms range from prepayment to 120 days. The distributor payment terms are not contingent on the distributor selling the product to end users. Customers do not have the right to return products except for warranty claims. We offer customary product warranties. We present our sales in our statement of operations net of taxes, such as sales, use, value-added and certain excise taxes, collected from the customers and remitted to governmental authorities.

Accounts Receivable. We grant credit to our customers in the normal course of business and, generally, do not require collateral or any other security to support amounts due. If necessary, we have an outside party assist us with performing credit and reference checks and establishing credit limits for the customer. Accounts outstanding longer than the contractual payment terms, are considered past due. We carry our accounts receivable at the original invoice amount less an estimated allowance for doubtful receivables based on a periodic review of all outstanding amounts, and less an estimated sales return allowance. We determine the allowance for doubtful accounts based on the customer's financial health, and both historical and expected credit loss experience. We write off our accounts receivable when we deem them uncollectible. We record recoveries of accounts receivable previously written off when received. We are not always able to timely anticipate changes in the financial condition of our customers and if circumstances related to these customers deteriorate, our estimates of the recoverability of accounts receivable could be materially affected and we may be required to record additional allowances. Alternatively, if more allowances are provided than are ultimately required, we may reverse a portion of such provisions in future periods based on the actual collection experience. We determine the sales return allowance based on historical experience. Historically, the accounts receivable balances we have written off and the sales returns have generally been within our expectations.


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Inventories. We state inventories at the lower of cost or market using the first-in, first-out method. We value at lower of cost or market the slow moving and obsolete inventories based upon current and expected future product sales and the expected impact of product transitions or modifications. Historically, the inventory write-offs have generally been within our expectations.

Foreign Currency Translation/Transactions. The financial statements of our foreign subsidiaries are translated in accordance with the provisions of ASC 830, "Foreign Currency Matters." We translate all assets and liabilities using period-end exchange rates, and we translate statements of operations items using average exchange rates for the period. We record the resulting translation adjustment within accumulated other comprehensive loss, a separate component of shareholders' equity. We recognize foreign currency transaction gains and losses in the statement of operations, including unrealized gains and losses on short-term intercompany obligations using period-end exchange rates, resulting in an increase in the volatility of our consolidated statements of operations.

Impairment of Long-Lived Assets. Our long-lived assets consist of property, plant and equipment and intangible assets. We review our long-lived assets for impairment whenever events or business circumstances indicate that the carrying amount of an asset may not be recoverable. We measure the recoverability of assets to be held and used by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. We use judgment to forecast future cash flows including forecasting revenues and margins, and working capital needs. If we consider such assets impaired, we measure the impairment to be recognized by the amount by which the carrying amount of the assets exceeds the fair value of the assets. We did not record any impairment charge in fiscal years 2014, 2013 or 2012.

Share-Based Compensation. We account for share-based compensation costs under ASC 718, "Compensation - Stock Compensation." ASC 718 covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. We recognize the compensation cost relating to share-based payment transactions, including grants of employee stock options and restricted shares, in our financial statements. We measure that cost based on the fair value of the equity or liability instruments issued.

Defined Benefit Pension Plans. We have a liability attributed to defined benefit pension plans we offered to certain former and current employees of our subsidiaries in the UK and the Netherlands. The liability is dependent upon numerous factors, assumptions and estimates, and the continued benefit costs we incur may be significantly affected by changes in key actuarial assumptions such as the discount rate, mortality, compensation rates, or retirement dates used to determine the projected benefit obligation. Additionally, changes made to the provisions of the plans may impact current and future benefit costs. In accordance with the provisions of ASC 715, "Compensation - Retirement Benefits," changes in benefit obligations associated with these factors may not be immediately recognized as costs in the statement of operations, but are recognized in future years over the expected average future service of the active employees or the average remaining life expectancies of inactive employees.

Income Taxes. We recognize deferred tax assets and liabilities for future tax consequences attributable to differences between the financial carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using enacted tax rates we expect to apply to taxable income in the years in which we expect to recover or settle those temporary differences. As of March 31, 2014, we have generated approximately $36 million in U.S. net operating loss ("NOL") carry forwards that we cannot use to offset taxable income in foreign jurisdictions. We recognize a valuation allowance when we determine it is more likely than not that we will not realize a portion of the deferred tax asset. We have established a valuation allowance for U.S. and certain foreign deferred tax assets due to the uncertainty that we will generate enough income in those taxing jurisdictions to utilize the assets.

In addition, future utilization of NOL carry forwards is subject to certain limitations under Section 382 of the Internal Revenue Code. This section generally relates to a 50 percent change in ownership of a company over a three-year period. We believe that the issuance of our common stock in the December 2006 follow-on public offering resulted in an "ownership change" under
Section 382. Accordingly, our ability to use NOL tax attributes generated prior to December 2006 is limited to approximately $750,000 per year. Additionally, we believe there was an ownership change in December 2012. Accordingly, our ability to use NOL tax attributes generated after December 2006 and before December 2012 is limited to approximately $2,000,000 per year.

See Note 5 to our consolidated financial statements for further discussion.


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Results of Operations

Net Sales. In fiscal 2014, consolidated net sales of $24.6 million represented a $2.2 million, or a 10% increase, over net sales of $22.4 million in fiscal 2013. In fiscal 2013, consolidated net sales of $22.4 million represented a $1.9 million, or a 9% increase, over net sales of $20.6 million in fiscal 2012. The increase in consolidated net sales is mainly attributed to the sales growth of our Urgent PC System.

Net sales to customers in the U.S. of $18.0 million in fiscal 2014, represented an increase of $1.6 million, or 10%, over net sales of $16.4 million in fiscal 2013. Net sales to customers in the U.S. of $16.4 million in fiscal 2013, represented an increase of $2.5 million, or 18%, over net sales of $13.9 million in fiscal 2012.

Net sales in the U.S. of our Urgent PC System increased 17% to $12.3 million in fiscal 2014, from $10.5 million last year. Net sales in the U.S. of our Urgent PC System of $10.5 million in fiscal 2013 increased 35% from $7.8 million in fiscal 2012. Net sales increased as a result of improved sales execution of our Urgent PC System 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 decreased 2%, or $121,000, to $5.6 million in fiscal 2014, compared to fiscal 2013. Net sales in the U.S. of our Macroplastique product decreased 2%, or $138,000 to $5.7 million in fiscal 2013, compared to fiscal 2012.

Net sales to customers outside the U.S. in fiscal 2014 increased 9% to $6.5 million, compared to $6.0 million in fiscal 2013. The increase in sales is attributed to the increase in adoption of our Urgent PC System by our customers, primarily in the United Kingdom. Net sales to customers outside the U.S. in fiscal 2013 decreased 10% to $6.0 million compared to $6.7 million in fiscal 2012.

Urgent PC System sales to customers outside of the U.S. of $2.7 million in fiscal 2014 increased 29% from $2.1 million in fiscal 2013. The increase in sales is attributed to the increase in adoption of the product by our customers, primarily in the United Kingdom. Urgent PC System sales to customers outside of the U.S. of $2.1 million in fiscal 2013 increased 5% from $2.0 million in fiscal 2012.

Macroplastique sales to customers outside of the U.S. decreased 2% to $2.8 million in fiscal 2014 over fiscal 2013 and Macroplastique sales to customers outside of the U.S. decreased 18% to $2.8 million in fiscal 2013 over fiscal 2012. The decrease in fiscal 2013 in Macroplastique sales was mainly due to budget cuts for hospitals in several European countries.

Gross Profit: Gross profit was $21.5 million, or 87.6% of net sales in fiscal 2014, $19.4 million, or 86.6% in fiscal 2013, and $17.5 million, or 85.2% in fiscal 2012.

The 1.0% increase in the gross profit percentage in fiscal 2014 is attributed primarily to a 0.2% impact of a favorable product mix, a 0.2% impact from an increase in capacity absorption, and a 0.3% impact from reduced royalty payments. Starting with fiscal 2014, we no longer pay royalties on sales of our bulking agent products in markets outside of the U.S.

The 1.4% increase in gross profit percentage in fiscal 2013 was attributed primarily to a 1% impact of a favorable product mix, and a 0.2% impact from an increase in capacity absorption.

General and Administrative Expenses (G&A): G&A expenses of $6.5 million during fiscal 2014 increased $2.3 million from $4.2 million during fiscal 2013. Changes in executive management attributed to $1.0 million of this increase, of which $696,000 is non-cash, share based compensation expense. Further, we incurred $1.1 million in legal and accounting fees pertaining to the review of certain internal control issues in the first and second quarter of fiscal 2014.

G&A expenses of $4.2 million during fiscal 2013 increased $455,000 from $3.7 million during fiscal 2012. Included in fiscal 2013 is a charge of $473,000 for non-cash, share-based compensation expense, compared with $412,000 in fiscal 2012. Excluding share-based compensation charges, G&A expenses increased by $394,000 in 2013, primarily due to an $182,000 increase in personnel costs primarily from an increase in headcount, and a $127,000 increase in professional fees for legal, audit, tax and consulting.

Research and Development Expenses ("R&D"): R&D expenses of $2.2 million during fiscal 2014, decreased $0.2 million from $2.4 million in fiscal 2013. The decrease is attributed primarily to a $389,000 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 $189,000 increase in costs attributed to clinical studies.


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R&D expenses of $2.4 million during fiscal 2013 increased $0.5 million from $1.9 million in fiscal 2012. The increase is attributed primarily to a $389,000 charge for product testing and validation of the planned replacement of components for one of our products, a $253,000 increase in new product development costs, a $35,000 increase in cost for the U.S. fecal incontinence study, and a $121,000 increase in compensation costs due to increased headcount, increased bonuses, and promotions, offset by a $170,000 decrease in human clinical study costs and a $112,000 charge in the prior fiscal year for costs incurred for utilizing a third-party for tooling development.

Selling and Marketing Expenses ("S&M"): S&M expenses of $18.1 million in fiscal 2014 increased $2.9 million from $15.2 million in fiscal 2013. The increase is attributed primarily to a $2.2 million increase in personnel and travel costs due to the expansion and reorganization of our selling and marketing team, $234,000 for the Medical Device Tax, and a $189,000 increase in marketing costs related to product promotion and education, advertising, trade shows and conventions.

S&M expenses of $15.2 million in fiscal 2013 decreased $57,000 from $15.3 million in fiscal 2012. S&M expenses decreased primarily because of a $863,000 decrease in bonus and incentive costs, offset by a $54,000 increase in salary primarily due to increase in head count, a $308,000 increase in commission costs primarily due to an increase in sales, and a $310,000 increase in travel related expenses. Also, included in the fourth quarter of fiscal 2013 is a charge of $68,000 for the medical device excise tax on U.S. sales that went into effect on January 1, 2013.

Amortization of Intangibles: Amortization of intangibles was $30,000 in fiscal 2014, $863,000 in fiscal 2013, and $857,000 in fiscal 2012. In April 2007, we acquired from CystoMedix, Inc., certain intellectual property assets related to the Urgent PC system for $4.7 million, which became fully amortized in fiscal 2013.

Other Income (Expense): Other income (expense) includes interest income, interest expense, foreign currency exchange and other non-operating costs when incurred. Net other income was $17,000, $47,000 and $64,000 for fiscal 2014, 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.

We recognize exchange gains and losses primarily as a result of fluctuations in currency rates between the U.S. dollar (the functional reporting currency) and the Euro and British pound (currencies of our subsidiaries), as well as their effect on the dollar denominated short-term intercompany obligations between us and our foreign subsidiaries. In fiscal 2014, fiscal 2013, and fiscal 2012 we recorded foreign currency exchange (losses) gains of $(5,000), $2,000, and $4,000 respectively.

Income Tax Expense: In fiscal 2014, fiscal 2013, and fiscal 2012, we recorded income tax expense of $72,000, $51,000 and $48,000, respectively. Income tax expense is attributed to our foreign subsidiaries and to the payment of minimum State taxes in the U.S. We cannot use our U.S. net operating loss carry forwards to offset taxable income in foreign jurisdictions. Our actual income tax expense differs from the statutory federal income tax benefit largely due to the recording of valuation allowances in all three periods presented.

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 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, or 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 and incentive compensation for senior management because we believe such measures are one important indicator 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 for fiscal 2014, 2013 and 2012 was approximately $3.5 million, $1.3 million and $2.5 million, respectively. The fiscal 2014 increase in non-GAAP operating loss 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 partially by the increase in net sales and gross profit percent. The fiscal 2013 decrease in non-GAAP operating loss compared to the same prior year period is attributed primarily to an increase in net sales which more than offset the increase in non-GAAP spending.


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                                                                     Expense Adjustments
                                                     Share-based                           Amortization
                                        GAAP           Expense         Depreciation       of Intangibles        Non-GAAP
Year Ended March 31, 2014
Gross Profit                        $ 21,527,000     $     27,000     $       33,000     $              -     $ 21,587,000
% of Net sales                              87.6 %                                                                    87.8 %
Operating Expenses
General & administrative               6,522,000       (1,117,000 )         (200,000 )                  -        5,205,000
Research and development               2,151,000          (51,000 )           (4,000 )                  -        2,096,000
Selling and marketing                 18,123,000         (241,000 )          (86,000 )                  -       17,796,000
Amortization                              30,000                -                  -              (30,000 )              -
                                      26,826,000       (1,409,000 )         (290,000 )            (30,000 )     25,097,000
Operating Loss                      $ (5,299,000 )   $  1,436,000     $      323,000     $         30,000     $ (3,510,000 )



Year Ended March 31, 2013
Gross Profit                      $ 19,403,000     $   31,000     $   34,000     $        -     $ 19,468,000
% of Net sales                            86.6 %                                                        86.8 %
Operating Expenses
General & administrative             4,188,000       (473,000 )     (196,000 )            -        3,519,000
Research and development             2,415,000        (54,000 )       (3,000 )            -        2,358,000
Selling and marketing               15,238,000       (254,000 )      (57,000 )            -       14,927,000
Amortization                           863,000              -              -       (863,000 )              -
                                    22,704,000       (781,000 )     (256,000 )     (863,000 )     20,804,000
Operating Loss                    $ (3,301,000 )   $  812,000     $  290,000     $  863,000     $ (1,336,000 )



Year Ended March 31, 2012
Gross Profit                      $ 17,525,000     $   22,000     $   34,000     $        -     $ 17,581,000
% of Net sales                            85.2 %                                                        85.5 %
Operating Expenses
General & administrative             3,733,000       (412,000 )     (163,000 )            -        3,158,000
Research and development             1,905,000        (39,000 )       (9,000 )            -        1,857,000
Selling and marketing               15,296,000       (212,000 )      (55,000 )            -       15,029,000
Amortization                           857,000              -              -     $ (857,000 )              -
                                    21,791,000       (663,000 )     (227,000 )     (857,000 )     20,044,000
Operating Loss                    $ (4,266,000 )   $  685,000     $  261,000     $  857,000     $ (2,463,000 )

Liquidity and Capital Resources

Cash Flows.

At March 31, 2014, our cash and cash equivalents and short-term investments balances totaled $12.1 million. At March 31, 2014, we had working capital of approximately $12.6 million.

Cash used in operating activities was $2.9 million in fiscal 2014, $1.2 million in fiscal 2013 and $3.1 million in fiscal 2012. We used this cash primarily to fund the operating loss, net of non-cash charges for depreciation, amortization of intangibles and equity compensation, of $3.6 million, $1.3 million, and $2.4 million in the respective years. We have continued to show an operating loss . . .

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