Attached files
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| EX-32 - CERTIFICATION OF CEO/CFO PURSUANT TO SECTION 906 - UROLOGIX INC | urologix104624_ex32.htm |
| EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - UROLOGIX INC | urologix104624_ex31-1.htm |
| EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - UROLOGIX INC | urologix104624_ex31-2.htm |
| EX-23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - UROLOGIX INC | urologix104624_ex23-1.htm |
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UNITED STATES |
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SECURITIES AND EXCHANGE COMMISSION |
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Washington, D.C. 20549 |
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FORM 10-K |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended June 30, 2010. |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ___________________ to ____________________. |
Commission File Number 0-28414
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UROLOGIX, INC. |
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Minnesota |
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41-1697237 |
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(State or other jurisdiction of |
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(IRS Employer |
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incorporation or organization) |
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Identification No.) |
14405
21st Avenue North, Suite 110, Minneapolis, MN 55447
(Address of
principal executive offices)
Registrant’s telephone number, including area code: (763) 475-1400
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Securities registered pursuant to Section 12(b) of the Act: |
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Name of Exchange on Which Registered: |
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Common Stock, $.01 par value |
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The NASDAQ Stock Market LLC |
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Series A Junior Participating Preferred Stock Purchase Rights |
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Securities registered pursuant to Section 12(g) of the Act: None |
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted an posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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Large Accelerated Filer o |
Accelerated Filer o |
Non-Accelerated Filer o |
Smaller Reporting Company x |
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Yes o |
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The aggregate value of the Company’s Common Stock held by non-affiliates of the Company was approximately $25,234,677 as of the last day of the Company’s most recently completed second fiscal quarter, December 31, 2009, when the last reported sales price was $1.85.
As of September 1, 2010, the Company had outstanding 14,513,672 shares of Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information is incorporated into Part III of this report by reference to the Proxy Statement for the Registrant’s 2010 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
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Forward-Looking Statements
Statements included in this Annual Report on Form 10-K that are not historical or current facts are forward-looking statements. In addition, our officers may make forward-looking statements orally. We caution readers that these statements are not predictions of actual future results. Our actual results could differ materially from any such forward-looking statements as a result of risks and uncertainties, including those set forth below in Item 1A “Risks Factors” and in other documents we file from time to time with the Securities and Exchange Commission, including our Quarterly Reports on Form 10-Q. Any such forward-looking statements reflect information available to us as of the date of this Annual Report on Form 10-K, and we undertake no obligation to update any such forward-looking statements.
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BUSINESS |
Overview
Urologix develops, manufactures, and markets non-surgical, catheter-based therapies that use a proprietary cooled microwave technology for the treatment of benign prostatic hyperplasia (BPH), a disease that affects more than 23 million men worldwide. We market our control units under the CoolWave® and Targis® names and our procedure kits, that consist of a disposable treatment catheter, Rectal Thermal Unit (RTU) and coolant bag, under the CTC Advance®, Targis, and Prostaprobe™ names. All systems utilize the Company’s Cooled ThermoTherapy™ (CTT) technology, a targeted microwave energy combined with a unique cooling mechanism that protects healthy tissue and enhances patient comfort while providing safe, effective, lasting relief from the symptoms of BPH by the thermal ablation of hyperplastic prostatic tissue. Cooled ThermoTherapy can be performed without general anesthesia or intravenous sedation and can be performed in a urologist’s office or an outpatient clinic. We believe that Cooled ThermoTherapy provides an efficacious, safe and cost-effective solution for BPH with results clinically superior to medication and without the complications and side effects inherent in surgical procedures.
We maintain a website at www.urologix.com. Our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our periodic reports on Form 8-K (and any amendments to these reports) are available free of charge on our website as soon as reasonably practical after we file these reports with the SEC. To obtain copies of these reports, go to www.urologix.com.
Benign Prostatic Hyperplasia
BPH is a non-cancerous disease in which the prostate grows and constricts the urethra causing adverse changes in urinary voiding patterns. The prostate is a walnut-sized gland surrounding the male urethra (the channel that carries urine from the bladder out of the body) that is located just below the bladder and adjacent to the rectum. While the actual cause of BPH is not fully understood, it is known that as men reach middle age, cells within the prostate begin to grow at an increasing rate. As the prostate grows, it compresses or impinges on the urethra and bladder neck, thereby restricting the normal passage of urine. BPH patients typically suffer from a variety of troubling symptoms that can have a significant impact on their quality of life. Symptoms of BPH include frequent urination during the day and night, urgency and painful urination. A delay in treatment can have serious consequences, including complete obstruction (acute retention of urine), urinary tract infections, loss of bladder function and, in extreme cases, kidney failure.
BPH generally affects men after the age of 50. Medical experts suggest that nearly every man will be affected by this condition at some time in his life. The BPH market is large and can be expected to continue to grow due to the general aging of the world’s population as well as increasing life expectancies.
Due in part to the side effects and complications associated with traditional BPH therapies, many patients diagnosed with BPH are regularly monitored by their urologists but elect not to receive active intervention. This course of inaction is known as “watchful waiting.” If symptoms persist or worsen, drug therapy or surgical intervention has historically been recommended. Drug therapy has historically been the first line of treatment. It is estimated that more than 20% of patients who initially pursue drug therapy discontinue treatment within 12 months for various reasons including cost, ineffectiveness, side effects and the burdens of compliance. Patients may also try multiple drugs or combinations of drugs to improve effectiveness. This leads to a more costly treatment and often additional side effects. Traditionally, the most common surgical procedure has been Transurethral Resection of the Prostate (TURP), an invasive surgery in which portions of the prostatic urethra and surrounding tissue are removed, thereby widening the channel and improving urinary flow. While TURP results in a dramatic improvement in urine flow and reduction in symptoms, the procedure can require a lengthy recovery time and is reported to have a high rate of side effects and complications. Because the TURP procedure requires a highly skilled surgeon with extensive training, the incidence of complications is affected by the experience of the surgeon performing the TURP.
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Cooled ThermoTherapy
Our Targis System, which includes both the CoolWave and Targis control units, and our Prostatron System utilize Cooled ThermoTherapy, a catheter-based treatment for BPH that is clinically superior to medication and less invasive than surgery. Our newest Cooled ThermoTherapy devices are the CoolWave control unit combined with our CTC Advance microwave catheter; a combination that provides increased capabilities compared to prior generations’ devices. Cooled ThermoTherapy is a first line definitive option for patients with BPH. The urologist and patient must determine if it is the best option, but CTT is often selected for patients who prefer not to initiate daily chronic medication or have tried BPH medication and are unhappy with the lack of clinical improvement and/or the side effects.
Cooled ThermoTherapy utilizes a proprietary focused high energy microwave technology, delivered through a flexible catheter that targets energy into the transitional zone of the prostate producing a temperature sufficient to cause cell death, while simultaneously cooling and protecting the healthy, pain-sensitive urethral tissue. During a Cooled ThermoTherapy procedure, a catheter is inserted into the urethra and anchored in the bladder, and a rectal thermosensing unit is placed into the patient’s rectum. Chilled water is then circulated through the catheter to lower the temperature of the urethra and protect it from heat and discomfort during the treatment. Temperatures in the urethra and rectum are monitored continuously during the treatment while microwave energy is delivered into the prostatic tissue, ultimately resulting in a reduction in the size of the prostate and relief of symptoms as the body re-absorbs the destroyed tissue during the months following treatment.
Cooled ThermoTherapy provides significant advantages over other BPH therapies, producing lasting results that are clinically superior to drug therapy while avoiding the complications associated with surgery. Because Cooled ThermoTherapy does not require punctures or incisions and protects the urethra during treatment, it can be performed in the urologist’s office or other outpatient environments without the need for general anesthesia or intravenous sedation which results in fewer complications and lower overall cost to the healthcare system.
Clinical Studies
Clinical trials of the Cooled ThermoTherapy procedure have been performed to produce data to support potential new indications and marketing claims, to generate long-term durability data, and to gather data for Medicare and other reimbursement approvals in various markets. We have conducted numerous multi-center, multi-year studies to evaluate the long-term durability of Cooled ThermoTherapy procedures. In our published results from multi-center clinical trials, conducted both in the United States and internationally, the majority of Cooled ThermoTherapy patients for whom follow-up data is available show significant long-term relief from the symptoms of BPH, without significant post-procedure complications. This was confirmed in April 2009 by the presentation of the results of five year data on Cooled ThermoTherapy, which can be found on our website at www.urologix.com, substantiating the efficacy of our CTC microwave catheter is durable for five years with 90 percent of the patients enjoying freedom from additional minimally invasive procedures or surgical procedures relating to BPH.
Sales and Marketing
Our goal is to establish Cooled ThermoTherapy as a standard of care for the treatment of BPH. Our business strategy to achieve this goal is to (i) educate both patients and urologists on the benefits of Cooled ThermoTherapy compared to other treatment options, (ii) increase the use of Cooled ThermoTherapy by urologists who already have access to a Cooled ThermoTherapy control unit, (iii) increase the number of urologists who provide Cooled ThermoTherapy to their patients, and (iv) provide more urologists with access to Cooled ThermoTherapy through the use of our own Cooled ThermoTherapy mobile service or third party mobile providers in the United States.
United States
We have a sales and marketing team consisting of sales management, marketing support, clinical support, mobile application specialists and direct sales representatives, all of whom are dedicated to marketing our Cooled ThermoTherapy products and our Cooled ThermoTherapy mobile service. Our direct sales force and marketing efforts are targeted at urologists who treat or are interested in treating BPH patients in their office. Our Cooled ThermoTherapy mobile application specialists transport the CoolWave control unit, along with the single-use treatment catheters and necessary supplies, to urologist offices, ambulatory surgery centers and hospitals on a scheduled basis, making the treatment available to urologists and patients on an efficient and economical basis. As of June 30, 2010, our mobile assets included 17 vans which service 16 mobile routes in select geographies across the United States. In addition to our direct sales force and Cooled ThermoTherapy mobile application specialists, we continue to utilize independent third-party mobile service providers to provide hospitals, ambulatory surgery centers and urology clinics with access to our Cooled ThermoTherapy treatment. As of June 30, 2010, we employed a total of 43 individuals in our sales and marketing departments and in our Cooled ThermoTherapy mobile service. The expenses for our Cooled ThermoTherapy mobile service are included in cost of goods sold.
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We offer our Cooled ThermoTherapy control units to our customers on a direct purchase, or on an evaluation or longer-term use basis. Pricing for single-use treatment catheters to direct customers and our Cooled ThermoTherapy mobile service varies based upon treatment volume.
International
Although our international sales efforts have historically been relatively modest, we believe that there is a potential market for Cooled ThermoTherapy outside of the United States in certain, limited markets. While we will continue to utilize local distributors experienced in selling products to hospitals and urologists to assist us in these opportunities, our principal focus is on the U.S. market opportunity. The inherent challenge outside the United States is that third party reimbursement of our Cooled ThermoTherapy procedure is less prevalent and our revenue in international markets will largely depend on private payors’ willingness to pay a fair amount for our product and service, or that the patient will pay out-of-pocket for significant portions or all of the treatment costs.
Manufacturing
We assemble Targis and CoolWave control units and procedure kits using materials and components supplied by various subcontractors and suppliers, as well as components we fabricate at our suburban Minneapolis facility. Several of the components used in our control units and procedure kits are currently available to us through a single vendor. We outsource the manufacturing for Prostatron products.
During the fourth quarter of fiscal year 2007, in connection with our development of the CTC Advance catheter, we implemented an end-of-life plan for our Prostatron control units and Prostaprobe catheters. As a result, we negotiated an end-of-life build with the MedTech Group, Inc. for the supply of Prostaprobe single-use treatment catheter products to support our Prostatron customers until we transition them to another of our products. The inventory of Prostaprobe catheters will be depleted within 24 months.
We continuously seek to develop alternative sources for critical components. Where alternative sourcing is not possible, we work to enter into supply agreements with each component provider. Nevertheless, failure to obtain components from these providers or delays associated with any future component shortages, particularly if we increase our manufacturing level, could have a material adverse effect on our business, our financial condition and our overall operating results.
Our manufacturing operations and the operations of our third-party suppliers must comply with the U.S. Food and Drug Administration’s (FDA) quality system regulation which includes, but is not limited to, the FDA’s Good Manufacturing Practices (GMP) requirements, and must comply with certain requirements of state, local and foreign governments for assuring quality by controlling components, processes and document traceability and retention, among other things.
The FDA periodically inspects our facility, documentation and quality systems. To date the FDA has noted no significant deficiencies of GMP. Our facility will continue to be subject to periodic inspections by the FDA and by other auditors. We believe that our manufacturing and quality control procedures meet the requirements of the FDA and other regulators and that we have established training and internal audit systems designed to ensure compliance.
We have received and maintained ISO 13485 quality system certification indicating compliance of our manufacturing facilities with international standards for quality assurance and manufacturing process control. We also have received and maintain CE mark certification, which allows us to affix the CE Mark to our Targis and Prostatron System components and market them in the European Union.
As of June 30, 2010, we employed 32 individuals in our manufacturing department.
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Research and Development
We will continue to invest in research and development and clinical trials to improve our products and our therapy. These investments are intended to broaden our product offering and expand the clinical evidence supporting our proprietary Cooled ThermoTherapy treatment for BPH. In April 2009 at the American Urological Association (AUA) annual meeting, we launched our newest Cooled ThermoTherapy treatment catheter, the CTC Advance short antenna length, and had two separate presentations of our clinical data. The presentations highlighted our five year durability data and the ability of urologists using our system to customize the treatment for patients. At the 2010 AUA we had two additional presentations at the subspecialty meeting of the Geriatric Urological Society. The first presentation highlighted how the combination of cooling and high energy with Cooled ThermoTherapy uniquely enables delivery of a therapeutically effective treatment. The second demonstrated the five year preservation of sexual function following Cooled ThermoTherapy, a significant concern for sexually active men considering the alternatives of chronic medication or surgery.
We intend to build upon our intellectual properties, our scientific and clinical knowledge and our relationships to develop innovative future generations of BPH products and services as well as other urology products. Our research and development efforts and goals are currently focused primarily on improving the features and functions of our Cooled ThermoTherapy, expanding the treatable population, improving the ease of use, patient comfort and clinical response to Cooled ThermoTherapy treatment and reducing the manufacturing cost of our products.
During the fiscal years ended June 30, 2010, 2009, and 2008, we spent $1.8 million, $2.4 million, and $2.8 million, respectively, on our research and development efforts. As of June 30, 2010, we employed 12 individuals in our research and development department.
Reimbursement
We believe that third-party reimbursement is essential to the continued adoption of Cooled ThermoTherapy, and that clinical efficacy, overall cost-effectiveness and physician advocacy will be keys to maintaining such reimbursement. We estimate that 60% to 80% of patients who receive Cooled ThermoTherapy treatment in the United States are eligible for Medicare coverage. The remaining patients will be covered by either private insurers, including traditional indemnity health insurers and managed care organizations, or they will be private paying patients. As a result, Medicare reimbursement is particularly critical for widespread market adoption of Cooled ThermoTherapy in the United States.
Each calendar year the Medicare reimbursement rate for Cooled ThermoTherapy is determined by the Centers for Medicare and Medicaid Services (CMS). The Medicare reimbursement rate for physicians varies depending on the site of service, wage indexes and geographic location. The national average reimbursement rate is the fixed rate for the year without any geographic adjustments, but does vary based on site of service. Cooled ThermoTherapy can be performed in a urologist’s office, an ambulatory surgery center (ASC), or a hospital as an outpatient procedure.
The national average reimbursement rate in the physician office setting – which is a “global fee” paid entirely to the urologist - is currently $2,430 for our Cooled ThermoTherapy treatment. The CMS published the Physician Fee Schedule (PFS) final rule for calendar 2010 on October 30, 2009. Since publication, Congress has acted four times to temporarily adjust the 2010 Medicare reimbursement for all physician payments. These adjustments are to offset broader prescribed reimbursement cuts to Medicare driven by the Sustainable Growth Rate (SGR) formula. The current temporary adjustment expires November 30, 2010. If Congress fails to act to extend the temporary adjustment to the Medicare Physician Fee Schedule, the level of Medicare reimbursement in the physician office setting for Cooled ThermoTherapy will decline to $1,869. While Congress has acted four times since the publication of the 2010 final rule to delay the impacts from the SGR, we do not know when nor if these adjustments will be extended for the final month of calendar year 2010 and calendar year 2011. We are monitoring these developments closely and will continue to execute on our active reimbursement strategy.
Urologists who perform Cooled ThermoTherapy procedures in an ASC are reimbursed under the two-part system in which the ASC receives a fixed fee of $1,868 in the 2010 PFS as compared to $1,849 in 2009, while the urologist performing the treatment is reimbursed $601 currently. In the hospital outpatient setting, which is not affected by changes in the SGR, the national average total reimbursement is $3,147 for calendar year 2010 compared to $3,026 in calendar year 2009. In the hospital outpatient setting, the urologist performing the treatment is reimbursed $601.
Private insurance companies and HMOs make their own determinations regarding coverage and reimbursement based upon “usual and customary” fees. To date, we have received coverage and reimbursement from private insurance companies and HMOs throughout the United States. We intend to continue our efforts to gain coverage and reimbursement across the United States. There can be no assurance that we will receive favorable coverage nor reimbursement determinations for Cooled ThermoTherapy from these payers or that amounts reimbursed to urologists for performing Cooled ThermoTherapy procedures will be sufficient to encourage urologists to use Urologix’ product and service offerings.
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As a result of recently enacted federal health care reform legislation, substantial changes are anticipated in the United States health care system. Such legislation includes numerous provisions affecting the delivery of health care services, the financing of health care costs, reimbursement of health care providers and the legal obligations of health insurers, providers and employers. These provisions are currently slated to take effect at specified times over approximately the next decade. The federal health care reform legislation did not directly affect our fiscal year 2010 financial statements and we do not expect the legislation to affect our financial results for fiscal year 2011.
We have an active reimbursement strategy, and have retained consultative experts to assist us with reimbursement matters. For calendar 2011, CMS published the proposed rule with additional changes to the physician fee schedule covering Cooled ThermoTherapy. The reimbursement for calendar year 2011 will be determined by both the final CMS rule for the Physician Fee Schedule as well as Congressional actions to address the SGR formula. If Congress acts to stop the negative impacts of the SGR, reimbursement for calendar year 2011 as proposed for our code should be relatively consistent with current levels. We are actively participating in the CMS comment process.
Internationally, reimbursement approvals for the Cooled ThermoTherapy procedure are awarded on an individual-country basis.
Patents and Proprietary Rights
We currently own 47 U.S. and 18 international patents. We also have three patent applications pending in the United States and one patent application in non-U.S. jurisdictions, and we intend to file additional patent applications in the future.
Several of our United States patents claim methods and devices that we believe are critical to providing a safe and efficacious treatment for BPH. There can be no assurance that our patents, or any patents that may be issued as a result of existing or future applications, will offer any degree of protection from competitors or that any of our patents or applications will not be challenged, invalidated or circumvented in the future.
In addition to patents, we also rely on trade secrets and proprietary know-how that we intend to protect, in part, through proprietary information agreements with employees, consultants and other parties. Our proprietary information agreements with employees and most of our consultants contain provisions requiring that the individuals assign to us, without additional consideration, any inventions conceived or reduced to practice while employed by or under contract with us, subject to customary exceptions. Our officers and other key employees also agree not to compete with us for a period following termination.
Competition
Competition in the market for the treatment of BPH comes from drug therapy, other minimally invasive office-based treatments, and invasive surgical therapies, such as TURP and laser surgeries (Laser Vaporization or Laser Enucleation). There are multiple companies that market or distribute surgical products for either TURP or laser procedures including: Olympus, Karl Storz, American Medical Systems, Boston Scientific, Lumenis, Lisa Laser and Biolitec.
There are eight well-recognized prescription drugs available in the United States for treating the symptoms of BPH: Flomax (Boehringer Ingelheim International GmbH), Hytrin (Abbott Laboratories), Cardura (Pfizer Inc.), UroXatral (Sanofi-Synthelabo), Rapaflo (Watson Pharmaceuticals, Inc.), Proscar (Merck & Co., Inc.), Jalyn (GlaxoSmithKline), and Avodart (GlaxoSmithKline), some of which are now also available in generic preparation. Drug therapy is currently the first-line therapy prescribed by most physicians – both primary care physicians and urologists - in the United States for BPH. The drug companies have significant resources to educate urologists and patients through direct sales and direct to consumer marketing. We focus on educating urologists and their patients to the benefits of our Cooled ThermoTherapy in a targeted and efficient manner but generally, we have fewer resources than manufacturers of BPH drugs.
Competition in the market for minimally invasive office-based treatments for BPH is also significant. Competitive devices include low energy microwave combined with balloon dilatation (Boston Scientific); non-cooled, low energy microwave (American Medical Systems); radio frequency needle ablation (Medtronic); and high energy microwave with limited cooling (Prostalund). Additional competitors may enter the market. We believe Cooled ThermoTherapy offers a durable solution as shown in peer reviewed clinical trials and final five year data as presented at the April 2009 AUA annual meeting, and our product is FDA-approved for the largest treatable patient population compared to other office-based BPH therapies. Because Cooled ThermoTherapy does not require punctures or incisions, it can be performed in the urologist’s office or other outpatient environments without the need for general anesthesia or intravenous sedation. Further, by combining focal high energy microwave therapy with cooling, we can achieve higher temperatures in a controlled pattern that conforms to the natural shape of the prostate, destroying hyperplastic tissues to create lasting results while preventing damage to the urethra, enhancing patient comfort and reducing complications.
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Government Regulation
Governmental regulation in the United States and other countries is a significant factor affecting the research and development, manufacture and marketing of our products. In the United States, the FDA has broad authority under the Federal Food, Drug and Cosmetic Act and the Public Health Service Act to regulate the manufacture, distribution and sale of medical devices. Foreign sales of medical devices are subject to foreign governmental regulation and restrictions that vary from country to country.
Medical devices intended for human use in the United States are classified into one of three categories. Such devices are classified by regulation into either Class I (general controls), Class II (general controls and special controls) or Class III (general controls and pre-market approval (PMA)) depending upon the level of regulatory control required to provide reasonable assurance of the safety and effectiveness of the device. Good manufacturing practices, labeling, maintenance of records and filings with the FDA also apply to medical devices.
Urologix systems have received FDA approval for sale in the United States as a Class III medical device. We have obtained CE Mark certification for distribution in Europe and product registration for distribution in Canada, Australia, and New Zealand.
The FDA’s regulations require agency approval of a PMA supplement for a Class III medical device when certain changes are made to a product if the changes affect the safety and effectiveness of the device. Such changes include, but are not limited to, new indications for use; the use of a different facility or establishment to manufacture, process or package the device; changes in manufacturing methods or quality control systems; changes in vendors used to supply components of the device; changes in performance or design specifications; and certain labeling changes. Any such changes will require FDA approval of a PMA supplement prior to marketing of the device. There can be no assurance that the required approvals of PMA supplements for any changes will be granted on a timely basis or at all. Delays in receipt of, or failure to receive such approvals, or the loss of the approval of the PMA for either of our Targis or Prostatron systems would have a material adverse effect on our business.
The process of obtaining FDA and other required regulatory clearances or approvals is lengthy and expensive. There can be no assurance that we will be able to obtain or maintain the necessary clearances or approvals for clinical use or for manufacturing or marketing of our products. Failure to comply with applicable regulatory approvals can, among other things, result in warning letters, fines, suspensions of regulatory approvals, product recalls, operating restrictions and criminal prosecution. In addition, government regulation may be established that could prevent, delay, modify or rescind regulatory clearance or approval of our products.
Medical device laws are also in effect in many of the countries outside of the United States in which we do business. These laws range from comprehensive device approval and quality system requirements for some or all of our medical device products to simple requests for product data or certifications. The number and scope of these requirements are increasing. All medical devices sold in Europe must meet the European Medical Device Directive standards and receive CE Mark certification. CE Mark certification involves a comprehensive quality system program and submission of data on a product to the Notified Body in Europe.
Health Care Regulation
We regularly monitor developments in laws and regulations relating to our business. We may be required to modify our agreements, operations, marketing and expansion strategies from time to time in response to changes in the statutory and regulatory environment. Although we plan to structure all of our agreements, operations, marketing and strategies in accordance with applicable law, there can be no assurance that our arrangements will not be challenged successfully or that required changes will not have a material adverse effect on operations or profitability.
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Product Liability and Insurance
As a result of our exposure to product liability claims, we currently carry product liability insurance covering our products with policy limits per occurrence and in the aggregate that we have deemed to be sufficient. We cannot predict, however, whether this insurance will actually be sufficient, or if not, whether we will be able to obtain sufficient insurance to cover the risks associated with our business or whether such insurance will be available at premiums that are commercially reasonable. In addition, these insurance policies must be renewed annually. Although we have been able to obtain liability insurance, such insurance may not be available in the future on acceptable terms, if at all. A successful claim against us or settlement by us with respect to uninsured liabilities or in excess of our insurance coverage, or our inability to maintain insurance in the future, or any claim that results in significant costs or adverse publicity against us, could have a material adverse effect on our business, financial condition, results of operations and liquidity.
Employees
As of June 30, 2010, we employed 96 individuals on a full-time basis. We also had several part-time employees, consultants and independent third-party sales representatives. None of our employees are covered under a collective bargaining agreement. We consider our relationship with our employees to be good.
Seasonality
We believe that holidays and vacations taken by urologists, patients and patient families can have a seasonal impact on our sales as can major medical conventions which take urologists away from their practices. However, we typically do not experience a regular pattern of revenue fluctuations as a result of seasonality effects. We continue to monitor and assess the impact seasonality may have on demand for our products.
Backlog
As of June 30, 2010, we had a backlog of product orders for the Prostaprobe catheter due to a temporary interruption in our end of life build. This backlog has since been resolved. Our policy is to stock enough inventory to ship most orders within a few days of receipt or as requested by our customers. Therefore, we rely on orders placed during a given period for sales during that period. Backlog information as of the end of a particular period is not indicative of future levels of our revenue.
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RISK FACTORS |
The occurrence of any of the following risks could harm our business. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our operations. If any of these risks materialize, the trading price of our common stock could decline, and investors may lose all or part of their investment.
Third party reimbursement is critical to market acceptance of our products.
Our future revenues are subject to uncertainties regarding health care reimbursement and reform. In the United States, health care providers, such as hospitals and urologists, generally rely on third-party payers. Third-party reimbursement is dependent upon decisions by the CMS, contracted Medicare carriers or intermediaries, individual managed care organizations, private insurers, foreign governmental health programs and other payers of health care costs. Failure to receive or maintain favorable coding, coverage and reimbursement determinations for Cooled ThermoTherapy by these organizations could discourage urologists from using our products. We may be unable to sell our products on a profitable basis if third-party payers deny coverage, provide low reimbursement rates or reduce their current levels of reimbursement.
The continuing efforts of government, insurance companies, health maintenance organizations and other payers of health care costs to contain or reduce costs of health care may affect our future revenues and profitability. With recent federal and state government initiatives directed at lowering the total cost of health care, the United States Congress and state legislatures will likely continue to focus on health care reform including the reform of the Medicare and Medicaid entitlement programs, and on the cost of medical products and services. Additionally, third-party payers are increasingly challenging the prices charged for medical products and services. Also, the trend toward managed health care in the United States and the concurrent growth of organizations such as HMO’s that could control or significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may also result in lower prices for, or rejection of, our products. The cost containment measures that health care payers and providers are instituting and the effect of any health care reform could cause reductions in the amount of reimbursement available, and could have a materially adverse effect on our revenues and the ability to operate profitably. We have an active reimbursement strategy, and have retained consultative experts to assist us with communicating the significant benefit to the healthcare system this safe and effective minimally invasive office-based therapy delivers to the second most commonly diagnosed medical problem for men over the age of 60.
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We are faced with intense competition and rapid technological and industry change.
The medical device industry is characterized by rapid technological change, changing customer needs and frequent new product introductions. Our products may be rendered obsolete as a result of future innovations. We face intense competition from other device manufacturers and surgical manufacturers, as well as from pharmaceutical companies. Nearly all of our competitors are significantly larger than we are and have greater financial, technical, research, marketing, sales, distribution and other resources than we do. We believe that price competition will continue amongst products developed in our markets. Our competitors may develop or market technologies, products and services, including drug-based treatments that are more effective or commercially attractive than any we are developing or marketing. Our competitors may succeed in obtaining regulatory approval and introducing or commercializing products before we do. Such developments could have a significantly negative effect on our business, financial condition and results of operations. Even if we are able to compete successfully, we may not be able to do so in a profitable manner.
We depend upon our Cooled ThermoTherapy products for all of our revenues.
All of our revenues are derived from sales of our Cooled ThermoTherapy control units and single-use treatment catheters and treatments delivered through our Cooled ThermoTherapy mobile service. As a result, our success is solely dependent upon the success of our Cooled ThermoTherapy products. If we are unable to more widely commercialize the use of these systems through our marketing initiatives, including our company-owned Cooled ThermoTherapy mobile service, our business, financial condition and results of operations will be materially and adversely affected. Furthermore, higher than expected manufacturing, marketing and distribution costs, lower than expected reimbursement levels, lower than expected usage by urologists, and/or other competitive forces may require us to alter our pricing or marketing structure in a manner that could have a material adverse effect on us.
We have a history of unprofitability.
We incurred a net loss of $2.2 million for the year ended June 30, 2010 and $4.4 million for the year ended June 30, 2009. Since our inception, we have incurred losses of approximately $106.3 million. If urologists do not continue to purchase and use Cooled ThermoTherapy to treat patients with BPH, we may not be able to achieve profitability. Because we expect to continue to incur additional expenses relating to sales and marketing activities and research and development activities, we must increase the revenues received from sales of our products to operate in a profitable manner. We cannot offer assurance that we will generate increases in our revenues, attain profitable operations, or successfully implement our business plan or future business opportunities.
We may need additional capital to continue our business, which may not be available in the amount or at the time we need it.
We used approximately $1.3 million of net cash from operating activities in the year ended June 30, 2010 and ended our 2010 fiscal year with approximately $5.7 million in cash and cash equivalents. We believe our $5.7 million in cash and cash equivalents, together with funds generated from product sales, will be sufficient to fund our operations, working capital and capital resource needs beyond fiscal year 2011. Our liquidity and capital resource needs are based upon management estimates as to future revenue and expense based upon our business plan. Our needs are subject to change based upon, among other factors, the success of our efforts to increase revenue, our ability to generate cash flow from operations and our ability to control costs and expenses. If our estimates of our financing needs change, we may need additional capital sooner than we currently estimate.
If we do not generate capital through increasing income and cash flow from our operations, we eventually will deplete our available capital resources and would then need additional debt or equity capital to fund our operations. We may seek additional financing by incurring indebtedness or from an offering of our equity securities or both. No assurance can be given that additional financing will be obtained in an amount that is sufficient for our needs, in a timely manner, or on terms and conditions acceptable to us or our shareholders.
11
Our
efforts to raise additional funds from the sale of equity may be hampered by
the depressed trading price of our common stock and the fact that we are
currently not compliant with the minimum bid price requirement for continued
listing on The NASDAQ Capital Market. Our efforts to raise funds by incurring
additional indebtedness may be hampered by the fact that we do not have
significant tangible assets and the challenges we would face in servicing our
current indebtedness with cash flow from operations.
The following factors may
also affect our ability to obtain additional financing on favorable terms, or
at all:
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our results of operations, financial condition and business prospects; |
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changes in and trends in reimbursement amounts; |
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conditions in the medical device industry and competition from other BPH treatment providers; and |
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general economic conditions, including the availability of credit and lending standards of banks and other financial institutions. |
If we are unable to obtain additional capital in an amount sufficient for our needs and in a timely manner, we may be required to further reduce our expenses and curtail our capital expenditures, sell our assets, or suspend or discontinue our operations.
We currently fail to meet one of NASDAQ’s listing requirements and if our common stock is delisted it may then become illiquid.
Our common stock is listed on The NASDAQ Capital Market. On August 19, 2010, we received a letter from The NASDAQ Stock Market which stated that for the last 30 consecutive business days the bid price of our common stock has closed below the minimum $1.00 per share required for continued inclusion on the Nasdaq Capital Market. Therefore, we are not in compliance with the requirements for continued listing of the Nasdaq Capital Market. If, at any time before February 15, 2011, the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, the staff of The NASDAQ Stock Market will provide us written notification that we have achieved compliance with this requirement for continued listing.
If we fail to regain compliance with the minimum bid price requirement or if at any time we fail to satisfy each of the other requirements for continued listing, our common stock will be delisted from The Nasdaq Capital Market. If delisted from The Nasdaq Capital Market, our common stock will likely be quoted in the over-the-counter market in the so-called “pink sheets” or quoted in the OTC Bulletin Board. In addition, our common stock would be subject to the rules promulgated under the Securities Exchange Act of 1934 relating to “penny stocks.” These rules require brokers who sell securities that are subject to the rules, and who sell to persons other than established customers and institutional accredited investors, to complete required documentation, make suitability inquiries of investors and provide investors with information concerning the risks of trading in the security. Consequently, we believe an investor would find it more difficult to buy or sell our common stock in the open market if it were quoted on the over-the-counter market or the OTC Bulletin Board. There can be no assurance that our common stock may be sold without a significant negative impact on the price per share that may make it more difficult for us to meet the minimum bid price requirement or that any market will continue to exist for our common stock.
Government regulation has a significant impact on our business.
Government regulation in the United States and other countries is a significant factor affecting the research and development, manufacture and marketing of our products. In the United States, the FDA has broad authority under the federal Food, Drug and Cosmetic Act and the Public Health Service Act to regulate the distribution, manufacture and sale of medical devices. Sales of medical devices outside the United States are subject to government regulation and restrictions that vary from country to country. In addition, we, along with our distributors and health care providers who purchase our products and services, are subject to state and federal laws prohibiting kickbacks or other forms of bribery in the health care industry. We may be subject to civil and criminal prosecution for violations of any of these laws by our agents or us.
Before any new products we may offer are introduced into the U.S. market, we must obtain prior authorization from the FDA. This authorization is based on a review by the FDA of the medical device’s safety and effectiveness for its intended uses. The process of obtaining clearances or approvals from the FDA and other applicable regulatory authorities can be expensive, uncertain and time consuming.
12
In addition, we may not be able to obtain necessary approvals for clinical testing or for the manufacturing or marketing of any of our products in the United States or in other countries. If regulatory approvals for any of our other products are not obtained on a timely basis, or not approved as submitted, or at all, it could have a significant negative effect on our financial condition and results of operations. Additionally, delays in receipt of regulatory approvals for our products or failure to receive such approvals, the loss of previously obtained approvals, or failure to comply with existing or future regulatory requirements would have a significant negative effect on our financial condition and results of operations.
Even if such an approval is obtained, our failure to comply with applicable regulatory approvals could, among other things, result in fines, suspension of regulatory approvals, product recalls, operating restrictions and criminal prosecution. In addition, government regulations may be established that could prevent, delay, modify or rescind regulatory approval of our products. Any such position or change of position by the FDA may adversely impact our business and financial condition. Regulatory approvals, if granted, may include significant limitations on the indicated uses for which our products may be marketed in the United States or in other countries. In addition to obtaining such approvals, the FDA and foreign regulatory authorities may impose numerous other requirements on us. The FDA prohibits the marketing of approved medical devices for unapproved uses. In addition, product approvals can be withdrawn for failure to comply with regulatory standards or the occurrence of unforeseen problems following initial marketing.
In addition, the health care industry in the United States is generally subject to fundamental change due to regulatory as well as political influences. We anticipate that Congress and state legislatures will continue to review and assess alternative health care delivery and payment systems. Potential approaches that have been considered include controls on health care spending through limitations on the growth of private purchasing groups and price controls. We cannot predict what impact the adoption of any federal or state health care reform measures may have on our business.
We are dependent upon a limited number of third-party suppliers to manufacture our products.
We manufacture the Targis and CoolWave control units and single-use treatment catheters for use with our Targis and CoolWave control units at our suburban Minneapolis facility. Our success will depend upon our ability to cost-effectively manufacture a reliable product and deliver that product in a timely manner. Because we lack experience manufacturing our products in large quantities, we may encounter difficulties in maintaining production efficiencies, quality control and assurance, component supply and qualified personnel. We cannot offer assurance that we will be able to manufacture a reliable product and deliver that product to customers in a timely fashion. Our failure to maintain a reputation among our customers as a timely, responsive manufacturer, or our failure to remedy manufacturing issues in a timely manner and to our customers’ satisfaction, or higher than expected manufacturing costs, would adversely affect our business.
Other than the Targis and CoolWave control units and procedure kits, we outsource the remaining manufacturing for our products. We assemble Targis and CoolWave control units and procedure kits using materials and components supplied by various subcontractors and suppliers, as well as components we fabricate. We rely on single sources for several components, one of which is obtained from a source that has a patent for the technology. Our reliance on outside suppliers for our components involves risks including limited control over the price and uncertainty regarding timely delivery and quality of parts. During the fourth quarter of fiscal year 2007, in connection with our strategy to develop a next generation catheter, we implemented an end-of-life plan for our Prostatron product line. As a result, we negotiated an end-of-life build with the MedTech Group, Inc. for the supply of Prostatron Cooled ThermoTherapy single-use treatment catheter products to support our Prostatron customers until we can transition them to another of our products. The inventory of Prostaprobe devices will be depleted within 24 months.
The start-up, transfer, termination or interruption of any of these relationships or products, or the failure of these manufacturers or suppliers, some of which operate in countries outside of the United States, to supply products or components to us on a timely basis or in sufficient quantities, likely would cause us to be unable to meet customer orders for our products and harm our reputation with customers and our business. Identifying and qualifying alternative suppliers of components or manufacturers of products takes time and involves significant additional costs and may delay the production of our products. Further, if we obtain a new supplier for a component, manufacture our product with an alternative component or if our products are manufactured by an alternative manufacturer, we will likely need FDA approval of a PMA supplement to reflect changes in product manufacturing and the FDA may require additional testing of any component from new suppliers prior to our use of these components. Further, if FDA approval of a PMA supplement is required, any delays in delivery of our product to customers would be extended and our costs associated with the change in product manufacturing would increase.
The failure of our third-party manufacturers to manufacture the products for us, and the failure of our components suppliers to supply us with the components, consistent with our requirements as to quality, quantity and timeliness, would materially harm our business.
13
Our business of the manufacturing, marketing, and sale of medical devices involves the risk of liability claims and such claims could seriously harm our business, particularly if our insurance coverage is inadequate.
Our business exposes us to potential product liability claims that are inherent in the testing, production, marketing and sale of medical devices. Like other participants in the medical device industry, we are from time to time involved in lawsuits, claims and proceedings alleging product liability and related claims such as negligence. If any current or future product liability claims become substantial, our reputation could be damaged significantly, thereby harming our business. We may be required to pay substantial damage awards as a result of any successful product liability claims. Any product liability claim against us, whether with or without merit, could result in costly litigation, and divert the time, attention, and resources of our management.
As a result of our exposure to product liability claims, we currently carry product liability insurance covering our products with policy limits per occurrence and in the aggregate that we have deemed to be sufficient. Our insurance may not cover certain product liability claims or our liability for any claims may exceed our coverage limits. Therefore, we cannot predict whether this insurance is sufficient, or if not, whether we will be able to obtain sufficient insurance to cover the risks associated with our business or whether such insurance will be available at premiums that are commercially reasonable. In addition, these insurance policies must be renewed annually. Although we have been able to obtain liability insurance, such insurance may not be available in the future on acceptable terms, if at all. A successful claim against us or settlement by us with respect to uninsured liabilities or in excess of our insurance coverage, or our inability to maintain insurance in the future, or any claim that results in significant costs to or adverse publicity against us, could have a material adverse effect on our business, financial condition and results of operations.
We are dependent on adequate protection of our patent and proprietary rights.
We rely on patents, trade secrets, trademarks, copyrights, know-how, license agreements and contractual provisions to establish and protect our intellectual property rights. However, these legal means afford us only limited protection and may not adequately protect our rights or remedies to gain or keep any advantages we may have over our competitors.
Other competitors may independently develop the same or similar technologies or otherwise obtain access to our technology and trade secrets. Our competitors, many of which have substantial resources and may make substantial investments in competing technologies, may apply for and obtain patents that will prevent, limit, or interfere with our ability to manufacture or market our products. Further, while we do not believe that any of our products or processes interfere with the rights of others, third parties may nonetheless assert patent infringement claims against us in the future.
Costly litigation may be necessary to enforce patents issued to us, to protect trade secrets or “know-how” we own, to defend us against claimed infringement of the rights of others or to determine the ownership, scope, or validity of our proprietary rights and the rights of others. In connection with the settlement of a patent infringement suit we filed in March 2002, we granted, in January 2004, ProstaLund AB, ProstaLund Operations AB and Circon Corporation (a/k/a ACMI Corporation) a non-exclusive, royalty free license under certain of our patents to sell the ProstaLund transurethral microwave thermotherapy system marketed in the United States by ACMI Corporation as the CoreTherm device.
Any claim of infringement against us may involve significant liabilities to third parties, could require us to seek licenses from third parties, and could prevent us from manufacturing, selling, or using our products. The occurrence of this litigation or the effect of an adverse determination in any of this type of litigation could have a material adverse effect on our business, financial condition and results of operations.
Our products may be subject to product recalls even after receiving FDA clearance or approval, which would harm our reputation and our business.
The FDA and similar governmental authorities in other countries in which our products are sold, have the authority to request and, in some cases, require the recall of our products in the event of material deficiencies or defects in design, manufacture or labeling. A government-mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors, labeling errors or design defects. Any recall of product would divert managerial and financial resources, harm our reputation with our customers and damage our business.
14
We are dependent on key personnel.
Our failure to attract and retain skilled personnel could hinder the management of our business, our research and development, our sales and marketing efforts, and our manufacturing capabilities. Our future success depends to a significant degree upon the continued services of key senior management personnel, including Stryker Warren, Jr., our Chief Executive Officer, Greg Fluet, our Chief Operating Officer and Brian Smrdel, our Chief Financial Officer. We have employment agreements with Mr. Warren, Mr. Fluet and Mr. Smrdel that provides that either the Company or the individuals may terminate the individuals’ employment at any time with or without cause. If there is a change in control and we terminate Mr. Warren’s, Mr. Fluet’s or Mr. Smrdel’s employment without cause, however, we would be required to make specified payments to them as described in their employment agreement. We do not have key person life insurance on Mr. Warren, Mr. Fluet or Mr. Smrdel.
Our future success also depends on our continuing ability to attract, retain and motivate highly qualified managerial, technical and sales personnel. During the past year we experienced turnover in our sales force. Our inability to retain or attract qualified personnel could have a significant negative effect and thereby materially harm our business and financial condition.
Fluctuations in our future operating results may negatively affect the market price of our common stock.
Our operating results have fluctuated in the past and can be expected to fluctuate from time to time in the future. Some of the factors that may cause these fluctuations include but are not limited to:
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the timing, volume and pricing of customer orders for both control units and procedure kits, |
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the impact to the marketplace of competitive products and pricing, |
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the timing of expenditures related to sales and marketing, and research and development, |
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product availability and cost, and |
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changes in or announcements regarding potential changes to CMS reimbursement rates. |
If our operating results are below the expectations of securities analysts or investors, the market price of our common stock may fall abruptly and significantly.
Our stock price may be volatile and a shareholder’s investment could decline in value.
Our stock price has fluctuated in the past and may continue to fluctuate significantly, making it difficult for an investor to resell shares or to resell shares at an attractive price. The market prices for securities of technology companies have historically been highly volatile. Future events concerning us or our competitors could cause such volatility, including:
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actual or anticipated variations in our operating results, |
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technological innovations or new commercial products introduced by our competitors, |
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developments regarding government and third-party reimbursement, |
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changes in government regulation, |
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government investigation of us or our products, |
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result of regulatory process for approval of our devices, |
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changes in reimbursement rates or methods affecting our products, |
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developments concerning proprietary rights, |
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litigation or public concern as to the safety of our products or our competitors’ products, |
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our compliance with the requirements for continued listing on The NASDAQ Stock Market and disclosures regarding our non-compliance with any requirement, |
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investor perception of us and our industry, |
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general economic and market conditions including market uncertainty, |
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national or global political events, |
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difficulties with international expansion or operations, |
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public confidence in the securities markets and regulation by or of the securities markets, and |
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changes in senior management. |
In addition, the stock market is subject to price and volume fluctuations that affect the market prices for companies in general, and small-capitalization, high-technology companies in particular, which are often unrelated to the operating performance of these companies. Any failure by us to meet or exceed estimates of financial analysts is likely to cause a decline in our common stock price.
15
Future sales of shares of our common stock may negatively affect our stock price.
Future sales of our common stock could have a significant negative effect on the market price of our common stock. In addition, upon exercise of outstanding options, the number of shares outstanding of our common stock could increase substantially. This increase, in turn, could dilute future earnings per share, if any, and could depress the market value of our common stock. Dilution and potential dilution, the availability of a large amount of shares for sale, and the possibility of additional issuances and sales of our common stock may negatively affect both the trading price and liquidity of our common stock. These sales also might make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that we would deem appropriate.
Provisions of Minnesota law, our governing documents and other agreements may deter a change of control of us and have a possible negative effect on our stock price.
Certain provisions of Minnesota law, our articles of incorporation and bylaws and other agreements may make it more difficult for a third party to acquire, or discourage a third party from attempting to acquire control of us, including:
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the provisions of Minnesota law relating to business combinations and control share acquisitions, |
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the provisions of our bylaws regarding the business properly brought before shareholders, |
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the provisions of our articles of incorporation and bylaws regarding our staggered board of directors, |
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the right of our board of directors to establish more than one class or series of shares and to fix the relative rights and preferences of any such different classes or series, and |
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the provisions of our stock option plans allowing for the acceleration of vesting or payments of awards granted under the plans in the event of specified events that result in a “change in control” and provisions of agreements with certain of our executive officers requiring payments if their employment is terminated and there is a “change in control.” |
These measures could discourage or prevent a takeover of us or changes in our management, even if an acquisition or such changes would be beneficial to our shareholders. This may have a negative effect on the price of our common stock.
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UNRESOLVED STAFF COMMENTS |
Not applicable.
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PROPERTIES |
We lease approximately 26,000 square feet of office, manufacturing and warehouse space in a suburb of Minneapolis, Minnesota. On September 9, 2010, the Company entered into a new lease agreement with our current landlord, covering the same square footage, for a period of seventy-two months, effective August 1, 2010. We believe our facilities will be sufficient to meet our current and future requirements and that additional space at or near the current location will be available at a reasonable cost if additional space is required in the future.
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LEGAL PROCEEDINGS |
We have been and are involved in various legal proceedings and other matters that arise in the normal course of our business, including product liability claims that are inherent in the testing, production, marketing and sale of medical devices. Based upon currently available information, we believe that the ultimate resolution of these matters will not have a material effect on the financial position, liquidity or results of operations of the Company.
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REMOVED AND RESERVED |
Not applicable.
16
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MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is traded on the NASDAQ Stock Market LLC under the symbol “ULGX.” The Company’s common stock was transferred from The Nasdaq Global Market to The Nasdaq Capital Market on October 5, 2009. The following table sets forth quarterly high and low last-sale prices of our common stock for each quarter during the past two years.
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Quarter |
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Fiscal Year |
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First |
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Second |
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Third |
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Fourth |
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2010 |
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High |
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$1.31 |
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$2.02 |
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$2.02 |
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$1.68 |
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Low |
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0.84 |
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0.81 |
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1.33 |
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0.93 |
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2009 |
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High |
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$2.00 |
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$1.26 |
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$0.60 |
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$1.24 |
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Low |
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1.05 |
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0.34 |
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0.21 |
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0.36 |
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The foregoing prices reflect inter-dealer prices, without dealer markup, markdown or commissions, and may not represent actual transactions.
Dividends
To date, we have not declared or paid any cash dividends on our common stock, and we do not intend to do so in the foreseeable future.
Equity Compensation Plan Information
The table below presents our equity compensation plan information as of June 30, 2010:
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Plan Category |
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Number of securities to be |
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Weighted-average exercise |
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Number of securities |
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Equity compensation plans approved by security holders |
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1,732,264 |
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$2.11 |
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762,416 |
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Equity compensation plan not approved by security holders |
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- |
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- |
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- |
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Total |
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1,732,264 |
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$2.11 |
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762,416 |
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The “equity compensation plans approved by security holders” listed above represent shares issuable under the Urologix, Inc. Amended and Restated 1991 Stock Option Plan, an “employee benefit plan” as defined by Rule 405 of Regulation C of the Securities Act of 1933. Shareholders approved the most recent amendment to the Amended and Restated 1991 Stock Option Plan, which, among other things, increased the number of shares of common stock available under the plan by 1,000,000 shares at the 2004 Annual Meeting of Shareholders held on November 9, 2004.
17
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ITEM 6. |
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Years ended June 30, |
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2010 |
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2009 |
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2008 |
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2007 |
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2006 |
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(in thousands, except per share data) |
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Statements of Operations Data: |
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Sales |
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$ |
14,771 |
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$ |
12,816 |
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$ |
14,906 |
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$ |
21,317 |
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$ |
25,885 |
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Cost of goods sold |
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6,569 |
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6,367 |
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6,893 |
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13,893 |
(3) |
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8,995 |
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Gross profit |
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8,202 |
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6,449 |
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8,013 |
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7,424 |
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16,890 |
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Costs and Expenses: |
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Selling, general and administrative |
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8,601 |
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8,534 |
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11,767 |
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11,086 |
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12,940 |
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Research and development |
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1,834 |
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2,356 |
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2,780 |
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3,026 |
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2,987 |
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Amortization and impairment of identifiable intangible assets |
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24 |
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24 |
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71 |
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2,244 |
(4) |
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194 |
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Impairment of goodwill |
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- |
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- |
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10,193 |
(1) |
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- |
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- |
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Total costs and expenses |
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10,459 |
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10,914 |
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24,811 |
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16,356 |
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16,121 |
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Operating earnings (loss) |
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(2,257 |
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(4,465 |
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(16,798 |
) |
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(8,932 |
) |
|
769 |
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Interest income, net |
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- |
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|
53 |
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|
400 |
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|
554 |
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371 |
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Earnings (Loss) before income taxes |
|
|
(2,257 |
) |
|
(4,412 |
) |
|
(16,398 |
) |
|
(8,378 |
) |
|
1,140 |
|
|
Income tax expense (benefit) |
|
|
(88 |
) |
|
7 |
|
|
(1,501 |
)(2) |
|
4,859 |
(5) |
|
(4,354 |
)(6) |
|
Net earnings (loss) |
|
$ |
(2,169 |
) |
$ |
(4,419 |
) |
$ |
(14,897 |
) |
$ |
(13,237 |
) |
$ |
5,494 |
|
|
|
||||||||||||||||
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per common share: |
|
$ |
(0.15 |
) |
$ |
(0.31 |
) |
$ |
(1.04 |
) |
$ |
(0.92 |
) |
$ |
0.38 |
|
|
Weighted average shares used in computing net earnings (loss) per share |
|
|
14,508 |
|
|
14,469 |
|
|
14,338 |
|
|
14,332 |
|
|
14,319 |
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per common share: |
|
$ |
(0.15 |
) |
$ |
(0.31 |
) |
$ |
(1.04 |
) |
$ |
(0.92 |
) |
$ |
0.38 |
|
|
Weighted average shares used in computing net earnings (loss) per share |
|
|
14,508 |
|
|
14,469 |
|
|
14,338 |
|
|
14,332 |
|
|
14,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
|||||
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
5,702 |
|
$ |
7,032 |
|
$ |
11,031 |
|
$ |
12,250 |
|
$ |
11,054 |
|
|
Working capital |
|
|
6,720 |
|
|
7,963 |
|
|
11,259 |
|
|
16,067 |
|
|
16,926 |
|
|
Total assets |
|
|
10,203 |
|
|
12,141 |
|
|
17,480 |
|
|
32,653 |
|
|
43,898 |
|
|
Total liabilities |
|
|
1,997 |
|
|
2,216 |
|
|
3,633 |
|
|
4,778 |
|
|
3,918 |
|
|
Shareholders’ equity |
|
|
8,206 |
|
|
9,925 |
|
|
13,847 |
|
|
27,875 |
|
|
39,980 |
|
|
|
|
|
(1) |
Represents a $10.2 million non-cash charge to fully impair our goodwill as of December 31, 2007. |
|
|
|
|
(2) |
Represents the non-cash reversal of our deferred tax liability of $1.6 million as a result of the impairment of our goodwill, partially offset by state taxes. |
18
|
|
|
|
(3) |
Includes the following non-cash charges as a result of the implementation of an end-of-life plan for our Prostatron control units and Prostaprobe catheters in connection with our strategy to develop a next generation catheter: |
|
|
|
|
|
|
|
Inventory write-down |
|
$ |
213,000 |
|
|
Fixed asset impairment |
|
|
178,000 |
|
|
Developed technology intangible asset impairment |
|
|
4,044,000 |
|
|
|
|
$ |
4,435,000 |
|
|
|
|
|
(4) |
Includes the following non-cash charges as a result of the implementation of an end-of-life plan for our Prostatron control units and Prostaprobe catheters in connection with our strategy to develop a next generation catheter: |
|
|
|
|
|
|
|
Trademark intangible asset impairment |
|
$ |
969,000 |
|
|
Customer base intangible asset impairment |
|
|
991,000 |
|
|
|
|
$ |
1,960,000 |
|
|
|
|
|
(5) |
Includes a $4.8 million non-cash income tax expense to increase the valuation allowance to fully reserve our deferred tax assets that will not reverse against deferred tax liabilities within the scheduled reversal period. |
|
|
|
|
(6) |
Includes a $4.6 million non-cash income tax benefit to reduce the valuation allowance related to deferred tax assets. |
SELECTED QUARTERLY FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2010 |
|
|||||||||||
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
|||||
|
|
|
(in thousands, except per share data) |
|
|||||||||||
|
|
||||||||||||||
|
Sales |
|
|
$3,853 |
|
|
$4,064 |
|
|
$3,594 |
|
|
$3,260 |
|
|
|
Gross profit |
|
|
2,138 |
|
|
2,329 |
|
|
1,978 |
|
|
1,757 |
|
|
|
Loss before income taxes |
|
|
(681 |
) |
|
(282 |
) |
|
(598 |
) |
|
(696 |
) |
|
|
Net Loss |
|
|
(677 |
) |
|
(273 |
) (1) |
|
(597 |
) |
|
(622 |
) (1) |
|
|
Basic net loss per share |
|
|
$(0.05 |
) |
|
$(0.02 |
) |
|
$(0.04 |
) |
|
$(0.04 |
) |
|
|
Diluted net loss per share |
|
|
$(0.05 |
) |
|
$(0.02 |
) |
|
$(0.04 |
) |
|
$(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2009 |
|
|||||||||||
|
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
|
|
|
(in thousands, except per share data) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
$ 2,655 |
|
|
$ 3,386 |
|
|
$ 3,328 |
|
|
$ 3,447 |
|
|
|
Gross profit |
|
|
1,171 |
|
|
1,814 |
|
|
1,660 |
|
|
1,804 |
|
|
|
Loss before income taxes |
|
|
(1,240 |
) |
|
(1,056 |
) |
|
(1,198 |
) |
|
(918 |
) |
|
|
Net Loss |
|
|
(1,274 |
) |
|
(1,068 |
) |
|
(1,201 |
) |
|
(876 |
) |
|
|
Basic net loss per share |
|
|
$ (0.09 |
) |
|
$ (0.07 |
) |
|
$ (0.08 |
) |
|
$ (0.06 |
) |
|
|
Diluted net loss per share |
|
|
$ (0.09 |
) |
|
$ (0.07 |
) |
|
$ (0.08 |
) |
|
$ (0.06 |
) |
|
|
|
|
|
(1) |
An income tax benefit of $84,000 should have been recorded in the second quarter of fiscal year 2010. The Company recorded the amount as an out-of-period adjustment in the fourth quarter of fiscal year 2010. The adjustment had no impact on the full year fiscal 2010 financial results. |
19
|
|
|
|
ITEM 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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, catheter-based therapies that use a proprietary cooled microwave technology for the treatment of benign prostatic hyperplasia (BPH). BPH is a disease caused by the proliferation of non-cancerous cells in the prostate gland, better known as an enlarged prostate. This disease affects more than 23 million men worldwide and presents itself with clinical symptoms including nocturia (night voiding), urinary obstruction, frequency, urgency, and incomplete voiding. Any or all of these symptoms can negatively affect the quality of life among BPH sufferers. Without proper treatment, BPH can cause substantial upper and lower urinary tract dysfunction including recurrent bladder infections, bladder decompensation and kidney failure.
We market our control units under the Targis® and CoolWave® names and our procedure kits under the CTC Advance®, Targis and Prostaprobe™ names. All systems utilize the Company’s Cooled ThermoTherapy technology, a targeted microwave energy combined with a unique cooling mechanism that protects healthy tissue and enhances patient comfort while providing safe, effective, lasting relief from the symptoms of BPH. Cooled ThermoTherapy can be performed without general anesthesia or intravenous sedation and can be performed in a urologist’s office or an outpatient clinic. We believe that Cooled ThermoTherapy provides an efficacious, safe and cost-effective solution for BPH with results clinically superior to medication and without the complications and side effects inherent in surgical procedures.
We believe that third-party reimbursement is essential to the continued adoption of Cooled ThermoTherapy, and that clinical efficacy, overall cost-effectiveness and physician advocacy will be keys to maintaining such reimbursement. We estimate that 60% to 80% of patients who receive Cooled ThermoTherapy treatment in the United States will be eligible for Medicare coverage. The remaining patients will either be covered by private insurers, including traditional indemnity health insurers and managed care organizations, or they will be private paying patients. As a result, Medicare reimbursement is particularly critical for widespread market adoption of Cooled ThermoTherapy in the United States.
The level of Medicare reimbursement for Cooled ThermoTherapy is dependent on the site of service. A majority of our Cooled ThermoTherapy treatments are performed in the urologist’s office, but our treatments can be performed in an ambulatory surgery center (ASC) or in a hospital outpatient setting.
The national average reimbursement rate in the physician office setting – which is a “global fee” paid entirely to the urologist - is currently $2,430 for our Cooled ThermoTherapy treatment. The CMS published the Physician Fee Schedule (PFS) Final Rule for calendar 2010 on October 30, 2009. Since publication, Congress has acted four times to temporarily adjust the 2010 Medicare reimbursement for all physician payments. These adjustments are to offset broader prescribed reimbursement cuts to Medicare driven by the Sustainable Growth Rate (SGR) formula. The current temporary adjustment expires November 30, 2010. If Congress fails to act to extend the temporary adjustment to the Medicare Physician Fee Schedule, the level of Medicare reimbursement in the physician office setting for Cooled ThermoTherapy will decline to $1,869. While Congress has acted four times since the publication of the 2010 Final Rule to delay the impacts from the SGR, we do not know when nor if these adjustments will be extended for the final month of calendar year 2010 and calendar year 2011. We are monitoring these developments closely and will continue to execute on our active reimbursement strategy.
Urologists who perform Cooled ThermoTherapy procedures in an ASC are reimbursed under the two-part system in which the ASC receives a fixed fee of $1,868 in the 2010 PFS as compared to $1,849 in 2009, while the urologist performing the treatment is reimbursed $601 currently. In the hospital outpatient setting, which is not affected by changes in the PFS Conversion Factor, the national average total reimbursement is $3,147 for calendar year 2010 compared to $3,026 in calendar year 2009. In the hospital outpatient setting the urologist performing the treatment is reimbursed $601.
Private insurance companies and HMOs make their own determinations regarding coverage and reimbursement based upon “usual and customary” fees. To date, we have received coverage and reimbursement from private insurance companies and HMOs throughout the United States. We intend to continue our efforts to gain coverage and reimbursement across the United States. There can be no assurance that we will receive favorable coverage nor reimbursement determinations for Cooled ThermoTherapy from these payers or that amounts reimbursed to urologists for performing Cooled ThermoTherapy procedures will be sufficient to encourage urologists to use Urologix’ product and service offerings.
20
As a result of recently enacted federal health care reform legislation, substantial changes are anticipated in the United States health care system. Such legislation includes numerous provisions affecting the delivery of health care services, the financing of health care costs, reimbursement of health care providers and the legal obligations of health insurers, providers and employers. These provisions are currently slated to take effect at specified times over approximately the next decade. The federal health care reform legislation did not directly affect our fiscal year 2010 financial statements and we do not expect this legislation to affect our financial results for fiscal year 2011.
Our goal is to grow Cooled ThermoTherapy as a standard of care for the treatment of BPH. Our business strategy to achieve this goal is to (i) educate both patients and urologists on the benefits of Cooled ThermoTherapy as an effective, safe and cost effective treatment option that can provide superior clinical outcomes with long term durability compared to other treatment options, including BPH medication, (ii) increase the use of Cooled ThermoTherapy by urologists who already have access to a Cooled ThermoTherapy system, (iii) increase the number of urologists who provide Cooled ThermoTherapy to their patients, and (iv) provide more urologists with access to Cooled ThermoTherapy through the use of our own Cooled ThermoTherapy mobile service or third party mobile providers in the United States.
In the future, we expect to increase our investment in research and development and clinical trials to continue to improve our products and our therapy. These investments are intended to broaden our product offering and expand the clinical evidence supporting our proprietary Cooled ThermoTherapy treatment for BPH. In April 2009 at the American Urological Association annual meeting, we launched our newest Cooled ThermoTherapy treatment catheter, the CTC Advance Short (short antenna length), and had two separate presentations of our clinical data. The presentations highlighted our 5 year durability data and the ability of urologists using our system to customize the treatment for patients.
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. In addition to our sales of Cooled ThermoTherapy control units, we place our Cooled ThermoTherapy control units with customers free of charge under a variety of programs for both evaluation and long-term use, and also provide access to Cooled ThermoTherapy treatments via our Cooled ThermoTherapy mobile service. We retain title to the control units placed with our customers for evaluation and longer-term use. These programs, as well as our Cooled ThermoTherapy mobile service, are designed to expand access to our technology, and thus expand the market for our single-use treatment catheters. Revenue for the free use of our Cooled ThermoTherapy control units are bundled with the sale of single-use treatment catheters and are considered a single unit of accounting. Revenue from the bundled sales is recognized when the single-use treatment catheters 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.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We consider factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay when determining the adequacy of the allowance. Accounts receivable are written-off after management determines they are uncollectible. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
21
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 both merchandise 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
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.
In fiscal year 2010, we did not generate positive cash flows from operations. If our long-term future plans do not yield positive cash flows in excess of the carrying amount of our long-lived assets, we would anticipate possible future impairments of those assets.
Considerable management judgment is necessary in estimating future cash flows and other factors affecting the valuation of long-lived assets, 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. 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. 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, 2010, we carried a valuation allowance of $38.6 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.
22
Results of Operations
Fiscal Years Ended June 30, 2010 and 2009
Net Sales
Net sales increased 15 percent to $14.8 million in fiscal year 2010 from $12.8 million in fiscal year 2009. The increase in sales from fiscal year 2009 is primarily due to increased orders for procedure kits as well as an increase in the number of Cooled ThermoTherapy mobile treatments performed.
During fiscal year 2010, revenue from catheter sales to direct accounts constituted 36 percent of sales compared to 35 percent in the prior fiscal year, while catheter sales to third party mobiles constituted 15 percent of revenue in the current fiscal year compared to 14 percent in fiscal year 2009. Revenue derived from the Urologix mobile service constituted 47 percent of total sales in fiscal year 2010 compared to 48 percent in the prior fiscal year. The remaining two percent of our sales in fiscal year 2010 were from sales of our warranty service contracts, non-kit items and other miscellaneous 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 Cooled ThermoTherapy mobile service. Cost of goods sold for fiscal year 2010 increased to $6.6 million or 3 percent from $6.4 million in fiscal year 2009. This increase in cost of goods sold is attributed to the 15 percent increase in sales year over year. This overall increase was offset by a lower manufacturing expense per unit.
Gross profit as a percentage of sales increased to 56% in fiscal year 2010 from 50% in the prior fiscal year. The six percentage point increase in fiscal year 2010 as compared to fiscal year 2009 is a result of lower manufacturing expense per unit due to higher production volume of our treatment catheters, which provided a larger base to absorb our fixed manufacturing overhead costs. In addition, the delivery cost per treatment for our mobile service decreased by 11% from the prior year.
Selling, General & Administrative
Selling, general and administrative expenses in fiscal year 2010 increased $67,000, or 1 percent, to $8.6 million from $8.5 million in fiscal year 2009. The increase in selling, general and administrative expense is largely the result of a reversal of $396,000 for a sales tax accrual in the first quarter of fiscal year 2009 and a net increase of $158,000 for commissions and bonuses achieved during fiscal year 2010. These increases were partially offset by a $132,000 decrease in freight and shipping costs, a decrease in audit and professional fees of $89,000, and a decrease in our stock based compensation expense of $75,000 due to the lower grant date fair value of options in recent periods. In addition, as part of the Company’s expense reduction efforts, meeting expense decreased by $69,000 and recruiting, insurance and travel expense decreased by $128,000.
Research and Development
Research and development expenses, which include expenditures for product development, regulatory compliance and clinical studies, decreased to $1.8 million for fiscal year 2010, a decline of 22 percent from $2.4 million in fiscal year 2009. The decrease in research and development is due to a $287,000 decrease in consulting and legal fees, a $213,000 decrease in payroll expenses due to employee turnover and a $77,000 decrease in expenses associated with clinical studies, offset by a $63,000 increase in temporary labor and outside services.
Amortization and Impairment of Identifiable Intangible Assets
Amortization and impairment of identifiable intangible assets remained consistent at $24,000 in fiscal years 2010 and 2009. This amortization expense relates to the amortization of our remaining customer base intangible asset over its remaining useful life of 4.25 years.
23
Net Interest Income
Due to lower cash balances and lower interest rates in fiscal year 2010, net interest income was less than $1,000 and is, therefore, not included on the face of the income statement compared to $53,000 in fiscal year 2009.
Provision for Income Taxes
We recorded $88,000 of income tax benefit for the fiscal year ended June 30, 2010 compared to $7,000 of income tax expense for the fiscal year ended June 30, 2009. The $88,000 of 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. The $7,000 of income tax expense for fiscal year June 30, 2009 was the result of the recording of $55,000 of state income tax expense partially offset by $48,000 of an income tax benefit related to research and development credits.
Fiscal Years Ended June 30, 2009 and 2008
Net Sales
Net sales decreased 14 percent to $12.8 million in fiscal year 2009 from $14.9 million in fiscal year 2008. The decrease in sales from fiscal year 2008 is primarily due to reduced orders for procedure kits as well as a reduction in the number of Cooled ThermoTherapy mobile treatments performed due to fewer accounts treating, partially offset by an increase in orders for procedure kits to our third-party mobiles, as well as an increase in the mobile service ASP.
During fiscal year 2009, revenue from catheter sales to direct accounts constituted 35 percent of sales compared to 43 percent in fiscal year 2008, while catheter sales to third party mobiles constituted 14 percent of revenue in fiscal year 2009 compared to 10 percent in fiscal year 2008. Revenue derived from the Urologix mobile service constituted 48 percent of total sales in fiscal year 2009 compared to 45 percent in the prior year. The remaining three percent of our sales in fiscal year 2009 were from sales of our control units and warranty service contracts.
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, as well as costs associated with the delivery of our Cooled ThermoTherapy mobile service. Cost of goods sold for fiscal year 2009 decreased to $6.4 million or 8 percent from $6.9 million in fiscal year 2008. This decrease in cost of goods sold is a result of the 14 percent decrease in sales year over year, as well as fiscal year 2008 non-recurring charges related to the impairment of developed technologies of $65,000 and a $131,000 provision for Prostaprobe inventories, purchase commitments and warranties as a result of the projected decline in sales as a result of the decision to end-of-life the Prostatron product line. These decreases were partially offset by higher manufacturing expense per unit and increased unabsorbed manufacturing expense due to lower production volume in fiscal year 2009.
Gross profit as a percentage of sales decreased to 50% in fiscal year 2009 from 54% in fiscal year 2008. The four percentage point decrease in fiscal 2009 as compared to fiscal 2008 is a result of higher manufacturing expense per unit and lower production volume of our treatment catheters, which provide a smaller base to absorb our fixed manufacturing overhead costs. In addition, the number of mobile unit treatments as a percentage of sales increased, which have lower overall margins.
Selling, General & Administrative
Selling, general and administrative expenses in fiscal year 2009 decreased $3.2 million or 27 percent to $8.5 million from $11.8 million in fiscal year 2008. The decrease in selling, general and administrative expense is largely the result of a $755,000 increase to our sales tax accrual in fiscal year 2008, of which approximately $396,000 was reversed in the first quarter of fiscal year 2009 as a result of new information obtained which indicated that we would not owe as much sales tax as previously estimated. In addition, the decrease in expenses from fiscal year 2008 to 2009 reflects a $496,000 decrease in legal and audit fees, a $383,000 decrease in consulting and professional fees due to certain one-time expenses in fiscal 2008 that were not repeated in fiscal 2009, a $230,000 decrease in commission expense due to lower sales, a $155,000 decrease in stock option expense due to lower grant date fair values, a $146,000 decrease in advertising and promotion expense, a $104,000 decrease in wages and benefits as a result of severance accruals recorded during fiscal year 2008 for former Company executives, as well as smaller decreases in several other areas. Much of the decrease in selling, general and administrative expense in fiscal year 2009 was a result of our continuing efforts to manage expenses.
24
Research and Development
Research and development expenses, which include expenditures for product development, regulatory compliance and clinical studies, decreased to $2.4 million, or 15 percent for fiscal year 2009 from $2.8 million for fiscal year 2008. The decrease in research and development is due to a $557,000 decrease in product testing and project materials as we launched our newest catheter, CTC Advance at the end of the prior year. In addition, wages and benefits decreased by approximately $247,000 as a result of a reduction in headcount. These decreases were partially offset by an increase in consulting expenses of $450,000 as a result of research and development employee turnover.
Amortization and Impairment of Identifiable Intangible Assets
Amortization and impairment of identifiable intangible assets decreased to $24,000 in fiscal year 2009 compared to $71,000 in fiscal year 2008. The decrease in amortization and impairment expense is the result of the implementation of an end-of-life plan in fiscal year 2007 for the Prostatron control units and Prostaprobe catheters in connection with our strategy to develop a next generation catheter. As a result of this plan, in fiscal year 2008 we wrote-off the remaining balance of our trademark intangible asset of $16,800, as well as recorded an additional write-down of the customer base intangible asset of $24,000 due to a decrease in projected sales of this end-of-life product line.
Net Interest Income
Net interest income for fiscal year 2009 decreased to $53,000 from $400,000 in fiscal year 2008. The decrease is due to lower cash and investment balances and lower interest rates.
Provision for Income Taxes
We recorded $7,000 of income tax expense for the fiscal year ended June 30, 2009 compared to a $1.5 million income tax benefit for the fiscal year ended June 30, 2008. The $7,000 of income tax expense for fiscal year 2009 was the result of $55,000 of state income tax expense partially offset by $48,000 of an income tax benefit related to research and development credits. The income tax benefit for the fiscal year ended June 30, 2008 is a result of a $1.6 million reversal of the deferred tax liability balance related to goodwill which was no longer necessary after the impairment of goodwill at December 31, 2007. This was partially offset by $18,000 of tax expense mainly related to 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 system control units and single-use treatment catheters. As of June 30, 2010, we had total cash and cash equivalents of $5.7 million compared to cash and cash equivalents of $7.0 million as of June 30, 2009. The decrease in cash and cash equivalents resulted primarily from our net operating loss of $2.2 million in fiscal year 2010.
Cash Provided by Operating Activities
During fiscal year 2010, we used $1.3 million of cash from operating activities compared to $3.9 million in fiscal year 2009 primarily as a result of the improvement in the net operating loss. The net loss included non-cash charges of $793,000 for depreciation and amortization expense and $440,000 of stock-based compensation expense. Changes in asset and liability balances used $368,000 of operating cash flow for the year as a result of an increase in inventory levels of $387,000 and a decrease in accrued expenses and deferred income of $191,000, partially offset by a decrease in other assets of $158,000.
Cash Used for Investing Activities
We used $85,000 for investing activities as a result of the purchase of property and equipment to support our mobile, office and manufacturing operations, as well as a slight increase in our intellectual property.
25
Cash Provided by Financing Activities
During fiscal year 2010, we generated $10,000 from financing activities as a result of proceeds from the exercise of stock options.
We believe our $5.7 million in cash and cash equivalents at June 30, 2010 will be sufficient to fund our working capital and capital resources needs beyond the next 12 months. In addition, we believe the majority of our cash equivalents are secure as they are backed by United States Government Treasuries.
Contractual Commitments
We plan to continue offering customers a variety of programs for both evaluation and longer-term use of our Cooled ThermoTherapy control units in addition to purchase options, as well as grow our mobile service which provides urologists and patients with efficient access to our Cooled ThermoTherapy control units on a pre-scheduled basis. As of June 30, 2010, our property and equipment, net, included approximately $837,000 of control units used in evaluation or longer-term use programs and units used in our Company-owned mobile service. Depending on the growth of these programs, we may use additional capital to finance these programs.
Future contractual commitments that will affect cash flows are as follows (in thousands):
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
|
|||||||||||||
|
Building and equipment leases |
|
|
$ 144 |
|
|
$205 |
|
|
$207 |
|
|
$207 |
|
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
Recently Issued Accounting Standards
Information regarding recently issued accounting pronouncements is included in Note 2 to the Financial Statements included in this Annual Report on Form 10-K.
|
|
|
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our financial instruments include cash equivalent instruments. Increases and decreases in prevailing interest rates generally translate into decreases and increases, respectively, in the fair value of these instruments, as our investments are variable rate investments. Also, fair values of interest rate sensitive instruments may be affected by the credit worthiness of the issuer, prepayment options, relative values of alternative instruments, the liquidity of the instrument and other general market conditions.
Market risk was estimated as the potential decrease in fair value resulting from a hypothetical 1% change in interest rates and was not materially different from the quarter-end carrying value. Due to the nature of our cash equivalents instruments, we have concluded that we do not have a material market risk exposure.
Our policy is not to enter into derivative financial instruments. We do not have any significant foreign currency exposure since we do not generally transact business in foreign currencies. Therefore, we do not have significant overall currency exposure. In addition, we do not enter into any futures or forward commodity contracts since we do not have significant market risk exposure with respect to commodity prices.
26
|
|
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|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
|
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|
|
|
|
The following financial statements are included in the Form 10-K: |
|
|
|
|
|
|
|
Management’s Report on Internal Control over Financial Reporting |
28 |
|
|
29 |
|
|
|
30 |
|
|
|
Statements of Operations for the years ended June 30, 2010, 2009 and 2008 |
31 |
|
|
Statements of Shareholders’ Equity for the years ended June 30, 2010, 2009 and 2008 |
32 |
|
|
Statements of Cash Flows for the years ended June 30, 2010, 2009 and 2008 |
33 |
|
|
34 |
27
Management’s Report on Internal Control over Financial Reporting
The Board of
Directors and Shareholders
Urologix, Inc.:
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a15-(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that:
|
|
|
|
|
|
(i) |
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
|
|
|
|
|
|
(ii) |
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
|
|
|
|
|
|
(iii) |
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision of our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment and those criteria, management concluded that the Company maintained effective internal control over financial reporting as of June 30, 2010.
* * *
This Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm, KPMG LLP, regarding internal controls over financial reporting. Management’s report was not subject to attestation by KPMG LLP pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K.
28
Report of Independent Registered Public Accounting Firm
The Board of
Directors and Shareholders
Urologix, Inc.:
We have audited the accompanying balance sheets of Urologix, Inc. (the Company) as of June 30, 2010 and 2009, and the related statements of operations, shareholders’ equity and cash flows for each of the years in the three-year period ended June 30, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Urologix, Inc. as of June 30, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 2010, in conformity with U.S. generally accepted accounting principles.
|
|
|
|
|
/s/ KPMG LLP |
Minneapolis, Minnesota
September 17, 2010
29
Urologix, Inc.
Balance Sheet
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|||||
|
|
|
2010 |
|
|
2009 |
|
||
|
ASSETS |
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
5,702 |
|
|
$ |
7,032 |
|
|
Accounts receivable, net of allowance of $96 and $72, respectively |
|
|
1,378 |
|
|
|
1,505 |
|
|
Inventories |
|
|
1,498 |
|
|
|
1,407 |
|
|
Prepaids and other current assets |
|
|
139 |
|
|
|
80 |
|
|
Total current assets |
|
|
8,717 |
|
|
|
10,024 |
|
|
Property and equipment: |
|
|
|
|
|
|
|
|
|
Property and equipment |
|
|
11,669 |
|
|
|
11,788 |
|
|
Less accumulated depreciation |
|
|
(10,655 |
) |
|
|
(10,380 |
) |
|
Property and equipment, net |
|
|
1,014 |
|
|
|
1,408 |
|
|
Other assets |
|
|
349 |
|
|
|
566 |
|
|
Identifiable intangible assets, net |
|
|
123 |
|
|
|
143 |
|
|
Total assets |
|
$ |
10,203 |
|
|
$ |
12,141 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
434 |
|
|
$ |
462 |
|
|
Accrued compensation |
|
|
875 |
|
|
|
791 |
|
|
Deferred income |
|
|
169 |
|
|
|
210 |
|
|
Other accrued expenses |
|
|
519 |
|
|
|
598 |
|
|
Total current liabilities |
|
|
1,997 |
|
|
|
2,061 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income |
|
|
- |
|
|
|
155 |
|
|
Total liabilities |
|
|
1,997 |
|
|
|
2,216 |
|
|
Commitments and Contingencies (Note 9) |
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 25,000 shares authorized; 14,447 and 14,413 shares issued and outstanding |
|
|
144 |
|
|
|
144 |
|
|
Additional paid-in capital |
|
|
114,360 |
|
|
|
113,910 |
|
|
Accumulated deficit |
|
|
(106,298 |
) |
|
|
(104,129 |
) |
|
Total shareholders’ equity |
|
|
8,206 |
|
|
|
9,925 |
|
|
Total liabilities and shareholders’ equity |
|
$ |
10,203 |
|
|
$ |
12,141 |
|
The accompanying notes to financial statements are an integral part of these statements.
30
Urologix,
Inc.
Statements
of Operations
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended June 30, |
|
|||||||||
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|||
|
SALES |
|
$ |
14,771 |
|
|
$ |
12,816 |
|
|
$ |
14,906 |
|
|
COST OF GOODS SOLD |
|
|
6,569 |
|
|
|
6,367 |
|
|
|
6,893 |
|
|
Gross profit |
|
|
8,202 |
|
|
|
6,449 |
|
|
|
8,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS AND EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
8,601 |
|
|
|
8,534 |
|
|
|
11,767 |
|
|
Research and development |
|
|
1,834 |
|
|
|
2,356 |
|
|
|
2,780 |
|
|
Amortization and impairment of identifiable intangible assets |
|
|
24 |
|
|
|
24 |
|
|
|
71 |
|
|
Impairment of goodwill |
|
|
- |
|
|
|
- |
|
|
|
10,193 |
|
|
Total costs and expenses |
|
|
10,459 |
|
|
|
10,914 |
|
|
|
24,811 |
|
|
OPERATING LOSS |
|
|
(2,257 |
) |
|
|
(4,465 |
) |
|
|
(16,798 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME |
|
|
- |
|
|
|
53 |
|
|
|
400 |
|
|
LOSS BEFORE INCOME TAXES |
|
|
(2,257 |
) |
|
|
(4,412 |
) |
|
|
(16,398 |
) |
|
INCOME TAX EXPENSE (BENEFIT) |
|
|
(88 |
) |
|
|
7 |
|
|
|
(1,501 |
) |
|
NET LOSS |
|
$ |
(2,169 |
) |
|
$ |
(4,419 |
) |
|
$ |
(14,897 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS PER COMMON SHARE - BASIC |
|
$ |
(0.15 |
) |
|
$ |
(0.31 |
) |
|
$ |
(1.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS PER COMMON SHARE - DILUTED |
|
$ |
(0.15 |
) |
|
$ |
(0.31 |
) |
|
$ |
(1.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC |
|
|
14,508 |
|
|
|
14,469 |
|
|
|
14,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED |
|
|
14,508 |
|
|
|
14,469 |
|
|
|
14,338 |
|
The accompanying notes to financial statements are an integral part of these statements.
31
Urologix, Inc.
Statements of Shareholders’ Equity
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
Additional |
|
Accumulated |
|
Total
|
|
|||||||
|
|
|
Shares |
|
Amount |
|
|
|
|
||||||||
|
Balance, June 30, 2007 |
|
|
14,333 |
|
$ |
143 |
|
$ |
112,545 |
|
$ |
(84,813 |
) |
$ |
27,875 |
|
|
Net loss |
|
|
- |
|
|
- |
|
|
- |
|
|
(14,897 |
) |
|
(14,897 |
) |
|
Stock options exercised |
|
|
50 |
|
|
1 |
|
|
38 |
|
|
- |
|
|
39 |
|
|
Stock-based compensation |
|
|
- |
|
|
- |
|
|
830 |
|
|
- |
|
|
830 |
|
|
Balance, June 30, 2008 |
|
|
14,383 |
|
|
144 |
|
|
113,413 |
|
|
(99,710 |
) |
|
13,847 |
|
|
Net loss |
|
|
- |
|
|
- |
|
|
- |
|
|
(4,419 |
) |
|
(4,419 |
) |
|
Stock options exercised |
|
|
10 |
|
|
- |
|
|
8 |
|
|
- |
|
|
8 |
|
|
Vesting of restricted stock |
|
|
20 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
Stock-based compensation |
|
|
- |
|
|
- |
|
|
489 |
|
|
- |
|
|
489 |
|
|
Balance, June 30, 2009 |
|
|
14,413 |
|
|
144 |
|
|
113,910 |
|
|
(104,129 |
) |
|
9,925 |
|
|
Net loss |
|
|
- |
|
|
- |
|
|
- |
|
|
(2,169 |
) |
|
(2,169 |
) |
|
Stock options exercised |
|
|
14 |
|
|
- |
|
|
10 |
|
|
- |
|
|
10 |
|
|
Vesting of restricted stock |
|
|
20 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
Stock-based compensation |
|
|
- |
|
|
- |
|
|
440 |
|
|
- |
|
|
440 |
|
|
Balance, June 30, 2010 |
|
|
14,447 |
|
$ |
144 |
|
$ |
114,360 |
|
$ |
(106,298 |
) |
$ |
8,206 |
|
The accompanying notes to financial statements are an integral part of these statements.
32
Urologix, Inc.
Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended June 30, |
|
|||||||||
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|||
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,169 |
) |
|
$ |
(4,419 |
) |
|
$ |
(14,897 |
) |
|
Adjustments to reconcile net loss to net cash used for operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
793 |
|
|
|
973 |
|
|
|
1,191 |
|
|
Employee stock-based compensation expense |
|
|
440 |
|
|
|
489 |
|
|
|
830 |
|
|
Impairment of goodwill and long-lived assets |
|
|
- |
|
|
|
- |
|
|
|
10,299 |
|
|
Provision for bad debts |
|
|
47 |
|
|
|
12 |
|
|
|
108 |
|
|
Deferred income taxes |
|
|
- |
|
|
|
- |
|
|
|
(1,519 |
) |
|
Loss on disposal of assets |
|
|
2 |
|
|
|
43 |
|
|
|
- |
|
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
80 |
|
|
|
256 |
|
|
|
2,190 |
|
|
Inventories |
|
|
(387 |
) |
|
|
(79 |
) |
|
|
172 |
|
|
Prepaids and other assets |
|
|
158 |
|
|
|
221 |
|
|
|
207 |
|
|
Accounts payable |
|
|
(28 |
) |
|
|
(312 |
) |
|
|
(174 |
) |
|
Accrued expenses and deferred income |
|
|
(191 |
) |
|
|
(1,105 |
) |
|
|
548 |
|
|
Net cash used for operating activities |
|
|
(1,255 |
) |
|
|
(3,921 |
) |
|
|
(1,045 |
) |
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(81 |
) |
|
|
(86 |
) |
|
|
(213 |
) |
|
Net purchases and disposals of intellectual property |
|
|
(4 |
) |
|
|
- |
|
|
- |
|
|
|
Net cash used for investing activities |
|
|
(85 |
) |
|
|
(86 |
) |
|
|
(213 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds stock option exercises |
|
|
10 |
|
|
|
8 |
|
|
|
39 |
|
|
Net cash provided by financing activities |
|
|
10 |
|
|
|
8 |
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(1,330 |
) |
|
|
(3,999 |
) |
|
|
(1,219 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year |
|
|
7,032 |
|
|
|
11,031 |
|
|
|
12,250 |
|
|
End of year |
|
$ |
5,702 |
|
|
$ |
7,032 |
|
|
$ |
11,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash-flow information |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid during the period |
|
$ |
13 |
|
|
$ |
22 |
|
|
$ |
35 |
|
|
Net carrying amount of inventory transferred to property and equipment |
|
$ |
296 |
|
|
$ |
306 |
|
|
$ |
615 |
|
The accompanying notes to financial statements are an integral part of these statements.
33
UROLOGIX, INC.
Notes to Financial Statements
|
|
|
|
1. |
Nature of Business |
Description of Operating Activities
Urologix, Inc. (the “Company,” “Urologix,” “we”) develops, manufactures, and markets non-surgical, catheter-based therapies that use a proprietary cooled microwave technology for the treatment of benign prostatic hyperplasia (BPH), a disease that affects more than 23 million men worldwide. We market our control units under the CoolWave® and Targis® names and our procedure kits under the CTC Advance®, Targis, and Prostaprobe™ names. During the fourth quarter of fiscal year 2007, in connection with our strategy to develop a next generation catheter, we implemented an end-of-life plan for our Prostatron control units and Prostaprobe catheters. We have converted the majority of the Prostaprobe customers to our Coolwave or Targis platforms. However, we do have a limited number of customers for whom we have committed to perform an end-of-life build, after which we expect the remainder of these customers to convert to one of our other platforms. All systems utilize the Company’s Cooled ThermoTherapy™ technology, a targeted microwave energy combined with a unique cooling mechanism that protects healthy tissue and enhances patient comfort while providing safe, effective, lasting relief from the symptoms of BPH. Cooled ThermoTherapy can be performed without general anesthesia or intravenous sedation and can be performed in a urologist’s office or an outpatient clinic.
|
|
|
|
2. |
Significant Accounting Policies |
Cash and Cash Equivalents
We classify highly liquid investments with original maturities of 90 days or less as cash equivalents. Cash equivalents are stated at cost, which approximates market value.
Revenue Recognition
We recognize revenue from the sale of Cooled ThermoTherapy™ control units upon delivery to the customer. In addition to our sales of Cooled ThermoTherapy control units, we place our Cooled ThermoTherapy control units with customers free of charge under a variety of programs for both evaluation and long-term use, and also provide access to Cooled ThermoTherapy treatments via our Cooled ThermoTherapy mobile service. We retain title to the control units placed with our customers for evaluation and longer-term use. These programs, as well as our Cooled ThermoTherapy mobile service, are designed to expand access to our technology, and thus expand the market for our single-use treatment catheters. Revenue for the free use of our Cooled ThermoTherapy control units is bundled with the sale of single-use treatment catheters and is considered a single unit of accounting. Revenue from the bundled sales is recognized as the single-use treatment catheters 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 ratably 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.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We consider factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay when determining the adequacy of the allowance. Accounts receivable are written-off after management determines they are uncollectible.
34
UROLOGIX, INC.
Notes to Financial Statements
Bad debt and sales returns provisions and accounts receivable write-offs for the years ended June 30, 2010, 2009 and 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Beginning |
|
Provisions |
|
Write-offs |
|
Ending |
|
|
|
|||||||||
|
June 30, 2010 |
|
$ 72 |
|
$ 47 |
|
($23) |
|
$ 96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
153 |
|
12 |
|
(93) |
|
72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
224 |
|
108 |
|
(179) |
|
153 |
|
Inventories
Inventories are stated at the lower of cost or market on a first-in, first-out (FIFO) basis and consist of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
June 30, 2009 |
|
||||
|
|
|||||||||
|
Raw materials |
|
$ |
702 |
|
|
$ |
766 |
|
|
|
Work-in-process |
|
|
208 |
|
|
|
198 |
|
|
|
Finished goods |
|
|
588 |
|
|
|
443 |
|
|
|
Total inventories |
|
$ |
1,498 |
|
|
$ |
1,407 |
|
|
Long-Lived Assets
We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or if cash flows from operations in a given year is not positive. An asset or asset group is considered impaired if its carrying amount exceeds the undiscounted future net cash flow 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 individual 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. No impairment charges were recorded in fiscal years 2010 or 2009.
Property and Equipment
Property and equipment are stated at cost. Company owned Cooled ThermoTherapy control units located at customer sites for evaluation and long-term use programs are transferred from inventory and classified as property and equipment that are valued at cost to manufacture and depreciated over a useful life of four years. Improvements that extend the useful lives of property and equipment are capitalized at cost and depreciated over their remaining useful lives. Repairs and maintenance are charged to expense as incurred. Depreciation is calculated using the straight-line method based upon estimated useful lives of three to seven years for machinery, equipment, furniture and vehicles. Leasehold improvements are amortized over the shorter of the useful life of the assets or term of the lease.
35
UROLOGIX, INC.
Notes to Financial Statements
Property and equipment, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
June 30, 2009 |
|
||||
|
|
|||||||||
|
Leasehold improvements, equipment, furniture and vehicles |
|
$ |
154 |
|
|
$ |
309 |
|
|
|
Computer equipment |
|
|
23 |
|
|
|
23 |
|
|
|
Control units |
|
|
837 |
|
|
|
1,076 |
|
|
|
Total property and equipment, net |
|
$ |
1,014 |
|
|
$ |
1,408 |
|
|
Other Assets
Other assets consist primarily of prepaid royalties resulting from patent licensing agreements. The agreements require us to pay a royalty on sales of Cooled ThermoTherapy products. Royalties are charged to cost of goods sold as sales are recognized.
Leases and Deferred Rent
We lease all of our office space. We evaluate and classify all of our leases as operating or capital leases for financial reporting purposes. As of June 30, 2010, all of our leases were accounted for as operating leases. For leases that contain rent escalations, we record the total rent payable during the lease term, as determined above, on a straight-line basis over the term of the lease and record the difference between the rents paid and the straight-line rent as a deferred rent. Any lease incentives we receive for items such as leasehold improvements, we record a deferred credit for the amount of the lease incentive and amortize it over the lease term, which may or may not equal the amortization period of the leasehold improvements.
Warranty Costs
Certain of our products are covered by warranties against defects in material and workmanship for periods of up to 24 months. We record a liability for warranty claims at the time of sale. The amount of the liability is based on the trend in the historical ratio of product failure rates, material usage and service delivery costs to sales, the historical length of time between the sale and resulting warranty claim and other factors.
Warranty provisions and claims for the years ended June 30, 2010, 2009 and 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Beginning |
|
Warranty |
|
Warranty |
|
Ending |
|
|
|
|||||||||
|
June 30, 2010 |
|
$ 19 |
|
$ 43 |
|
($49) |
|
$ 13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
40 |
|
28 |
|
(49) |
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
105 |
|
(13) |
|
(52) |
|
40 |
|
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 bases of assets and liabilities. We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. 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. 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, 2010, we carried a valuation allowance of $38.6 million against our remaining net deferred tax assets.
36
UROLOGIX, INC.
Notes to Financial Statements
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. See Note 3 for additional discussion.
Net Loss Per Common Share
Basic loss per share was computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the periods presented. Diluted net loss per share was computed by dividing the net loss by the weighted average number of shares of common stock outstanding plus all potentially dilutive common shares that result from stock options. The number of shares used in earnings per share computations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended June 30, |
|
||||||||||
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|||
|
Weighted average common shares outstanding - basic |
|
|
14,508 |
|
|
|
14,469 |
|
|
|
14,338 |
|
|
|
Dilutive effect of stock options |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
Weighted average common shares outstanding - diluted |
|
|
14,508 |
|
|
|
14,469 |
|
|
|
14,338 |
|
|
Effective July 1, 2009, the Company adopted guidance which requires all outstanding unvested share-based payment awards that contain no forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) to be considered participating securities and to be included in the computation of basic and diluted earnings per share using the two-class method. The adoption of this statement resulted in the Company having to adjust prior weighted average shares outstanding to include outstanding unvested restricted stock that contains non-forfeitable rights to dividends of 60,000 and 1,000 shares for the fiscal years ended June 30, 2009 and 2008, respectively. This change in weighted average shares outstanding resulted in no change to our earnings per share amounts for the fiscal years ended June 30, 2009 and 2008.
The dilutive effect of stock options in the above table excludes 1.2 million, 1.6 million, and 1.3 million of underlying options for which the exercise price was higher than the average market price for the years ended June 30, 2010, 2009 and 2008, respectively. In addition, dilutive potential common shares of 73,890 shares, 11,016 shares and 6,994 shares, where the exercise price was lower than the average market price, were excluded from diluted weighted average common shares outstanding for the year ended June 30, 2010, 2009 and 2008, respectively as they would be anti-dilutive due to our net loss for those years.
37
UROLOGIX, INC.
Notes to Financial Statements
Research and Development Costs
Research and development costs are charged to expense as incurred.
Financial Instruments
The carrying amounts of our accounts receivable and accounts payable approximate fair value due to their short-term nature.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates and assumptions are based on management’s best estimates and judgments. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors that management believes to be reasonable under the circumstances, including the current economic environment. The Company adjusts such estimates and assumptions when facts and circumstances dictate. These include, among others, the continued recessionary economic conditions, tight credit markets, and a decline in consumer spending and confidence, all of which have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual amounts could differ significantly from those estimated at the time the financial statements are prepared. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
Recently Issued Accounting Standards
In June 2008, the FASB issued new guidance to help determine whether instruments granted in share-based payment transactions are participating securities. The new guidance requires all outstanding unvested share-based payment awards that contain no forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) to be considered participating securities and to be included in the computation of basic and diluted earnings per share using the two-class method. All prior period earnings per share data should be adjusted retrospectively. The Company adopted this new guidance effective July 1, 2009. The adoption of this statement resulted in the Company having to adjust prior weighted average shares outstanding to include outstanding unvested restricted stock that contains non-forfeitable rights to dividends of 60,000 and 1,000 shares at June 30, 2009 and 2008, respectively. This change in weighted average shares outstanding resulted in no change to our earnings per share amounts for the fiscal year ended June 30, 2009 and 2008.
In June 2009, the FASB issued the FASB Accounting Standards CodificationTM (the “Codification”) and amended the hierarchy of GAAP. The Codification is the single official source of authoritative U.S. accounting and reporting standards applicable for all nongovernmental entities, with the exception of guidance issued by the Securities and Exchange Commission. The Codification, which launched July 1, 2009, changes the referencing and organization of accounting guidance and is effective for interim and annual periods ending after September 15, 2009. Since it is not intended to change or alter existing US GAAP, the Codification did not have any impact on our financial condition or results of operations.
In October 2009, the FASB issued new revenue guidance that requires an entity to apply the relative selling price allocation method in order to estimate a selling price for all units of accounting, including delivered items when vendor-specific objective evidence or acceptable third-party evidence does not exist, as well as new guidance addressing the accounting for revenue transactions involving software. The new guidance is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and shall be applied on a prospective basis. Earlier application is permitted as of the beginning of an entity’s fiscal year. We are currently evaluating the impact adoption of the new guidance will have on our financial condition or results of operations.
38
UROLOGIX, INC.
Notes to Financial Statements
|
|
|
|
3. |
Stock Options and Restricted Stock Awards |
The Company has an equity compensation plan, the 1991 Stock Option Plan (the “1991 Plan”), that provides for the granting of incentive stock options to employees and nonqualified stock options and restricted stock to employees, directors and consultants. As of June 30, 2010, we had reserved 4,450,910 shares of common stock under the 1991 Plan, and 762,416 shares were available for future grants. Options expire ten years from the date of grant and typically vest 25 percent after the first year of service with the remaining vesting 1/36th each month thereafter.
Under the current terms of the 1991 Plan, persons serving as non-employee directors at the date of the annual shareholder meeting receive a grant to purchase 10,000 shares of common stock at a price equal to fair market value on the date of grant. Generally, such options are immediately exercisable on the date of grant, and expire 10 years from the date of grant, subject to earlier termination one year after the person ceases to be a director of the Company. On September 15, 2009, our Compensation Committee recommended, and the Board of Directors approved, an award of restricted stock to each non-employee director serving as a member of the Company’s Board of Directors immediately following the 2009 Annual Meeting of Shareholders held on November 10, 2009 with the number of shares of restricted stock equal to $9,300 divided by the closing price of our common stock on the date of the Annual Meeting, rounded up to the next whole share. A total of 8,774 shares of restricted stock were granted under the stock option plan to each of our non-employee directors on the date of the Annual Meeting. The restrictions on the restricted stock lapse on the first business day immediately prior to the date of our 2010 Annual Meeting of Shareholders if the director is serving as a director as of such date. The restricted stock award is in addition to the stock option grant under the stock option plan.
On February 25, 2008, our Interim Chief Executive Officer was granted an option to purchase 40,000 shares of the Company’s stock. The option is a non-qualified option which expires ten years from the grant date and vested 10,000 shares upon the date of grant, with an additional 10,000 shares vested on the 30, 60, and 90 day anniversary of the grant date.
On June 24, 2008, our newly appointed Chief Executive Officer was granted an option to purchase 355,000 shares of the Company’s stock and 80,000 shares of restricted stock under the 1991 Plan. The options granted, to the greatest extent possible, were issued as incentive stock options under Code Section 422 (the first $100,000 in value vesting in each year) with the remainder, granted as non-qualified stock options. All non-qualified options were immediately exercisable. If exercised before the vesting date, the Company will issue shares of restricted common stock subject to forfeiture until the vesting date of the corresponding option and subject to repurchase by the Company at the lower of (i) the original exercise price; or (ii) the fair market value of such shares upon forfeiture. Such incentive and non-qualified stock options expire 10 years from the date of grant and vest 25 percent after the first year of service with the remaining vesting 1/36th each month thereafter. None of the non-qualified options have been exercised. The restrictions on the restricted stock lapse as to 25 percent of the shares on each of the first four anniversaries of the date of grant.
In addition, non-employee consultants were granted options to purchase a total of 20,000 shares in fiscal year 2010, and 6,500 and 52,500 shares of the Company’s stock in fiscal years 2009 and 2008, respectively. These options are non-qualified options which expire ten years from the grant date and become fully vested either based on performance criteria, or over periods ranging from three months from the date of grant to over 24 months from the date of grant provided the consultants are still providing services to the Company. As these options were granted to non-employees, the final value of these options will need to be determined at their vesting dates, rather than the date of grant, using the Black-Scholes option pricing model and are marked to market at each reporting date until they become fully vested.
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. Our results of operations reflect compensation expense for new stock options granted and vested under our stock incentive plan and the unvested portion of previous stock option grants and restricted stock which vested during the year. Amounts recognized in the financial statements related to stock-based compensation for the fiscal years ended June 30, 2010, 2009 and 2008 were as follows (in thousands,):
39
UROLOGIX, INC.
Notes to Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
2008 |
|
|||
|
Cost of goods sold |
|
$ |
44 |
|
$ |
31 |
|
$ |
127 |
|
|
Selling, general and administrative |
|
|
350 |
|
|
425 |
|
|
580 |
|
|
Research and development |
|
|
46 |
|
|
33 |
|
|
123 |
|
|
Total cost of stock-based compensation |
|
|
440 |
|
|
489 |
|
|
830 |
|
|
Tax benefit of options issued |
|
|
- |
|
|
- |
|
|
- |
|
|
Total stock-based compensation, net of tax |
|
$ |
440 |
|
$ |
489 |
|
$ |
830 |
|
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. We use historical data to estimate expected volatility, the period of time that option grants are expected to be outstanding, as well as employee termination behavior. 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. For restricted stock awards, the fair value is calculated as the market price on date of grant and we amortize the fair value on a straight-line basis over the requisite service period of the award. The following weighted-average assumptions were used to estimate the fair value of options granted during the fiscal years ended June 30, 2010, 2009 and 2008 using the Black-Scholes option-pricing model:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
2008 |
|
|||
|
Volatility |
|
77.0% |
|
59.1% |
|
59.1% |
|
|||
|
Risk-free interest rate |
|
1.7% |
|
2.3% |
|
3.6% |
|
|||
|
Expected option life |
|
3 years |
|
3 years |
|
3 years |
|
|||
|
Stock dividend yield |
|
- |
|
- |
|
- |
|
|||
A summary of our options and option activity for the fiscal year ended June 30, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|||||||||||||||||
|
Range
of Exercise |
|
Outstanding
as |
|
Weighted |
|
Weighted |
|
Exercisable
as |
|
Weighted |
|||||||||||
|
$ |
- |
|
$ |
2.43 |
|
|
1,365,000 |
|
8.25 |
|
|
$ |
1.47 |
|
|
|
520,431 |
|
$ |
1.51 |
|
|
$ |
2.43 |
|
$ |
4.86 |
|
|
162,100 |
|
4.72 |
|
|
$ |
3.26 |
|
|
|
151,737 |
|
$ |
3.30 |
|
|
$ |
4.86 |
|
$ |
7.29 |
|
|
50,901 |
|
2.60 |
|
|
$ |
6.19 |
|
|
|
50,901 |
|
$ |
6.19 |
|
|
$ |
7.29 |
|
$ |
9.72 |
|
|
6,000 |
|
0.34 |
|
|
$ |
9.33 |
|
|
|
6,000 |
|
$ |
9.33 |
|
|
$ |
9.72 |
|
$ |
12.15 |
|
|
12,500 |
|
0.51 |
|
|
$ |
12.13 |
|
|
|
12,500 |
|
$ |
12.13 |
|
|
$ |
12.15 |
|
$ |
14.58 |
|
|
15,975 |
|
2.52 |
|
|
$ |
13.06 |
|
|
|
15,975 |
|
$ |
13.06 |
|
|
$ |
14.58 |
|
$ |
17.01 |
|
|
10,000 |
|
1.36 |
|
|
$ |
15.82 |
|
|
|
10,000 |
|
$ |
15.82 |
|
|
$ |
17.01 |
|
$ |
19.44 |
|
|
3,466 |
|
0.68 |
|
|
$ |
18.97 |
|
|
|
3,466 |
|
$ |
18.97 |
|
|
|
|
|
|
|
|
|
1,625,942 |
|
7.52 |
|
|
$ |
2.15 |
|
|
|
771,010 |
|
$ |
2.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of |
|
|
Weighted-avg. |
|
Weighted-avg. |
|
Aggregate
Intrinsic |
||||||
|
Outstanding at July 1, 2009 |
|
|
1,722,992 |
|
|
$ |
2.89 |
|
|
|
|
|
$ |
102,683 |
|
|
Options granted |
|
|
594,000 |
|
|
|
1.29 |
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(90,538 |
) |
|
|
1.23 |
|
|
|
|
|
|
|
|
|
Options expired |
|
|
(586,512 |
) |
|
|
3.63 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(14,000 |
) |
|
|
0.76 |
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2010 |
|
|
1,625,942 |
|
|
$ |
2.15 |
|
|
7.5 |
|
|
$ |
47,820 |
|
|
Exercisable at June 30, 2010 |
|
|
771,010 |
|
|
$ |
2.91 |
|
|
6.1 |
|
|
$ |
34,398 |
|
40
UROLOGIX, INC.
Notes to Financial Statements
The aggregate intrinsic value in the table above is based on our closing stock price of $1.07 on June 30, 2010, which would have been received by the optionees had all options been exercised on that date. The aggregate intrinsic value for options exercisable at June 30, 2009 and 2008 was $47,000 and $36,000, respectively, when the closing price of our stock on June 30, 2009 and 2008 was $1.24 and $1.77, respectively.
The weighted average fair value of our options at their grant date was approximately $0.69, $0.57 and $0.82 for options granted during the fiscal years ended June 30, 2010, 2009 and 2008, respectively. The total intrinsic value of options exercised during the fiscal years ended June 30, 2010 and 2008 was $7,000 and $29,000, respectively. There was no intrinsic value of the options exercised during fiscal year 2009 as the grant price of the options was greater than the stock price on the date of exercise.
A summary of the status of our non-vested options as of June 30, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Restricted |
|
Weighted-avg.
Grant- |
|
||
|
Non-vested at June 30, 2009 |
|
639,791 |
|
|
$0.69 |
|
|
|
Options granted |
|
594,000 |
|
|
0.69 |
|
|
|
Options forfeited |
|
(90,538 |
) |
|
0.55 |
|
|
|
Options vested |
|
(288,321 |
) |
|
0.72 |
|
|
|
Non-vested at June 30, 2010 |
|
854,932 |
|
|
0.69 |
|
|
A summary of restricted stock award activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Restricted |
|
Weighted-avg.
Grant- |
|
||
|
Non-vested at June 30, 2009 |
|
60,000 |
|
|
$1.79 |
|
|
|
Options granted |
|
35,096 |
|
|
1.06 |
|
|
|
Options forfeited |
|
(8,774 |
) |
|
1.06 |
|
|
|
Options vested |
|
(20,000 |
) |
|
1.79 |
|
|
|
Non-vested at June 30, 2010 |
|
66,322 |
|
|
$1.50 |
|
|
As of June 30, 2010, total unrecognized compensation cost related to non-vested stock options and restricted stock awards granted under our plan was $503,000 and $65,000, respectively. That cost is expected to be recognized over a weighted-average period of 2.5 years for non-vested stock options and 2 years for restricted stock awards. The total fair value of options vested during the fiscal years ended June 30, 2010, 2009 and 2008 was $208,000, $211,000 and $303,000, respectively.
|
|
|
|
4. |
Identifiable Intangible Assets, Net |
Balances of identifiable intangible assets, net, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010 |
|
As of June 30, 2009 |
|
||||||||||||||||||||||||||||||||
|
|
|
Carrying |
|
Accumulated |
|
Impairment |
|
Net |
|
Carrying |
|
Accumulated |
|
Impairment |
|
Net |
|
||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technologies |
|
|
$ |
7,500 |
|
|
|
$ |
3,391 |
|
|
|
$ |
4,109 |
|
|
$ |
- |
|
|
$ |
7,500 |
|
|
|
$ |
3,391 |
|
|
|
$ |
4,109 |
|
|
$ |
- |
|
|
Customer base |
|
|
|
2,300 |
|
|
|
|
1,183 |
|
|
|
|
1,015 |
|
|
|
102 |
|
|
|
2,300 |
|
|
|
|
1,159 |
|
|
|
|
1,015 |
|
|
|
126 |
|
|
Trademarks |
|
|
|
1,140 |
|
|
|
|
154 |
|
|
|
|
986 |
|
|
|
- |
|
|
|
1,140 |
|
|
|
|
154 |
|
|
|
|
986 |
|
|
|
- |
|
|
Patents |
|
|
|
21 |
|
|
|
|
- |
|
|
|
|
- |
|
|
|
21 |
|
|
|
17 |
|
|
|
|
- |
|
|
|
|
- |
|
|
|
17 |
|
|
Total identifiable intangible assets, net |
|
|
$ |
10,961 |
|
|
|
$ |
4,728 |
|
|
|
$ |
6,110 |
|
|
$ |
123 |
|
|
$ |
10,957 |
|
|
|
$ |
4,704 |
|
|
|
$ |
6,110 |
|
|
$ |
143 |
|
41
UROLOGIX, INC.
Notes to Financial Statements
Future annual amortization expense for the customer base is expected to be approximately $24,000 through September 2014, its estimated remaining useful life. The patent intangible assets relate to fees incurred for patents. We begin amortization of these patent costs when they are issued and any future annual amortization is expected to be minor.
|
|
|
|
5. |
Other Accrued Expenses |
Other accrued expenses is comprised of the following as of June 30 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
||
|
Sales tax accrual |
|
$ |
191 |
|
$ |
221 |
|
|
Accrued severance |
|
|
- |
|
|
104 |
|
|
Other |
|
|
328 |
|
|
273 |
|
|
Total other accrued expenses |
|
$ |
519 |
|
$ |
598 |
|
|
|
|
|
6. |
Income Taxes |
The components of income tax expense (benefit) for each of the years in the three-year period ended June 30, 2010 consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended June 30, |
|
|||||||||||||||||||||||||
|
|
|
2010 |
|
2009 |
|
2008 |
|
|||||||||||||||||||||
|
|
|
Current |
|
Deferred |
|
Total |
|
Current |
|
Deferred |
|
Total |
|
Current |
|
Deferred |
|
Total |
|
|||||||||
|
Federal |
|
$ |
(109 |
) |
$ |
- |
|
$ |
(109 |
) |
$ |
(48 |
) |
$ |
- |
|
$ |
(48 |
) |
$ |
- |
|
$ |
(1,369 |
) |
$ |
(1,369 |
) |
|
State |
|
|
21 |
|
|
- |
|
|
21 |
|
|
55 |
|
|
- |
|
|
55 |
|
|
18 |
|
|
(150 |
) |
|
(132 |
) |
|
Total |
|
$ |
(88 |
) |
$ |
- |
|
$ |
(88 |
) |
$ |
7 |
|
$ |
- |
|
$ |
7 |
|
$ |
18 |
|
$ |
(1,519 |
) |
$ |
(1,501 |
) |
For fiscal year 2010, current federal income tax benefit consists of current year estimated refundable research and development credits and refunds of alternative minimum tax paid during fiscal year 2005 and fiscal year 2006 that will be realized through a net operating loss (“NOL”) carry back claim. Current state tax expense consists of estimated state tax expense for the company.
A reconciliation of our statutory tax expense (benefit) to our actual tax expense (benefit) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended June 30, |
|
|||||||
|
|
|
2010 |
|
2009 |
|
2008 |
|
|||
|
Federal statutory rate at 34 percent |
|
$ |
(767 |
) |
$ |
(1,500 |
) |
$ |
(5,575 |
) |
|
State taxes, net of federal tax expense (benefit) and state valuation allowance |
|
|
(36 |
) |
|
(83 |
) |
|
(531 |
) |
|
Nondeductible expenses |
|
|
52 |
|
|
50 |
|
|
41 |
|
|
Stock –based compensation |
|
|
77 |
|
|
108 |
|
|
205 |
|
|
General business credits |
|
|
(77 |
) |
|
(220 |
) |
|
- |
|
|
NOL carryback claim |
|
|
(84 |
) |
|
- |
|
|
- |
|
|
Adjustments to NOL’s and credits |
|
|
2,061 |
|
|
937 |
|
|
- |
|
|
Other |
|
|
(11 |
) |
|
(8 |
) |
|
5 |
|
|
Change in valuation allowance |
|
|
(1,303 |
) |
|
723 |
|
|
4,354 |
|
|
|
|
$ |
(88 |
) |
$ |
7 |
|
$ |
(1,501 |
) |
42
UROLOGIX, INC.
Notes to Financial Statements
The components of our net deferred tax assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
||||
|
|
|
2010 |
|
2009 |
|
||
|
Deferred Tax Assets: |
|
|
|
|
|
|
|
|
Non-Current: |
|
|
|
|
|
|
|
|
Net operating loss carry forward |
|
$ |
33,826 |
|
$ |
34,749 |
|
|
Definite-lived intangibles |
|
|
2,935 |
|
|
3,412 |
|
|
Alternative minimum tax credit |
|
|
9 |
|
|
93 |
|
|
Federal and state general business credits |
|
|
975 |
|
|
994 |
|
|
Non-qualified stock-based compensation |
|
|
461 |
|
|
384 |
|
|
Current: |
|
|
|
|
|
|
|
|
Accrued expenses |
|
|
438 |
|
|
369 |
|
|
Gross deferred tax assets |
|
|
38,644 |
|
|
40,001 |
|
|
Deferred Tax Liabilities: |
|
|
|
|
|
|
|
|
Non-Current: |
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
(15 |
) |
|
(69 |
) |
|
Gross deferred tax liabilities |
|
|
(15 |
) |
|
(69 |
) |
|
Net deferred tax assets before valuation allowance |
|
|
38,629 |
|
|
39,932 |
|
|
Less: valuation allowance |
|
|
(38,629 |
) |
|
(39,932 |
) |
|
Total net deferred tax asset |
|
$ |
- |
|
$ |
- |
|
Of the valuation allowance amounts above, $535,000 as of June 30, 2010 and 2009 was attributable to increases in the net operating loss carry forwards resulting from the exercise of stock options. These amounts will be recorded as an increase to additional paid-in-capital if it is determined in the future that this portion of the valuation allowance is no longer required, and the net operating loss generated by these deductions is utilized on the tax return.
At June 30, 2010, the expiration dates and amounts of our net operating loss carryforwards and credits for federal income tax purposes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Years expiring (in thousands) |
|
Net Operating |
|
Credits |
|
||
|
2009 - 2010 |
|
$ |
4,719 |
|
$ |
156 |
|
|
2011 - 2015 |
|
|
31,046 |
|
|
- |
|
|
2016 - 2020 |
|
|
21,389 |
|
|
- |
|
|
2021 - 2028 |
|
|
35,336 |
|
|
628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
92,490 |
|
$ |
784 |
|
We also have a carryforward credit for alternative minimum tax of approximately $9,000 that has no expiration date.
The Company completed a Section 382 analysis of the net operating loss carryforwards through February 1, 2006. Through that analysis it was determined that none of the remaining pre-February 1, 2006 net operating loss carryforwards are subject to a Section 382 limitation. Net operating losses generated since February 1, 2006 have not been analyzed for any Section 382 limitations and therefore may or may not be fully realizable in the future.
As of July 1, 2007, we believed we had approximately $35,000 of unrecognized tax benefits related to state tax liabilities which would favorably impact the effective income tax rate in any future period, if recognized. As of June 30, 2009, the liability for gross unrecognized tax benefits was $15,000. During the year ended June 30, 2010, there were no significant changes to the total gross unrecognized tax benefits. It is expected that the amount of unrecognized tax benefits for positions which we have identified will not change significantly in the next twelve months.
43
UROLOGIX, INC.
Notes to Financial Statements
We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. We file income tax returns in the United States (U.S.) federal jurisdiction as well as various state jurisdictions. We are subject to U.S. federal income tax examinations by tax authorities for fiscal years after 1995 due to unexpired net operating loss carryforwards originating in and subsequent to that fiscal year. Income tax examinations we may be subject to for the various state taxing authorities vary by jurisdiction.
|
|
|
|
7. |
Deferred Income |
Deferred income as of June 30 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
||
|
Deferred royalty income |
|
$ |
155 |
|
$ |
339 |
|
|
Deferred warranty service income |
|
|
14 |
|
|
26 |
|
|
Total deferred income |
|
$ |
169 |
|
$ |
365 |
|
Deferred royalty income consists of a prepaid non-exclusive license previously granted to a third party for the use of certain of our technologies. Deferred royalty income is recognized as the greater of amounts due based on actual sales or amortization of the license fee over the remaining license period, which is 10 months as of June 30, 2010.
Deferred warranty service income is for prepayments made to us for warranty service contracts and is recognized over the contract period ranging from 12 to 24 months.
|
|
|
|
8. |
Goodwill Impairment and Reversal of Related Deferred Tax Liability |
In fiscal year 2008, we recorded a $10.2 million charge to fully impair our goodwill. In addition, as a result of the impairment of the goodwill, we also recorded an income tax benefit as of December 31, 2007 of $1.6 million due to the reversal of the deferred tax liability balance related to goodwill which is no longer necessary after the goodwill impairment.
|
|
|
|
9. |
Commitments and Contingencies |
Leases
The Company leases its facility and certain equipment under non-cancelable operating leases that expire at various dates through fiscal year 2011. Rent expense related to operating leases was approximately $215,000, $216,000, and $226,000 for the years ended June 30, 2010, 2009 and 2008, respectively. On September 9, 2010, the Company entered into a new lease agreement with our current landlord, covering the same square footage, for a period of seventy-two months, effective August 1, 2010. Future minimum annual lease commitments under non-cancelable operating leases with initial terms of one year or more are $144,000 in fiscal year 2011, $205,000 in fiscal year 2012 and $207,000 in fiscal year 2013.
Contingencies
We have been and are involved in various legal proceedings and other matters that arise in the normal course of our business, including product liability claims that are inherent in the testing, production, marketing and sale of medical devices. The ultimate liabilities, if any, cannot be determined at this time. However, based upon currently available information, we believe that the ultimate resolution of these matters will not have a material effect on the financial position, liquidity or results of operations of the Company.
|
|
|
|
10. |
Benefit Plan |
The Company provides a 401(k) savings plan to which eligible employees may make pretax payroll contributions up to the allowed limit of the Internal Revenue Service. Company matching contributions are discretionary, and none have been made to date.
44
|
|
|
|
ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
|
|
|
|
None. |
|
|
|
|
|
ITEM 9A. |
(a) Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer, Stryker Warren, Jr., and Chief Financial Officer, Brian J. Smrdel have evaluated the Company’s disclosure controls and procedures as of June 30, 2010. Based upon their review, they have concluded that these controls and procedures are effective.
The Company’s Chief Executive Officer and Chief Financial Officer used the definition of “disclosure controls and procedures” as set forth in Rule 13a-15(e) under the Exchange Act in making their conclusion as to the effectiveness of such controls and procedures.
(b) Changes in Internal Controls over Financial Reporting
There have been no changes in internal control over financial reporting that occurred during the fourth quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company’s internal control report is included in this report under Item 8, under the caption “Management’s Report on Internal Control over Financial Reporting.”
|
|
|
|
ITEM 9B. |
None.
45
46
|
|
|
|
ITEM 15. |
|
|
|
|
|
(a) |
Documents filed as part of this report. |
|
|
|
(1) |
Financial Statements. |
|
|
|
|
|
|
|
The financial statements of the Company are set forth at Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. |
|
|
|
|
|
|
(2) |
Financial Statement Schedules for fiscal years ended June 30, 2010, 2009 and 2008. |
|
|
|
|
|
|
|
None. |
|
|
|
|
|
(b) |
Exhibits. |
|
|
|
|
|
|
|
|
Exhibit Number |
|
Document |
|
Incorporated by Reference To: |
|
|
|
|
|
|
|
3.1 |
|
Amended and Restated Articles of Incorporation. |
|
Exhibit 3.1 of the Company’s Registration Statement on Form S-1 (File No. 333-03304) filed on May 28, 1996 (the “1996 Registration Statement”). |
|
|
|
|
|
|
|
3.2 |
|
Amended and Restated Bylaws of Urologix, Inc., as amended on December 5, 2006. |
|
Exhibit 3.2 of the Company’s Form 8-K dated December 5, 2006. |
|
|
|
|
|
|
|
4.1 |
|
Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock |
|
Exhibit 1 of the Company’s Registration Statement on Form 8-A (File No. 000-28414) filed January 16, 1997. |
|
|
|
|
|
|
|
10.1 |
|
* Amended and Restated Urologix, Inc. 1991 Stock Option Plan, as amended through June 21, 2008 |
|
Exhibit 10.1 of the Company’s Form 10-K for the year ended June 30, 2009. |
|
|
|
|
|
|
|
10.2 |
|
Lease Agreement dated January 20, 1992, between the Company and Parkers Lake Pointe I Limited Partnership, including Addendum to Lease Agreement dated April 5, 1995 |
|
Exhibit 10.5 of the Company’s 1996 Registration Statement. |
|
|
|
|
|
|
|
10.3 |
|
Amendment of Lease Agreement dated October 4, 2002 between Parkers Lake I Realty Corp. and the Company. |
|
Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2003. |
|
|
|
|
|
|
|
10.4 |
|
Tenth Amendment to Lease dated October 22, 2007 between Urologix, Inc. and Parkers Lake I Realty LLC. |
|
Exhibit 10.1 to Current Report on Form 8-K dated October 22, 2007. |
|
|
|
|
|
|
|
10.5 |
|
Letter Agreement Regarding Offer of Employment between Urologix, Inc. and Stryker Warren Jr. dated June 24, 2008. |
|
Exhibit 10.1 to Current Report on Form 8-K dated June 24, 2008. |
|
|
|
|
|
|
|
10.6 |
|
Letter Agreement Regarding Offer of Employment between Urologix, Inc. and Gregory Fluet dated July 14, 2008. |
|
Exhibit 10.1 to Current Report on Form 8-K dated July 14, 2008. |
|
|
|
|
|
|
|
10.7 |
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Amended and Restated Letter Agreement Regarding Change In Control Benefits between Urologix, Inc. and Certain Executive Officers dated December 29, 2008. |
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Exhibit 10.2 to Current Report on Form 8-K dated December 30, 2008. |
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10.8 |
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Letter Agreement dated April 27, 2010 regarding Offer of Employment entered into effective April 29, 2010 between Urologix, Inc. and Brian J, Smrdel |
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Exhibit 10.1 to Current Report on Form 8-K dated April 29, 2010. |
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10.9 |
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First Amended and Restated Lease dated as of August 1, 2010 by and between the Company and Parkers Lake I Realty LLC |
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Exhibit 10.1 to Current Report on Form 8-K dated September 9, 2010. |
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23.1 |
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Consent of Independent Registered Public Accounting Firm |
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Attached hereto. |
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31.1 |
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Certification of Chief Executive Officer (principal executive officer) pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act. |
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Attached hereto. |
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31.2 |
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Certification of Chief Financial Officer (principal financial officer and principal accounting officer) pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act. |
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Attached hereto. |
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32 |
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Certification pursuant to 18 U.S.C. §1350. |
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Attached hereto. |
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* Indicates a management contract or compensatory plan or arrangement. |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: September 17, 2010
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UROLOGIX, INC. |
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By: |
/s/ Stryker Warren, Jr. |
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Stryker Warren, Jr., Chief Executive Officer |
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(principal executive officer) |
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Each person whose signature appears below hereby constitutes and appoints Stryker Warren, Jr. and Brian J. Smrdel, and each of them, as his true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his behalf, individually and in each capacity stated below, all amendments and post-effective amendments to this Form 10-K and to file the same, with all exhibits thereto and any other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as each might or could do in person, hereby ratifying and confirming each act that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on behalf of the registrant by the following persons in the capacities indicated on September 17, 2010.
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Signature |
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Title |
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/s/ Stryker Warren, Jr. |
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Chief Executive Officer and Director |
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Stryker Warren, Jr. |
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(principal executive officer) |
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/s/ Brian J. Smrdel |
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Chief Financial Officer |
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Brian J. Smrdel |
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(principal financial officer and principal accounting officer) |
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/s/ Mitchell Dann |
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Director |
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Mitchell Dann |
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/s/ Sidney W. Emery, Jr. |
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Director |
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Sidney W. Emery, Jr. |
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/s/ Christopher R. Barys |
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Director |
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Christopher R. Barys |
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/s/ Guy C. Jackson |
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Director |
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Guy C. Jackson |
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/s/ Patrick D. Spangler |
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Director |
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Patrick D. Spangler |
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48