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Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

 

FORM 10-K

 

 

 


 

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended June 30, 2014.

 

OR

o

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

 

 

 


UROLOGIX, INC.
(Exact name of registrant as specified in its charter)

 

 

 

Minnesota

 

41-1697237

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

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

 

 

 


 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Common Stock, $.01 par value

 

 

Series A Junior Participating Preferred Stock Purchase Rights

 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:

 

 

 

 

Yes o

No x


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act:

 

 

 

 

Yes o

No x


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 x  No o

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

 

 

 

Yes x

No o


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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

 

 

 

 

 

Large Accelerated Filer o

Accelerated Filer o

Non-Accelerated Filer o

Smaller Reporting Company x


Indicate by check mark whether the registrant is a shell company (as defined in Rule 126-2 of the Act)

 

Yes o

No x

The aggregate value of the Company’s Common Stock held by non-affiliates of the Company was approximately $3,574,987 as of the last day of the Company’s most recently completed second fiscal quarter, December 31, 2013, when the last reported sales price was $0.18.

As of September 1, 2014, the Company had outstanding 21,655,906 shares of Common Stock, $.01 par value.

1



DOCUMENTS INCORPORATED BY REFERENCE

Certain information is incorporated into Part III of this report by reference to the definitive Proxy Statement for the Registrant’s 2014 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.









2


TABLE OF CONTENTS

 

 

 

 

PART I

 

 

 

 

 

 

Item 1.

Business

 

4

Item 1A.

Risk Factors

 

18

Item 1B.

Unresolved Staff Comments

 

29

Item 2.

Properties

 

29

Item 3.

Legal Proceedings

 

29

Item 4.

Mine Safety Disclosures

 

29

 

 

 

 

PART II

 

 

 

 

 

 

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

30

Item 6.

Selected Financial Data

 

31

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

33

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

 

42

Item 8.

Financial Statements and Supplementary Data

 

43

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

67

Item 9A.

Controls and Procedures

 

67

Item 9B.

Other Information

 

67

 

 

 

 

PART III

 

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

 

68

Item 11.

Executive Compensation

 

68

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

68

Item 13.

Certain Relationships and Related Transactions, and Director Independence

 

68

Item 14.

Principal Accountant Fees and Services

 

68

 

 

 

 

PART IV

 

 

 

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

 

69

 

 

 

 

SIGNATURES

 

71

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PART I

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 “Risk 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.

 

 

ITEM 1.

BUSINESS

Overview

          Urologix develops, manufactures, and markets non-surgical, office-based therapies for the treatment of the symptoms and obstruction resulting from non-cancerous prostate enlargement also known as benign prostatic hyperplasia (BPH). These therapies use proprietary technology in the treatment of BPH, a disease that affects more than 30 million men worldwide and is the most common prostate problem for men over 50. We market both the Cooled ThermoTherapy™ (CTT) product line and the Prostiva® Radio Frequency (RF) Therapy System (Prostiva). We acquired the exclusive worldwide license to the Prostiva RF Therapy System in September 2011. These two technologies are designed to be used by urologists in their offices without placing their patients under general anesthesia. CTT uses a flexible catheter to deliver targeted microwave energy combined with a unique cooling mechanism that protects healthy urethral tissue and enhances patient comfort to provide safe, effective, lasting relief from BPH voiding symptoms by the thermal ablation of hyperplastic prostatic tissue surrounding the urethra. The proprietary Prostiva RF Therapy System delivers radio frequency energy directly into the prostate through the use of insulated electrodes deployed from a transurethral scope, ablating targeted prostatic tissue under the direct visualization of the urologist. These focal ablations reduce constriction of the urethra, thereby relieving BPH voiding symptoms. These two proven technologies have slightly different, yet complementary, patient indications and providing them to our urologist customers enables them to treat a wide range of patients in their office. We believe that these office-based BPH therapies are efficacious, safe and low cost solutions for BPH as they have shown results clinically superior to those of daily BPH medication and without the complications and side effect profile inherent with surgical procedures.

          Our goal is to strengthen our business by efficiently deploying our resources to support adoption of Cooled ThermoTherapy and Prostiva RF Therapy as the preferred therapeutic options considered by urologists for their BPH patients in the earlier stages of disease progression. Typically, these are patients who do not want to take chronic BPH medication or are unhappy with the side effects, costs or results. A urologist can choose between our two therapies based upon clinical criteria specific to the BPH patient’s presentation. Our business strategy to achieve this goal is to:

 

 

 

 

Increase utilization of Cooled ThermoTherapy and Prostiva RF Therapy by urologists who already have access to a Cooled ThermoTherapy and/or Prostiva RF Therapy system,

 

 

 

 

Build upon the evidence supporting the cost effectiveness of our technologies and educate healthcare providers on the benefit to patients and the healthcare system of our in-office therapies,

 

 

 

 

Educate patients and urologists on the benefits of Cooled ThermoTherapy and Prostiva RF Therapy through educational and other market development efforts, and

 

 

 

 

Continue to partner with our European distributors to support the customers outside the United States.

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Benign Prostatic Hyperplasia (BPH)

          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. BPH is a non-cancerous disease in which the prostate grows and constricts the urethra causing adverse changes in urinary voiding patterns. 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 generally referred to as LUTS (Lower Urinary Tract Symptoms), which can have a significant impact on the quality of life of men suffering from BPH. LUTS caused by BPH includes frequent urination during the day and night, difficulty starting or stopping urination, urgency to urinate and painful urination. Delay in treatment may lead to serious consequences including complete obstruction (acute retention of urine), urinary tract infections, bladder stones, degeneration of bladder function and, in extreme cases, kidney failure.

Market Opportunity

          While there are over 30 million men worldwide with symptomatic BPH, we are focused on growing our market penetration primarily in the U.S. The U.S. BPH market is large, underpenetrated and can be expected to continue to grow due to the general aging of the population as well as increasing life expectancies. BPH generally affects men after the age of 50. Epidemiological studies have shown that BPH will occur in a percentage of men roughly equivalent to the average age of the group studied. To illustrate this concept, on average, 70 year old men have a 70% chance of having BPH, while 60 year old men have a 60% incidence rate. Approximately half of men with BPH will have moderate to severe LUTS related to their disease as determined by the standard method of assessing symptoms. Patient claims analysis has shown that there are over 8.7 million men that are currently diagnosed with BPH in the U.S. Based on the aging of the population and the incidence of the disease, we estimate over 750,000 new patients each year will develop clinically significant BPH in the U.S. alone. Over the last few years chronic drug therapy as the primary course of treatment for these patients has increased its dominance in this market. Despite the demonstrable value proposition of our technology, we have penetrated only a small portion of the addressable population and the total procedure market for BPH, both surgical and office-based, has declined over the last few years. We believe our products could help improve the lives of a much larger patient population than currently receive our therapeutic options.

Treatment Options

Watchful Waiting

          When a patient first presents with LUTS caused by BPH, physicians generally suggest drugs as the first treatment option, but ultimately leave the decision up to their patients. Due to the costs, side effects and complications associated with BPH drug therapies, many patients diagnosed with BPH choose to be regularly monitored by their urologists, but elect not to begin a drug regimen. The patients who opt out of therapy fall into a group referred to as “watchful waiting.” Historically, bothersome symptom persistence, symptom worsening or an acute urinary event such as retention is a trigger for the patient to move on to some other form of therapy for those in the “watchful waiting” group.

Chronic Drug Therapy

          Drug therapy has historically been the first line of treatment and the drug therapy market has continued to grow. Over 4 million men in the U.S. are on some form of chronic BPH medication. The most rigorous studies have shown that approximately 20% of patients treated with drug therapy discontinue treatment within 24 months for various reasons including cost, ineffectiveness, side effects and the burdens of compliance. However, patients may try different BPH drugs when one fails or combinations of drugs to improve effectiveness. Combination drug therapy leads to a more costly treatment regimen and often an increased incidence of side effects. In addition, there is risk that men who continue to take BPH drugs for long periods of time may miss signs of degradation in their urinary function due to the drug(s) masking the disease progression.

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          Most BPH patients suffering from LUTS are initially given an alpha-blocker. Alpha-blockers are a class of drugs also used to treat high blood pressure and work by relaxing smooth muscle cells such as those found around the urethra. This results in easing many of the symptoms of LUTS, but does nothing to slow down the progression of prostate enlargement resulting from BPH.

          When a patient is dissatisfied with his first drug for BPH, typically an alpha-blocker, and seeks additional therapy this is referred to as Complex BPH in the recently updated American Urological Association (AUA) Guidelines. At this point, the Guidelines recommend urologists discuss additional drugs, office-based procedures or surgery as an option and to come to a shared decision with the patient.

          If a patient wants to continue with drug therapy, a physician may prescribe a second drug called a 5-ARI. Taking both an alpha-blocker and a 5-ARI is referred to as “combination therapy.” 5-ARIs are drugs that inhibit the conversion of testosterone into DHT. Reducing DHT is believed to slow the growth of the prostate. While prescribing both an alpha-blocker and a 5-ARI has shown better symptom improvement than taking either drug alone, there are also increased rates of side effects as patients experience side effects from both drug classes.

Surgical Therapy

          There are two primary surgical procedures to treat BPH: TURP or laser. Traditionally, the “gold standard” 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 the patient is under general anesthesia, the urologist inserts a rigid scope into the urethra and then uses an electro-cautery device to core out sections of the prostate. Although TURP results in a dramatic improvement in urine flow and reduction in symptoms, the procedure can require a hospital stay and lengthy recovery time and is reported to have a higher rate of side effects and complications than other treatment options. Because the TURP procedure requires a highly skilled surgeon with extensive training, the outcomes and incidence of complications is affected by the experience of the surgeon performing the TURP. TURP currently accounts for approximately half of BPH surgical procedure volume.

          The other half of the surgical procedure volume consists of laser vaporization or laser enucleation of the prostate performed in an operating room through a rigid cystoscope and is similar to a TURP. The patient is placed under general anesthesia before a rigid scope is inserted into the urethra. Then the prostatic and urethral tissues are removed using a laser fiber placed down the rigid scope to ablate the tissue or cut it out instead of using an electro-cautery device. Similar to the traditional TURP, the success and safety profile of these procedures is largely dependent on technique.

Urologix’s Office-Based Treatment Options

          Urologix is focused on technologies that enable the treatment of patients in the safe, comfortable setting of a urologist’s office without general anesthesia. Office-based therapies provide significant advantages over other BPH treatment options. Compared to chronic drug therapy, it is a one-time treatment that provides lasting results in most patients without the ongoing risk of side effects and costs associated with long term daily medication. Compared to surgery, Urologix’s office-based technologies produce lasting results while avoiding many of the complications and costs associated with surgery.

          Providing the option of two different therapies, CTT or Prostiva, allows urologists to select which device will provide the best outcome for each patient whom they treat for BPH. Because of the unique aspects of each of our technologies some patients may be indicated for one technology over the other. The FDA indications help with these treatment decisions. For example, the Prostiva technology is only indicated for patients with a prostate size between 20 grams and 50 grams, while the CTT system is approved for prostates up to 100 grams. In addition, there is a minimum prostatic urethral length which CTT can treat due to the length of the microwave antenna, while the Prostiva system does not have this requirement. Other prostate anatomy issues can also favor one technology versus the other. Therefore, by having both technologies as an option the urologist can select the device best suited for the patient. Many patients may be candidates for either procedure, in which case the urologist can discuss both options and come to a shared decision with their patients, a process that aligns with the American Urological Association guidelines.

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          We believe that both CTT and Prostiva provide incremental value to the patient, the urologist and the healthcare system overall. For the patients, they are able to have an effective and durable procedure that will relieve the majority of them from the burden of chronic medication without the risk of general anesthesia or the expense of having to pay for the hospital deductibles. For the urologists, they can make their patients happy and healthier with a technology that fits into their office clinical routine and is well reimbursed. The healthcare system benefits because the overall cost of these office-based procedures is substantially less than the total cost for any surgical option and is intended to save the costs of chronic medication. Our technologies account for the majority of office-based BPH procedures and should be well positioned for a healthcare system of the future that rewards cost effective technologies that provide value to all the constituents in the healthcare equation.

Cooled ThermoTherapy

          Cooled ThermoTherapy (CTT) is a microwave energy treatment that provides effective, durable and safe relief from BPH symptoms. The CTT system consists of a CoolWave or prior generation Targis control unit and a proprietary, flexible catheter that targets energy into the transition zone of the prostate producing a temperature sufficient to cause cell death, while simultaneously cooling and protecting the healthy, pain-sensitive urethral tissue. Our Cooled ThermoTherapy catheter is the CTC Advance microwave catheter designed to improve ease of use and patient comfort compared to earlier generation devices.

 

 

 

 

 

(GRAPHIC)

 

During a Cooled ThermoTherapy procedure, a catheter is inserted into the urethra and anchored in the bladder, and a 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 through its natural healing process following the treatment. The treatment cycle is completed in approximately 30 minutes, while the total room time with the patient is approximately an hour.

 

(GRAPHIC)

Prostiva RF Therapy

          Prostiva RF Therapy is a radio frequency needle ablation treatment for BPH. Prostiva therapy is conducted in offices without the need for general anesthesia. The Prostiva system consists of a hand piece with a specialized 18.5F (approximately 6mm) rigid cystoscope connected to a radio frequency generator. The urologist is able to visualize the therapy continuously through the use of the scope and they control irrigation of the urethra for cooling and tissue preservation during the therapy.

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          During a Prostiva procedure, a grounding pad is placed over the patient’s sacrum, and the RF ablation current is directed towards the grounding pad through the prostatic tissue. Precise tissue heating occurs due to electrical resistance of the prostate tissue as electrons flow from the active to the return electrode. The RF current is precisely delivered to the region immediately surrounding the active electrode, with accurate control of the tissue effect. Ablation volume is a function of the placement and depth of the electrode, as well as the power utilized and the treatment duration. Temperature in the urethra is monitored continuously during the treatment while RF energy is delivered into the prostatic tissue, ultimately resulting in targeted necrosis of the prostatic tissues and relief of symptoms as the body re-absorbs the destroyed tissue through its natural healing process following treatment. Treatment time varies depending on gland size but is approximately 20-25 minutes and total room time is approximately 1 hour, equivalent to Cooled ThermoTherapy.

 

(GRAPHIC)

Clinical Studies

          The safety, efficacy and durability of Cooled ThermoTherapy and Prostiva are supported by substantial clinical evidence, unlike most of the competitive in-office BPH therapies. There are over 100 published peer reviewed clinical articles that are supportive of these technologies. Numerous multi-center, prospective, clinical trials of Cooled ThermoTherapy and Prostiva RF Therapy have been conducted both in the United States and internationally.

          Study objectives have included: collection of safety and efficacy data, support of new indications and marketing claims, generation of long-term durability data, and cost effectiveness data for Medicare and other reimbursement approvals in various markets. The results of these trials showed a majority of patients received significant long-term relief from the symptoms and obstruction caused by their BPH. BPH symptoms were measured using validated instruments, such as the American Urological Association Symptom Index (AUASI). Quality of life (QoL) was also measured using a validated scoring instrument where higher scores indicated a lower quality of life. Peak flow rates (Qmax) were measured in numerous studies where values were expressed in milliliters (mL) per second.

          The AUASI utilizes a 35-point scale where the higher the score (American Urological Association Symptom Score, or AUASS) the more severe the BPH symptoms. An AUASS greater than 7 is considered moderate symptomatic BPH. The minimum threshold for clinically significant improvement in the AUASS is commonly viewed as a reduction of 4 or more points. Success in clinical studies is often determined by a reduction of 30% from the baseline AUASS.

Cooled ThermoTherapy

          At the 2014 American Urological Association (AUA) annual meeting, data was presented on the comparative cost-effectiveness of both high-energy TUMT (TransUrethral Microwave Therapy) and low-energy TUMT. High energy TUMT included our CTT technology and resulted in lower total cost of care over time than the low-energy TUMT alternatives. The lower costs were achieved due to the durability, safety and effectiveness of the high-energy TUMT devices. We believe such society and professional presentations are important to underscore the efficacy, safety, durability and cost savings that Urologix technologies bring to patients, physicians, and payers.

          At the 2011 North Central Sectional meeting of the AUA, a presentation on the comparative cost effectiveness of BPH treatment options showed that CTT was a cost-effective treatment option for BPH.

          At the 2010 AUA annual meeting, we had two additional presentations at the sub-specialty meeting of the Geriatric Urological Society. The first presentation highlighted how the combination of cooling and high energy provided by Cooled ThermoTherapy 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.

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          In April 2009 at the American Urological Association (AUA) annual meeting, two separate presentations highlighted our five-year durability data, and the ability of urologists using our Cooled ThermoTherapy system to customize the treatment for individual patients.

          The most recent peer-reviewed journal publication of Cooled ThermoTherapy five-year data appeared in the Journal of Urology in May, 2011. Mynderse et al prospectively followed patients for five years during an FDA approved study of the Urologix Cooled ThermoCath® (CTC) Microwave Catheter. The results showed significant improvement in symptoms, Qmax and QoL, through the five-year time point. Participating clinical study sites included leading academic centers such as The Mayo Clinic, University of Texas Southwestern, Johns Hopkins and Duke University. In 2010, the AUA BPH Practice Guideline committee commented that the durability of high-energy transurethral microwave therapy (like Cooled ThermoTherapy) appeared to have improved due to the advent of higher energy, later generation devices. The figure below displays the sustained percentage improvement in AUASS and Qmax over the five-year follow-up period. The percent improvement over baseline for QoL followed a similar trend and was 41% better at year five.

 

(BAR CHART)

1 5 Year Results of a Multi-Center Trial of a New Generation Cooled TUMT for BPH, Roehrborn, C. et al, Moderated Poster, AUA 2009.

          The effectiveness of the Cooled ThermoTherapy BPH treatment was further demonstrated by Mynderse et al, when examining retreatment rates and patient follow-up in the study and is summarized in the figure below:

(PIE CHART)

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          The 5-year data described above are supported by multiple peer reviewed publications over the years showing the significant safety, effectiveness and durability of a CTT procedure. These published articles include:

 

 

 

 

1.

In 2001 Djavan et al compared 51 patients treated with Cooled ThermoTherapy vs. 52 treated with alpha blocker BPH medication. Symptom improvement, urinary flow rate, and QoL were measured.

 

 

 

 

2.

In 2003 Thalmann et al, conducted a prospective trial where 200 patients were treated with Cooled ThermoTherapy. Symptom improvement and urodynamics were measured.

 

 

 

 

3.

In 2003 Osman et al, compared the one-year subjective vs. urodynamic changes in 40 Cooled ThermoTherapy patients.

 

 

 

 

4.

In 2003 Miller et al, studied the durability of Cooled ThermoTherapy over three centers in 150 patients for five years.

 

 

 

 

5.

In 2003 Berger et al, studied Cooled ThermoTherapy in 78 high risk patients with acute urinary retention with a mean follow-up of 34 months.

 

 

 

 

6.

In 2004 Kaplan et al, conducted the largest prospective Cooled ThermoTherapy study which involved 345 patients treated over nine institutions.

          Djavan and colleagues noted improvements in BPH symptoms, QoL and Qmax for both the medication and Cooled ThermoTherapy groups; however, the Cooled ThermoTherapy group demonstrated a significantly greater improvement. Thalmann and colleagues demonstrated that the Qmax rates of Cooled ThermoTherapy patients increased from 6 to 13 mL per second at 24 months and symptoms scores were decreased from a mean of 23 to 3. Osman and colleagues reported mean AUASS reductions from 20.5 to 9, and mean Qmax increases from 9.2 to 15 mL per second. Miller et al reported ≥ 50% improvement in symptom score in 63% to 68% of patients available for follow-up at years 1, 2 and 3 and 50% and 51% of patients at years 4 and 5, respectively. Berger and colleagues reported 87.1% of patients in retention before treatment were able to void after Cooled ThermoTherapy, though 7.3% experienced repeat retention within two years. Kaplan and colleagues demonstrated that 65% of Cooled ThermoTherapy patients showed a greater than 50% reduction in AUASS the first year, with a mean improvement of 11.1 points. In the 85 patients available for five-year follow-up, absolute symptom score improvement was maintained at 8.4 points. Qmax improved from 7.5 to 10.5 mL per second at three years.

          In summary, since its introduction to the market in 1997, Urologix’ Cooled ThermoTherapy has been studied in numerous clinical trials; the results of which demonstrate significant and durable improvement in BPH symptoms, QoL, and urinary flow rate.

Prostiva RF Therapy

          Prostiva is the newest generation of transurethral RF needle ablation of the prostate. This technology was first used in the early 1990s, with the first preliminary clinical trials published in 1993. The first human clinical studies in the United States began in 1994, and subsequent U.S. Food and Drug Administration (FDA) clearance of the device was granted in 1996.

          Since FDA clearance of Prostiva RF Therapy, 4 randomized, prospective trials comparing it to transurethral resection of the prostate (TURP) have been published:

 

 

 

 

1.

In 1999 Roehrborn et al, summarized outcomes of symptom improvement, QoL, bladder wall pressure and Qmax at 6 months;

 

 

 

 

2.

In 2001 Hindley et al, compared Prostiva RF to TURP in 50 patients over 2 years, reporting on symptom improvement, QoL, and urodynamics;

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3.

In 2003 Cimentepe et al, also provided symptom improvement, QoL and urodynamics results after 18 months of follow-up on 59 patients; and

 

 

 

 

4.

In 2004 Hill and colleagues provided 5-year follow-up on same patient cohort as Roehrborn et al, 1999. Results included symptom improvement, QoL, and urodynamics in the same group of 121 patients.

 

 

 

          Roehrborn and colleagues (1999) found that symptom scores of Prostiva RF subjects were decreased by nearly 50% at six months. At 60 months Hill and colleagues (2004) reported symptom improvement for the same cohort of subjects was maintained. Hindley and colleagues (2001) reported symptoms were decreased by nearly 65% for Prostiva. QoL results followed a similar trend for Roehrborn and Hindley, and results were maintained at 5 years as reported by Hill et al. Cimentepe and colleagues (2003) found similar trends in symptom scores, QoL measures and urodynamics as reported by the other studies identified above. From these 4 studies, no significant short-term complications from Prostiva, including need for transfusion, were reported. In a confirmation of the results of the 4 randomized, prospective trials comparing Prostiva RF Therapy to TURP, the 2010 AUA BPH Practice Guidelines Committee concluded that: “… based on these reports, the symptom improvement is significant and sustained for both treatments, with somewhat greater improvement in the symptom score for TURP.”

          In addition to the 4 randomized prospective trials detailed above, numerous single-group cohort studies of Prostiva RF Therapy have been published as well. Symptom score improvement, QoL, and Qmax improved in a fashion very similar to that reported in the randomized trials. Short-term complications, including the need for transfusion, were uncommon or nonexistent. Erectile dysfunction and retrograde ejaculation were more common with TURP than Prostiva RF Therapy, and generally Prostiva patients reported very few sexual side effects. In fact, in 2010 the AUA BPH Practice Guideline Committee concluded that Prostiva RF Therapy is an attractive BPH therapy due to its safety; low perioperative complications, and low to nonexistent rate of sexual dysfunction. The Committee also noted that improvements in symptoms, QoL and Qmax were significant for Prostiva RF.

          In summary, since being introduced to the U.S. market, multiple prospective trials have established Prostiva RF Therapy’s significant clinical benefit as well as the attractive risk profile.

Sales and Marketing

          Our goal is to establish our technologies as the first treatment choice for BPH patients looking to avoid daily medication or who are dissatisfied with symptom improvement, cost and/or side effects from chronic BPH drugs.

          United States

          We have a sales and marketing team consisting of sales management, marketing support, mobile application specialists, direct sales representatives, inside sales representatives, and customer service, all of whom are dedicated to marketing our Cooled ThermoTherapy and Prostiva RF Therapy products and our Urologix mobile service. In the fourth quarter of fiscal year 2014, we launched a new sales deployment that added capacity to our inside sales channel, reduced and realigned our direct sales representatives, and increased the role of our mobile application specialists. The deployment was designed using a number of factors including matching our sales team member’s skills and resources to the identifiable needs of our customer base. The new deployment enables us to cover the vast majority of our business with sales team members that can support customer’s continued access to our technologies in a manner they are traditionally used to with a significantly smaller sales team. Our sales and marketing team will continue to provide market-leading quality of service to our urology customers.

          Urology customers access our Cooled ThermoTherapy and Prostiva capital equipment through a direct purchase, longer-term use basis, Urologix mobile service, or third party mobile service. Pricing for single-use CTC treatment catheters and Prostiva kits to direct customers and our Urologix mobile service varies based upon treatment volume.

          Our Urologix mobile application specialists transport the CoolWave and Prostiva capital equipment, along with the disposables, primarily to urologist offices, ambulatory surgery centers and in some cases hospitals on a scheduled basis, making the treatment available to urologists and their patients on an efficient and economical basis. As of June 30, 2014, our mobile service offering included 10 mobile routes in select geographies across the United States. In addition to our direct sales channel and Urologix owned mobile service, we continue to partner with independent third-party mobile service providers to provide urologists with access to our Cooled ThermoTherapy and Prostiva treatment.

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          Our marketing and patient education efforts are focused on four goals: (i) increasing urologist adoption of our technologies and optimizing patient selection for maximum patient benefit and appropriate utilization; (ii) increasing patient awareness of office based treatment options; (iii) exposing urologists to the significant patient need for effective non-surgical alternatives to medical management; and (iv) providing new evidence to educate urologists, provider networks and payers as to the cost effectiveness of our technologies. We employ specific tools to support each of these goals. For the first, this includes developing a well trained clinically oriented sales team that can explain both technologies and patient selection criteria and arming them with the tools and knowledge to be successful. For the second and third, our primary platform for raising patient awareness and increasing urologist exposure to the patient need is through the “Think Outside the Pillbox” patient education campaign. We have had repeated success with this effort with strong patient responses to our call to action and urologists are impressed with the turnout at the educational events. The result of these activities on our business is that the accounts that participate in this program have increased utilization, measured by revenue per account, after the campaign compared to before. For the fourth, we are working with our healthcare partners to complete new research showing the cost effectiveness of our technologies.

          As of June 30, 2014, we employed a total of 23 professionals in our sales and marketing departments and in our Urologix mobile service. The expenses for our Urologix mobile service are included in cost of goods sold.

          International

          Although our international sales efforts have historically been relatively modest, we believe that there is a potential market for Urologix products outside of the United States in certain, limited markets. In those regions outside of the U.S. where we sell our products, we utilize local distributors experienced in selling products to hospitals and urologists to assist us. During the second quarter of fiscal 2012, we assumed distribution responsibilities from Medtronic under the terms of the Transition Services and Supply Agreement for the distribution of the Prostiva RF Therapy system in Europe. We later entered into supply agreements with distributors in targeted countries within Europe for the sale of the Prostiva RF Therapy system. Our efforts have been directed at supporting existing users in markets with established reimbursement. Total international Prostiva sales for fiscal years 2014 and 2013 were $345,000 and $532,000, respectively.

Manufacturing

          We assemble CoolWave control units and CTC Advance catheter 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 became the legal manufacturer of the Prostiva RF Therapy system in April of 2013 and have agreements in place with third party manufacturing companies for the supply of the key components of the Prostiva RF Therapy system.

          We continuously seek to develop alternative sources for critical components. However, when alternative sourcing is not possible, we may 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.

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          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 CoolWave, Targis and CTC Advance products and market them in the European Union.

          As of June 30, 2014, we employed 22 individuals in our manufacturing department.

Research and Development

          Our research and development efforts and goals are currently focused primarily on improving the features and functions of the technologies used in our Cooled ThermoTherapy and Prostiva RF Therapy procedures; improving the ease of use, patient comfort and clinical response to treatment; reducing the manufacturing cost of our products and expanding the evidence of the cost effectiveness of our technologies.

          During the fiscal years ended June 30, 2014 and 2013, we spent $1.6 million and $2.3 million, respectively, on our research and development efforts. As of June 30, 2014, we employed 9 individuals in our research and development department.

Reimbursement

          We believe that third-party reimbursement is essential to the continued adoption of Cooled ThermoTherapy and Prostiva RF Therapy, and that clinical efficacy, overall cost-effectiveness and physician advocacy will be keys to maintaining such reimbursement. We estimate that 70% to 80% of patients who receive Cooled ThermoTherapy and Prostiva RF Therapy treatment in the United States are eligible for Medicare coverage. The remaining patients are covered by either private insurers, including traditional indemnity health insurers and managed care organizations, or are private paying patients. As a result, Medicare reimbursement is particularly critical for widespread and ongoing market adoption of Cooled ThermoTherapy and Prostiva RF Therapy in the United States.

          Each calendar year the Medicare reimbursement rates for all procedures, including Cooled ThermoTherapy and Prostiva RF Therapy, are determined by the Centers for Medicare and Medicaid Services (CMS). The Medicare reimbursement rate for physicians varies depending on the procedure type, 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 and Prostiva RF Therapy can be performed in the urologist’s office, an ambulatory surgery center (ASC), or a hospital as an outpatient procedure.

          CMS published their final rule in November 2013 for implementation during calendar year 2014 and the government acted to keep the Sustainable Growth Rate (SGR) from taking effect. The final rule resulted in an average reimbursement rate in the physician office setting for calendar year 2014 of $2,063 for Cooled ThermoTherapy and $1,899 for Prostiva RF Therapy. Cooled ThermoTherapy and Prostiva RF Therapy procedures are also reimbursed when performed in an ASC or a hospital outpatient setting, but these are a small portion of our business and the CMS rates will not have a material effect on our financial performance.

          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 maintain coverage and reimbursement across the United States. There can be no assurance that reimbursement determinations for either Cooled ThermoTherapy or Prostiva RF Therapy from these payers for amounts reimbursed to urologists to perform these procedures will be sufficient to compensate urologists for use of Urologix’ product and service offerings.

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          Internationally, reimbursement approvals for the Cooled ThermoTherapy and Prostiva procedures are awarded on an individual-country basis.

Medical Device Tax

          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 the next decade. Beginning in January 2013, the Federal health care reform legislation imposed significant new taxes on medical device manufacturers in the form of a 2.3% excise tax on all U.S. medical device sales. As a result, we have incurred approximately $223,000 and $106,000 in medical device excise tax for the 2014 and 2013 fiscal years, respectively. This significant increase in the tax burden on our industry could have a material, negative impact on our future results of operations and our cash flows.

Patents and Proprietary Rights

          We currently own U.S. and international patents. We also intend to file additional patent applications in the future. In addition, we have licensed numerous patents and patent applications related to the Prostiva technology as part of our worldwide exclusive license from Medtronic.

          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, Endo Pharmaceuticals (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 as a 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 we have far fewer resources than manufacturers of BPH drugs.

          Competition in the market for minimally invasive office-based treatments for BPH also exists. Competitive devices include low energy microwave combined with balloon dilatation (Medifocus, previously Boston Scientific); non-cooled, low energy microwave (Endo Pharmaceuticals/American Medical Systems); high energy microwave with limited cooling (Prostalund); and mechanically bracing open the urethra (Neotract).

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          Additional competitors may enter the market. We believe our technologies offer a durable solution as shown in peer reviewed clinical trials with a very favorable safety profile and that new technologies must demonstrate competitive long-term clinical data. Our products are FDA-approved for the largest treatable patient population compared to other office-based BPH therapies. Because our technologies do not require general anesthesia or have risk of significant bleeding or other complications, they can be performed in the urologist’s office or other outpatient environments. Further, because Cooled ThermoTherapy and Prostiva RF Therapy both combine high temperatures with cooling, we can achieve a controlled pattern of necrosis that conforms to a desired shape within the prostate, destroying hyperplastic tissues to create lasting results while preventing damage to the urethra, enhancing patient comfort and reducing complications.

Government Regulation

          Both domestic and international government regulation significantly affects the research and development, manufacturing and marketing of our products. Under the Federal Food, Drug and Cosmetic Act and the Public Health Service Act, the FDA holds the authority to regulate the manufacturing, distribution and sale of medical devices within the United States, while foreign sales are subject to governmental regulation and restrictions that vary by 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.

          Our Cooled ThermoTherapy systems have received FDA approval for sale in the United States as a Class III medical device. We have obtained the CE Mark for our Cooled ThermoTherapy systems though we are not currently distributing in Europe and product registration for distribution in Canada, Australia, and New Zealand. The Prostiva RF Therapy System has received FDA clearance for sale in the United States as a Class II medical device. The Prostiva RF Therapy System has also received the CE Mark for distribution in Europe.

          The FDA’s regulations require agency approval of a PMA supplement for Class III medical devices 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 our Cooled ThermoTherapy systems, or clearance for the Prostiva RF Therapy system 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.

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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 our operations or profitability.

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, 2014, we employed 61 individuals on a full-time basis compared to 95 individuals at June 30, 2013. None of our employees are covered under a collective bargaining agreement.

Prostiva Related Agreements

          On September 6, 2011, the Company entered into a License Agreement with Medtronic, Inc. (“Medtronic”) and its subsidiary, VidaMed, relating to the Prostiva RF Therapy. On September 6, 2011, the Company also entered into a related Transition Services and Supply Agreement with Medtronic, an Acquisition Option Agreement and Asset Purchase Agreement. These September 6, 2011 dated agreements with Medtronic are referred to as the “Transaction Documents.”

          On June 28, 2013, we entered into a Restructuring Agreement and Amendment to Transaction Documents (the “Restructuring Agreement”) with Medtronic and Medtronic VidaMed, Inc. The Restructuring Agreement relates to $7.5 million of obligations owed to Medtronic under the Transaction Documents. Under the Restructuring Agreement, on June 28, 2013, the Company delivered to Medtronic a promissory note (the “Note”) in the original principal amount of $5,332,538 and paid Medtronic $1,965,975 in satisfaction of the $7.5 million then owed to Medtronic under the Transaction Documents. In connection with the Restructuring Agreement, the Company agreed to permit Medtronic to designate an observer to the Board for as long as any obligations under the Note remain outstanding.

          The Note and the related security agreement are summarized below. In connection with the Restructuring Agreement, the Company also entered into an amendment to each of the License Agreement and the Transition and Services and Supply Agreement. The Transaction Documents, as amended by the Restructuring Agreement, are also each summarized below.

 

 

 

Note and Security Agreement: Interest on the principal amount of the Note will accrue at the annual rate of 6%, compounded annually. The Note requires that we make five equal annual payments of principal and accrued interest on March 31 of each year beginning March 31, 2015. All amounts under the Note are due and payable on March 31, 2019 or earlier upon a Change of Control (as defined in the Note). We may prepay the Note without penalty at any time. The Note also specifies certain customary events of default that will entitle Medtronic, after any required notice, to declare the outstanding obligations immediately due and payable. The Note contains customary representations, warranties and covenants by us.

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Pursuant to the terms of a Security Agreement dated as of June 28, 2013 by and between Urologix and Medtronic, our obligations under the Note are secured by a security interest in all of our assets, specifically excluding intellectual property (but including accounts receivable and proceeds of intellectual property).

 

 

 

License Agreement: Under the License Agreement, Medtronic and VidaMed granted us an exclusive, worldwide license under patents, trademarks and other intellectual property to make, have made, develop, use, import, export, distribute, market, promote, offer for sale and sell the Prostiva® RF Therapy System in the field of the radio frequency treatment of the prostate, including the treatment of benign prostatic hyperplasia (BPH).

 

 

 

In exchange for the license, we agreed to pay Medtronic a license fee of $1.0 million, of which $500,000 was paid upon the execution of the License Agreement. The remaining $500,000, less the $147,000 purchase price payable under the Asset Purchase Agreement and certain credits under the Transition Services and Supply Agreement, was due on September 6, 2012. The Asset Purchase Agreement and the Transition Services and Supply Agreement are described below. We are obligated to pay Medtronic royalties on net sales of product up to an annual maximum royalty amount. Beginning in the second contract year, we are obligated to pay Medtronic a minimum annual royalty amount. Earned royalties are payable thirty days following the end of each contract year. Beginning in the second contract year, additional amounts, if any, required to meet the minimum royalty obligations are payable ninety days following the end of each contract year. We are also obligated to pay an annual license maintenance fee of $65,000 on September 6 of each contract year beginning September 6, 2012.

 

 

 

In addition, if total payments by us to Medtronic under the License Agreement (other than the license maintenance fee) and under the Asset Purchase Agreement (described below) reach an aggregate of $10 million, we will have no further payment obligations to Medtronic and will thereafter have a fully paid up, royalty-free and perpetual license. The term of the License Agreement is ten years or the earlier closing date of a purchase under the Acquisition Option Agreement described below. In addition, either party may terminate the License Agreement by written notice for breach after an opportunity to cure, Medtronic may terminate the License Agreement in the event of our bankruptcy or insolvency, and the license will automatically terminate concurrently with certain terminations of the Transition Services and Supply Agreement (described below). Upon termination of the License Agreement, all rights to the Prostiva intellectual property will revert back to Medtronic and the Transition Services and Supply Agreement and Acquisition Option Agreement will terminate. Further, upon termination of the License Agreement by Medtronic as a result of our breach or bankruptcy, and following our purchase of assets under the Asset Purchase Agreement, Medtronic will have the right to repurchase such assets from us for the same purchase price we previously paid. Medtronic and VidaMed also entered into sublicenses to grant us rights to certain intellectual property relating to the Prostiva treatment.

 

 

 

Under the License Agreement, if a closing occurs under the Acquisition Option Agreement (described below), Medtronic and certain of its affiliates will be bound by a non-competition obligation for a two-year period following the closing of the transactions under the Acquisition Option Agreement, subject to certain exceptions.

 

 

 

Acquisition Option Agreement: Under the Acquisition Option Agreement with Medtronic, we have the right to purchase and Medtronic has the right to require us to purchase the assets associated with the Prostiva treatment and the licenses and sublicenses granted by Medtronic and VidaMed. The transaction will be structured as a purchase by us of all of VidaMed’s common stock and any other Prostiva assets such as patents, trademarks and other intellectual property.

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In the case of our exercise of our option to purchase, the purchase price will be $10 million less license fees and royalty amounts (including, if applicable, minimum royalty amounts) previously paid under the License Agreement and the purchase price paid under the Asset Purchase Agreement. In the case of Medtronic’s exercise of its option to require us to purchase, the purchase price will be the price stated by Medtronic in its exercise notice, provided that price is accepted by us in our sole discretion. Our rights and Medtronic’s rights under the Acquisition Option Agreement may be exercised until the License Agreement expires or terminates or, if earlier, the date the other party’s notice of exercise is received in accordance with the Acquisition Option Agreement. Upon exercise of our call option or Medtronic’s put option, we will grant Medtronic an exclusive, royalty-free, irrevocable, transferrable, sublicensable, worldwide license to exploit the patents we acquire in the Acquisition Option Agreement outside of the field of the radio frequency treatment of the prostate, including the treatment of BPH.

 

 

 

Transition Services and Supply Agreement: We entered into a Transition Services and Supply Agreement with Medtronic under which Medtronic provided us with transition services relating to manufacturing, sourcing, operations, compliance, quality, regulatory and other matters. Through the Transition Services and Supply Agreement, Medtronic appointed Urologix as its exclusive U.S. distributor (excluding Puerto Rico) of the Prostiva treatment until such time as we received the regulatory approvals necessary to allow us to sell the product in the U.S. Under the provisions of the Transition Services and Supply Agreement, the parties also agreed upon the handling of product warranty claims, agreed upon a transition plan for regulatory matters, and entered into a quality agreement. In addition, Medtronic assigned a supply agreement to us, will place orders with certain suppliers and sell those components to us at its cost, and will transfer certain other components to us. In April 2013, we received the regulatory approvals necessary to allow us to sell the product in the U.S. and accordingly, the parties have substantially completed their obligations under the Transition Services and Supply Agreement.

 

 

 

Asset Purchase Agreement: We entered into an Asset Purchase Agreement through which Medtronic was required to sell to us, and we were required to purchase from Medtronic, certain tangible assets used in the Prostiva business for a purchase price of $147,000.

 

 

 

Payment of the $1,965,975 in cash to Medtronic on the date of the Restructuring Agreement constituted payment in full of the following amounts: (i) earned royalties under the License Agreement as of September 6, 2012; (ii) $353,000 owing as the license fee under the License Agreement as of September 6, 2012; and (iii) $65,000 owing as the license maintenance fee under the License Agreement as of September 6, 2012; (iv) payment in full of the $147,000 purchase price under the Asset Purchase Agreement; (v) $52,500 for additional Prostiva generators purchased; and (vi) payment in full of $775,725 owing under outstanding invoices and $63,750 owing as monthly fees under the Transition Services and Supply Agreement.

 

 

 

The issuance of the Note pursuant to the Restructuring Agreement satisfied in full the outstanding liabilities balance of $5,332,538 relating to outstanding invoices for inventory sold to us as part of the acquisition and under the Transition Services and Supply Agreement.


 

 

ITEM 1A.

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.

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Risks Related to Our Financial Condition

As a result of our history of operating losses and inadequate operating cash flow, there is a substantial doubt about our ability to continue as a going concern.

          We have experienced significant operating losses to date, including net losses of $7.6 million for fiscal year 2014 and $4.3 million in fiscal year 2013. As of June 30, 2014, we had approximately $718,000 in cash. Although we completed a secondary offering in the first quarter of fiscal 2013 which contributed approximately $3.8 million of net proceeds, as a result of our history of operating losses and negative cash flows from operations, as well as our need for working capital to support operations, there is substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary as a result of this uncertainty. As a result of the substantial doubt about our ability to continue as a going concern, we may experience possible adverse effects from our customers, on our creditworthiness, or on investor confidence, any of which may have a material adverse effect on our business and the trading price of our common stock.

          Our ability to continue as a going concern depends upon our ability to generate expected revenues both from sales of our Cooled ThermoTherapy and Prostiva products and our ability to generate positive cash flow from our business.

          On April 10, 2014, management completed the implementation of a strategic restructuring plan which included deploying a new distribution model and operational structure to refocus the allocation of company resources and improve the Company’s ability to achieve profitability and generate positive cash flow from operations. The targeted annual savings from this restructuring total over $4 million annually compared to the first half of fiscal year 2014. These savings impact both cost of goods sold and operating expenses. However, there can be no assurance that we will be successful in improving our business or obtaining positive cash flows from operations.

We have a history of unprofitability and may not be able to generate sufficient cash flow to fund our operations.

          We incurred an operating loss of $6.9 million for the year ended June 30, 2014 and $3.9 million for the year ended June 30, 2013. From our inception to June 30, 2014, we have incurred losses of approximately $126.6 million. Moreover, we have historically not generated sufficient operating cash flow to fund our operations. Based on our history of inadequate cash flow, we may not be able to fund our short-term capital needs through operating cash flow alone. To fund our long-term capital and liquidity needs, we must increase the revenues received from sales of our products to generate cash flow and operate in a profitable manner.

          Our ability to execute our business plan and grow our business depends on our ability to generate sufficient cash flow from operations or our ability to obtain additional capital if we do not generate sufficient cash flow from operations. Our cash flow depends, in part, on our ability to generate significant revenue from existing and new customers, and manage expenses, as well as general economic conditions and other factors over which we have little control.

          We cannot offer assurance that we will generate increases in our revenues, attain a level of profitable operations, or successfully implement our business plan or future business opportunities.

We may not realize the expected benefits from our strategic restructuring initiatives, and they may result in unintended adverse impacts to our business.

          The Company made the strategic decision to restructure the organization, including deploying a new distribution model and operational structure to refocus the allocation of company resources and improve the Company’s ability to achieve profitability and generate positive cash flow from operations. On April 10, 2014, we completed the implementation of this plan. The strategic reorganization included implementing a leaner and more efficient sales team which will continue to support our customer base in a deployment designed to create a more profitable sales model. In addition, we have dedicated resources charged with pursuing new opportunities to expand our business by targeting large provider organizations such as ACOs and certain hospital systems which are highly-focused on cost-effective treatment alternatives like our in-office BPH technologies.

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          While the strategic restructuring is expected to generate over $4 million in annualized expense reductions beginning in the fourth quarter of fiscal year 2014 and to prove our ability as a Company to demonstrate our value proposition in this evolving healthcare system, we may not realize the expected benefits of our restructuring initiatives. In addition, these actions could yield unintended consequences, such as distraction of management and employees, business disruption, reduced employee morale and productivity and unexpected additional employee attrition, including the inability to attract or retain key personnel. These consequences could negatively affect our business, financial condition and results of operations. We cannot guarantee that these restructuring measures, or other expense reduction measures we take in the future, will result in the expected cost savings and additional operating efficiency intended.

We may need additional capital and any additional capital we seek may not be available in the amount or at the time we need it.

          We used approximately $1.6 million of net cash for operating and investing activities in the year ended June 30, 2014 and ended our 2014 fiscal year with approximately $718,000 in cash. We believe the key factors to funding our long-term capital needs will be our ability to generate revenue and positive cash flow from the sale of our products. To fund our short-term capital needs if we are not able to immediately increase the revenues we receive from product sales, generate positive cash flow or operate in a profitable manner, we will need to raise funds in the future to execute our business plan and pursue our strategic goals.

          If we raise funds in the future, we cannot assure you that additional financing will be available in the amount or at the time we need it, or that it will be available on acceptable terms or at all. We may obtain future additional financing by incurring indebtedness or from an offering of our equity securities or both. Our efforts to raise additional funds from the sale of equity may be hampered by depressed trading price of our common stock and the fact that our common stock is listed on the OTC Markets Group’s OTCQB Marketplace. Our efforts to raise funds by incurring additional indebtedness may be hampered by the fact that we have approximately $5.3 million in outstanding indebtedness to Medtronic and the challenges we may face in servicing our current indebtedness with cash flow from future operations, as well as the fact that all of our assets (other than our intellectual property) are pledged as collateral to secure our existing debt. 

          If we issue additional equity securities to raise funds, the ownership percentage of our existing shareholders would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of common stock. If we raise additional funds by incurring debt, we could incur significant expense and become subject to covenants that could affect the manner in which we conduct our business. If we cannot timely raise any needed funds, we might be forced to make substantial reductions in our operating expenses, which could adversely affect our ability to implement our business plan and ultimately our viability as a company.

          Our expected financing needs are based upon management estimates as to future revenue and expense. Our business plan and financing needs are subject to change based upon, among other factors, our ability to generate revenue from both the Prostiva RF Therapy System product and our Cooled ThermoTherapy products and our ability to effectively manage costs. If our estimate of our financing needs change, we may need additional capital more quickly than we expect or we may need a greater amount of capital.

Risks Related to Our Common Stock

Our common stock was transferred from The NASDAQ Capital Market (“NASDAQ”) to OTC Markets Group’s OTCQB Marketplace (“OTCQB”) which could impair our ability to raise capital and will likely hinder our investors’ ability to trade our common stock in the secondary market.

          On June 5, 2013, our Board of Directors authorized the transfer of our common stock from The NASDAQ Capital Market (“NASDAQ”) and the subsequent transfer to OTC Markets Group’s OTCQB Marketplace (“OTCQB”). Beginning on June 7, 2013, our common stock is traded on the OTCQB tier of the OTC Markets, an inter-dealer, over-the-counter market. As compared to securities quoted on a national exchange such as NASDAQ, selling our common stock could be more difficult because smaller quantities of shares are likely to be bought and sold, transactions could be delayed, security analysts’ coverage of us may be reduced, and our common stock may trade at a lower market price than it otherwise would.

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          In addition, our common stock is now 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 could find it more difficult to buy or sell our common stock in the open market.

          We also believe that moving to the OTCQB Marketplace could impair our ability to raise any capital we may require in the future through an equity financing. There can be no assurance that our common stock may be sold without a significant negative impact on the price per share or that any market will continue to exist for our common stock.

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:

 

 

 

 

the timing, volume and pricing of customer orders for both control units and procedure kits;

 

the impact to the marketplace of competitive products and pricing;

 

the timing of expenses, including those relating to sales and marketing, and research and development;

 

product availability and cost; and

 

changes in or announcements regarding potential changes to the Centers for Medicare and Medicaid Services (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:

 

 

 

 

actual or anticipated variations in our operating results;

 

technological innovations or new commercial products introduced by our competitors;

 

developments regarding government and third-party reimbursement;

 

changes in government regulation;

 

government investigation of us or our products;

 

result of regulatory process for approval of our devices;

 

changes in reimbursement rates or methods affecting our products;

 

developments concerning proprietary rights;

 

litigation or public concern as to the safety of our products or our competitors’ products;

 

investor perception of us and our industry;

 

general economic and market conditions including market uncertainty;

 

national or global political events;

 

difficulties with international expansion or operations;

 

public confidence in the securities markets and regulation by or of the securities markets; and

 

changes in senior management.

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          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. Further, there has been limited trading volume in our common stock, which tends to depress the market prices of our common stock and may make it difficult for you to resell shares at time and prices that you feel are appropriate.

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.

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 us, or discourage a third party from attempting to acquire control of us, including:

 

 

 

 

the provisions of Minnesota law relating to business combinations and control share acquisitions;

 

the provisions of our bylaws regarding the business properly brought before shareholders;

 

the provisions of our articles of incorporation and bylaws regarding our staggered board of directors;

 

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

 

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 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.

Risks Related to Our Business

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 Centers for Medicare and Medicaid Services (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 our products 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. 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 these safe and effective minimally invasive office-based therapies deliver 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.

          We face intense competition from other providers of therapies and treatments for BPH, primarily the pharmaceutical companies that sell BPH medications. Drug therapy is currently the first-line therapy prescribed by most physicians – both primary care physicians and urologists – in the United States for BPH. We also face competition from other device manufacturers and surgical manufacturers that provide BPH therapies. Some 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 urologists choose among BPH treatments based upon a number of factors, including clinical effectiveness, patient comfort and safety, and price and reimbursement rates. Our sales and marketing efforts are focused on differentiating our products from other competitive BPH therapies based upon these factors with the goal of establishing our products as the first-line therapeutic procedure prescribed by most physicians. We believe that in order to compete successfully with pharmaceutical companies, we must develop and execute compelling sales and marketing campaigns that educate urologists and patients as to the benefits of our products. However, even if we are able to compete successfully, we may not be able to do so in a profitable manner.

          Additionally, the medical device and pharmaceutical industries are 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. Our competitors may develop or market technologies, products and services, including drug-based treatments that are more effective or commercially attractive than products 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.

All of our revenues are derived from minimally invasive therapies that treat one disease, benign prostatic hyperplasia (BPH).

          All of our revenues are derived from sales of our Cooled ThermoTherapy control units and single-use treatment catheters and treatments delivered through our Urologix mobile service and from sales of the Prostiva® Radio Frequency (RF) System. Both Cooled ThermoTherapy products and the Prostiva products are minimally invasive treatments for benign prostatic hyperplasia (BPH). As a result, our success is solely dependent upon the success of minimally invasive treatments for BPH. We do not have any other lines of business or other significant sources of revenue to rely upon if we are unable to sell our products. If selling prices or the market for these products decline or we are not able to more widely popularize the use of our minimally invasive therapies among urologists and patients. Our lack of diversification means that we may not be able to adapt to changing market conditions, changes in regulation (including regulation affecting reimbursement for our products), increased competition or any decline in demand for minimally invasive BPH treatments.

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.

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          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.

          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.

Our business, financial condition, results of operations and cash flows could be significantly and adversely affected by recent healthcare reform legislation, including, most immediately, by the medical device excise tax that is effective January 1, 2013.

          The Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act of 2010 were enacted into law in March 2010. As a U.S. based company with significant sales in the United States, these health care reform laws will materially impact us and are expected to materially impact us. Certain provisions of these laws will not be effective for a number of years and there are many programs and requirements for which the details have not yet been fully established. Accordingly, it is unclear what the full impact will be from the recent health care reform legislation. However, beginning in January 2013, the legislation imposed a 2.3% excise tax on sales of our Cooled ThermoTherapy and Prostiva products in the United States. We expect the new tax will materially and adversely affect our business, cash flows and results of operations. For the fiscal years ended June 30, 2014 and 2013, we paid approximately $223,000 and $106,000, respectively in medical device excise tax.

          The laws also focus on a number of Medicare provisions aimed at improving quality and decreasing costs. The Medicare provisions include value-based payment programs, increased funding of comparative effectiveness research, reduced hospital payments for avoidable readmissions and hospital acquired conditions, and pilot programs to evaluate alternative payment methodologies that promote care coordination (such as bundled physician and hospital payments). Additionally, the recent health care reform legislation includes a reduction in the annual rate of inflation for Medicare payments to hospitals that began in 2011 and the establishment of an independent payment advisory board to recommend ways of reducing the rate of growth in Medicare spending beginning in 2014. We cannot predict what healthcare programs and regulations will be ultimately implemented at the federal or state level, or the effect of any future legislation or regulation. However, any changes that lower reimbursement for our products or reduce medical procedure volumes could adversely affect our business and results of operations.

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We are dependent upon a limited number of third-party suppliers for our products.

          We manufacture CoolWave control units and single-use treatment catheters for use with 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. 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 CoolWave control units and CTC Advance® catheter procedure kits, we outsource the remaining manufacturing for our products. We assemble 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.

          We also outsource the manufacturing of the Prostiva product line. Our reliance on outside suppliers for our components and for the Prostiva product involves risks, including limited control over the price and uncertainty regarding timely delivery and quality of parts and product. 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.

          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 likely will need either FDA approval of a pre-market approval (PMA) supplement or FDA clearance of a 510(k) application to make a change in component or product manufacturing. The process for obtaining FDA approval or FDA clearance may result in extended delays in delivery of our product to customers and increased costs associated with the change.

          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.

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.

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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 or licensed 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.

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 Gregory J. Fluet, our Chief Executive Officer and Interim Chief Financial Officer and Lisa Ackermann, our Executive Vice President, Sales and Marketing. Each of these members of senior management is employed “at will” by us. However, if there is a change in control and we terminate Mr. Fluet’s or Ms. Ackermann’s employment without cause, we would be required to make specified payments to him or her as described in an amended and restated change of control letter agreement dated April 23, 2012. We do not have key person life insurance on any member of senior management.

          Our future success also depends on our continuing ability to attract, retain and motivate highly qualified managerial, technical and sales personnel. Our inability to retain or attract qualified personnel could have a significant negative effect and thereby materially harm our business and financial condition.

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Risks Related to the Prostiva RF Therapy System and Related Agreements

          On September 6, 2011, we entered into a license agreement and other agreements with Medtronic, Inc. (“Medtronic”) and its subsidiary, VidaMed, Inc., relating to the Prostiva RF Therapy System. In addition, on June 28, 2013 we entered into a Restructuring Agreement and Amendment to Transaction Documents (the “Restructuring Agreement”). For a summary of the agreements with Medtronic, please see “Prostiva Related Agreements” in the “Business” section of this Annual Report on Form 10-K. The addition of the Prostiva RF product to our business and these agreements present additional risks to us and our business that are described below.

If we fail to comply with our obligations under our license agreement with Medtronic or if the license agreement terminates for any reason, we would lose the ability to sell the Prostiva product.

          In September 2011, we entered into a License Agreement with Medtronic, Inc. and its subsidiary, VidaMed, Inc., that granted us an exclusive worldwide license to the Prostiva RF Therapy System in the field of the radio frequency treatment of the prostate, including BPH. At the same time we entered into the License Agreement, we also entered into other agreements with Medtronic and VidaMed, including a Transition Services and Supply Agreement, an Acquisition Option Agreement and an Asset Purchase Agreement. Summaries of each of these agreements may be found in the “Business” section of this Annual Report on Form 10-K under the heading “Prostiva Related Agreements.”

          The term of the License Agreement is ten years or the earlier closing date of a purchase under the Acquisition Option Agreement. In addition, either party may terminate the License Agreement by written notice for breach after an opportunity to cure, and Medtronic may terminate the License Agreement in the event of our bankruptcy or insolvency. The License Agreement also will automatically terminate concurrently with certain terminations of the Transition Services and Supply Agreement, including terminations relating to regulatory challenges specified under the Transition Services and Supply Agreement. Upon termination of the License Agreement, all rights to the Prostiva intellectual property will revert back to Medtronic and the Transition Services and Supply Agreement and Acquisition Option Agreement will terminate. Further, upon termination of the License Agreement by Medtronic as a result of our breach or bankruptcy or default on the promissory note entered into with Medtronic on June 28, 2013, Medtronic will have the right, but not the obligation, to repurchase the assets from us that we previously purchased under the Asset Purchase Agreement for the same purchase price we previously paid.

          Any termination of the License Agreement would result in the loss of the right to sell the Prostiva product and would materially harm our business. In addition, if the License Agreement were terminated, we would not be able to recoup the transaction expenses associated with the acquisition of the Prostiva business or the expenses we have incurred associated with the integration of the Prostiva business.

We have not paid certain amounts due to Medtronic under the license agreement, which with proper notice and opportunities to cure would entitle Medtronic to terminate the license agreement for breach and entitle Medtronic to accelerate and demand repayment of our $5.3 million promissory note to Medtronic.

          Under the license agreement, royalty payments for Prostiva products are paid one year in arrears based on the contract year. The royalty payment due in the second quarter of fiscal year 2014 of $650,000 has not been paid. This amount is included in the short-term deferred acquisition payment liability as of June 30, 2014. In addition, we did not pay the annual $65,000 licensing maintenance fee due on October 6, 2013 which is included in other accrued expenses as of June 30, 2014.

          The non-payment does not entitle Medtronic to terminate the license agreement unless Medtronic provides written notice and an opportunity to cure the default. The non-payment under the license agreement is also not an event of default under our promissory note to Medtronic dated June 28, 2013 in the principal amount of approximately $5.3 million (the “Note”) unless Medtronic provides written notice and an opportunity to cure the default. We have not received any notice from Medtronic as of the date of this filing.

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          Medtronic may terminate the license agreement by written notice for breach after an opportunity to cure and in the event of our bankruptcy or insolvency. If the license agreement is terminated, our rights to sell the Prostiva product would be terminated. Further, upon an event of default under the Note (which includes a material breach of the license agreement or other transaction documents after written notice and an opportunity to cure), Medtronic may accelerate and declare due all amounts outstanding under the Note. If Medtronic accelerated and declared due all amounts outstanding under the Note, we would not have adequate cash to repay the amounts due, resulting in a loss of control of our business or bankruptcy.

          The Company’s ability to continue as a going concern is also dependent upon avoiding an event of default under the Note and avoiding termination of the license relating to the Prostiva product, whether by negotiation with Medtronic, cure of any non-payment giving rise to an event of default or termination, or otherwise. There can be no assurance that we will be able to cure any potential event of default of the Note or cure any breach of any agreement with Medtronic, maintain compliance with our agreements with Medtronic, raise additional capital or otherwise improve our liquidity, or improve our operating or financial performance. The Company’s cash needs and availability will be determined by a number of factors including operating performance and the timing of payment of the $650,000 in annual royalties.

The Prostiva RF Therapy System license, Restructuring Agreement and other agreements require significant future payments.

          Under the License Agreement, Transition Services and Supply Agreement, and Restructuring Agreement with Medtronic for the Prostiva RF Therapy System, we are obligated to make certain future payments, including:

 

 

 

 

$65,000 annually as a license maintenance fee;

 

Royalties on net sales of product payable thirty days following the end of each contract year (or minimum royalty amounts beginning in the second contract year that are payable ninety days following the end of each contract year);

 

five equal annual payments of principal and accrued interest beginning on March 31, 2015 on the $5,332,538 promissory note which accrues interest at 6 percent compounded annually. The promissory note represents amounts owed to Medtronic for inventory received as part of the acquisition of the Prostiva business, as well as inventory purchased subsequent to the acquisition.

          Our failure to pay these amounts when due with proper notice and opportunities to cure, would be a breach of the agreement, entitling Medtronic to terminate these agreements and our right to sell the Prostiva product after proper notice and an opportunity to cure.

The addition of the Prostiva RF Therapy System to our product portfolio may result in the exacerbation of certain risks to our business.

          As detailed above, we face a number of risks in our business and risks associated with our Cooled ThermoTherapy products. Because the addition of the Prostiva RF Therapy System to our product portfolio presents some of these same risks to us, these risks may be magnified. For example, with the Prostiva RF Therapy System, we face risks associated with:

 

 

 

 

reliance on third party reimbursement;

 

intense competition, primarily from pharmaceutical companies that market and sell BPH medication;

 

our lack of diversification because our products are minimally invasive treatments for BPH;

 

significant impact of government regulation;

 

risk of product liability claims;

 

risk of managing third party manufacturers; and

 

the possibility of product recalls.

          If we are unable to address these risks as they relate to both the CTT and Prostiva products, our results of operations, cash flows and the value of our common stock would be negatively impacted.

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ITEM 1B.

UNRESOLVED STAFF COMMENTS

          Not applicable.

 

 

ITEM 2.

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.

 

 

ITEM 3.

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.

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

          Not applicable.

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PART II

 

 

ITEM 5.

MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

          Our common stock was traded on The Nasdaq Capital Market under the symbol “ULGX” through June 6, 2013. As a result of our voluntary delisting from the Nasdaq Capital Market on June 5, 2013, our common stock began trading on the OTCQB Marketplace (“OTCQB”) under the symbol “ULGX” on June 7, 2013. The following table sets forth quarterly high and low last-sale prices of our common stock for each quarter during the past two fiscal years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter

 

Fiscal Year

 

 

 

 

First

 

Second

 

Third

 

Fourth

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

High

 

$

0.40

 

$

0.33

 

$

0.20

 

$

0.20

 

 

 

 

Low

 

 

0.15

 

 

0.14

 

 

0.14

 

 

0.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

 

High

 

$

1.00

 

$

0.84

 

$

0.77

 

$

0.54

 

 

 

 

Low

 

 

0.64

 

 

0.61

 

 

0.54

 

 

0.16

 

          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, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Plan Category

 

 

Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights

 

 

Weighted-average exercise
price of outstanding options,
warrants and rights

 

 

Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in first column)

 

Equity compensation plans approved by security holders

 

 

 

2,050,344

 

 

 

$                  1.17   

 

 

 

1,319,354

 

Equity compensation plan not approved by security holders

 

 

 

              -

 

 

 

                     -

 

 

 

             -

 

Total

 

 

 

2,050,344

 

 

 

$                  1.17   

 

 

 

1,319,354

 

          The “equity compensation plans approved by security holders” listed above represent shares issuable under the Urologix, Inc. 2012 Stock Incentive Plan, an “employee benefit plan” as defined by Rule 405 of Regulation C of the Securities Act of 1933. Shareholders approved the most recent Stock Incentive Plan at the 2012 Annual Meeting of Shareholders held on November 16, 2012.

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ITEM 6.

SELECTED FINANCIAL DATA


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years ended June 30,

 

 

 

2014

 

2013

 

2012

 

2011

 

2010

 

 

 

(in thousands, except per share data)

 

Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

14,235

 

$

16,590

 

$

17,027

 

$

12,571

 

$

14,771

 

Cost of goods sold

 

 

8,142

 (1)

 

8,407

 (2)

 

8,645

 

 

6,030

 

 

6,569

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

6,093

 

 

8,183

 

 

8,382

 

 

6,541

 

 

8,202

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

5,850

 

 

7,719

 

 

7,027

 

 

5,197

 

 

5,657

 

General and administrative

 

 

2,299

 

 

2,515

 

 

3,393

 

 

2,808

 

 

2,944

 

Research and development

 

 

1,625

 

 

2,269

 

 

2,189

 

 

2,238

 

 

1,834

 

Change in value of acquisition consideration

 

 

(105

)

 

(447

)

 

(172

)

 

-

 

 

-

 

Impairment of goodwill

 

 

3,036

 

 

-

 

 

-

 

 

-

 

 

-

 

Gain on demutualization

 

 

-

 

 

(321

)

 

-

 

 

-

 

 

-

 

Medical device tax

 

 

223

 

 

106

 

 

-

 

 

-

 

 

-

 

Amortization of identifiable intangible assets

 

 

95

 

 

104

 

 

90

 

 

24

 

 

24

 

Impairment of identifiable intangible assets

 

 

-

 

 

160

 (3)

 

-

 

 

-

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

 

13,023

 

 

12,105

 

 

12,527

 

 

10,267

 

 

10,459

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(6,930

)

 

(3,922

)

 

(4,145

)

 

(3,726

)

 

(2,257

)

Interest income/(expense), net

 

 

(693

)

 

(555

)

 

(482

)

 

1

 

 

-

 

Gain on debt extinguishment

 

 

-

 

 

206

 

 

-

 

 

-

 

 

-

 

Foreign currency exchange gain/(loss)

 

 

(1

)

 

(7

)

 

(13

)

 

-

 

 

-

 

Loss before income taxes

 

 

(7,624

)

 

(4,278

)

 

(4,640

)

 

(3,725

)

 

(2,257

)

Income tax expense (benefit)

 

 

(16

)

 

14

 

 

55

 

 

8

 

 

(88

)

Net loss

 

$

(7,608

)

$

(4,292

)

$

(4,695

)

$

(3,733

)

$

(2,169

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share:

 

$

(0.36

)

$

(0.21

)

$

(0.32

)

$

(0.26

)

$

(0.15

)

Weighted average shares used in computing net loss per share

 

 

21,219

 

 

20,703

 

 

14,741

 

 

14,556

 

 

14,508

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share:

 

$

(0.36

)

$

(0.21

)

$

(0.32

)

$

(0.26

)

$

(0.15

)

Weighted average shares used in computing net loss per share

 

 

21,219

 

 

20,703

 

 

14,741

 

 

14,556

 

 

14,508

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2012

 

2011

 

2010

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

718

 

$

2,290

 

$

1,899

 

$

3,061

 

$

5,702

 

Working capital/(deficit) (4)

 

 

(612

)

 

3,484

 

 

(1,520

)

 

4,038

 

 

6,720

 

Total assets

 

 

5,667

 

 

12,527

 

 

12,676

 

 

6,763

 

 

10,203

 

Total liabilities

 

 

12,644

 

 

12,107

 

 

12,050

 

 

1,917

 

 

1,997

 

Shareholders’ equity/(deficit)

 

 

(6,977

)

 

420

 

 

626

 

 

4,846

 

 

8,206

 


 

 

(1)

Includes a $739,000 non-cash charge to write down the value of Prostiva capital equipment inventory.

 

(2)

Includes a $274,000 non-cash charge to partially impair our developed technology acquired as part of the Prostiva acquisition as of June 30, 2013.

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(3)

Represents the following non-cash charges to partially impair intangible assets acquired as part of the Prostiva acquisition as of June 30, 2013:


 

 

 

 

Customer Base

$95,000

 

Trademarks

$65,000


 

 

(4)

Significant increase in working capital from fiscal year 2012 to fiscal year 2013 is a result of the restructuring of the Prostiva liabilities from accounts payable and short-term deferred acquisition payment to long-term debt.

SELECTED QUARTERLY FINANCIAL DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30, 2014

 

 

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

3,779

 

$

3,806

 

$

3,356

 

$

3,294

 

Gross profit

 

 

1,864

 

 

1,798

 

 

849

 (1)

 

1,583

 

Loss before income taxes

 

 

(1,322

)

 

(1,069

)

 

(1,646

)

 

(3,587

(2)

Net Loss

 

 

(1,334

)

 

(1,085

)

 

(1,664

)

 

(3,525

(2)

Basic net loss per share

 

$

(0.06

)

$

(0.05

)

$

(0.08

)

$

(0.17

)

Diluted net loss per share

 

$

(0.06

)

$

(0.05

)

$

(0.08

)

$

(0.17

)


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30, 2013

 

 

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

3,970

 

$

4,354

 

$

4,082

 

$

4,184

 

Gross profit

 

 

2,016

 

 

2,237

 

 

2,026

 

 

1,905

 (3)

Loss before income taxes

 

 

(1,053

)

 

(954

)

 

(988

)

 

(1,281

(4)

Net Loss

 

 

(1,069

)

 

(970

)

 

(1,005

)

 

(1,247

(4)

Basic net loss per share

 

$

(0.05

)

$

(0.05

)

$

(0.05

)

$

(0.06

)

Diluted net loss per share

 

$

(0.05

)

$

(0.05

)

$

(0.05

)

$

(0.06

)


(1) Includes a $739,000 non-cash charge for the write-down of Prostiva capital equipment inventory.
   
(2) Includes a non-cash impairment charge of $3,036,000 related to goodwill acquired as part of the Prostiva acquisition.
   
(3) Includes a non-cash impairment charge of $274,000 related to developed technologies acquired as part of the Prostiva acquisition.
   
(4) Includes the following non-cash charges to partially impair intangibles assets acquired as part of the Prostiva acquisition as of June 30, 2013:

 

 

 

 

 

Developed Technologies

 

$

274,000

 

Customer Base

 

 

95,000

 

Trademarks

 

 

65,000

 

 

 

$

434,000

 

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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, office-based therapies for the treatment of the symptoms and obstruction resulting from non-cancerous prostate enlargement also known as benign prostatic hyperplasia (BPH). These therapies use proprietary technology in the treatment of BPH, a disease that affects more than 30 million men worldwide and is the most common prostate problem for men over 50. We market both the Cooled ThermoTherapy™ (CTT) product line and the Prostiva® Radio Frequency (RF) Therapy System. We acquired the exclusive worldwide license to the Prostiva RF Therapy System in September 2011. These two technologies are designed to be used by urologists in their offices without placing their patients under general anesthesia. CTT uses a flexible catheter to deliver targeted microwave energy combined with a unique cooling mechanism that protects healthy urethral tissue and enhances patient comfort to provide safe, effective, lasting relief from BPH voiding symptoms by the thermal ablation of hyperplastic prostatic tissue surrounding the urethra. The proprietary Prostiva RF Therapy System delivers radio frequency energy directly into the prostate through the use of insulated electrodes deployed from a transurethral scope, ablating targeted prostatic tissue under the direct visualization of the urologist. These focal ablations reduce constriction of the urethra, thereby relieving BPH voiding symptoms. These two proven technologies have slightly different, yet complementary, patient indications and providing them to our urologist customers enables them to treat a wide range of patients in their office. We believe that these office-based BPH therapies are efficacious, safe and low cost solutions for BPH as they have shown results clinically superior to those of daily BPH medication and without the complications and side effect profile inherent with surgical procedures.

          Our goal is to strengthen our business by efficiently deploying our resources to support adoption of Cooled ThermoTherapy and Prostiva RF Therapy as the preferred therapeutic options considered by urologists for their BPH patients in the earlier stages of disease progression. Typically, these are patients who do not want to take chronic BPH medication or are unhappy with the side effects, costs or results. A urologist can choose between our two therapies based upon clinical criteria specific to the BPH patient’s presentation. Our business strategy to achieve this goal is to:

 

 

 

 

Increase utilization of Cooled ThermoTherapy and Prostiva RF Therapy by urologists who already have access to a Cooled ThermoTherapy and/or Prostiva RF Therapy system,

 

 

 

 

Build upon the evidence supporting the cost effectiveness of our technologies and educate healthcare providers on the benefit to patients and the healthcare system of our in-office therapies,

 

 

 

 

Educate patients and urologists on the benefits of Cooled ThermoTherapy and Prostiva RF Therapy through educational and other market development efforts, and

 

 

 

 

Continue to partner with our European distributors to support the customers outside the United States.

          Clinical research activities are focused on expanding the evidence demonstrating the cost effectiveness of our technologies. Our research and development engineering efforts and goals are currently focused primarily on continuing engineering projects to support the product lines. This includes improving the features and functions of the technologies used in our Cooled ThermoTherapy and Prostiva RF Therapy procedures; improving the ease of use, continuous quality improvement initiatives; and also reducing the manufacturing cost of our products.

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          We have incurred net losses of $7.6 million in fiscal year 2014 and $4.3 million in the fiscal year ended 2013. In addition, we have accumulated aggregate net losses since the inception of business through June 30, 2014 of $126.6 million.

          During the first quarter of fiscal 2012, the Company entered into a license agreement with Medtronic for the Prostiva RF Therapy System. The Company paid Medtronic $500,000 on September 6, 2011 for half of the $1,000,000 initial license fee, with the remaining $500,000 payable on September 6, 2012. On June 28, 2013, we entered into a Restructuring Agreement with Medtronic related to the $7.5 million we owed to Medtronic under the Transaction Documents. As part of this agreement, we paid Medtronic $2.0 million in satisfaction of royalties earned for the 12 months ended September 6, 2012, the second half of the initial licensing fee, the license maintenance fee for the 12 month period ended September 6, 2012, for outstanding transition services fees, and for Prostiva inventory included as part of the acquisition and purchased subsequent to the acquisition. In addition, we entered into a promissory note (the “Note”) with Medtronic for $5.3 million for the remaining amounts owed on Prostiva inventory acquired as part of the acquisition and purchased subsequent to the acquisition. Interest on the Note accrues at a rate of 6 percent, compounded annually and is payable in five equal installments of principal and accrued interest, on March 31st of each year beginning on March 31, 2015. The $206,000 difference between the $7.5 million in obligations owed to Medtronic and the $2.0 million paid and the $5.3 million Note was recorded as a gain on debt extinguishment in fiscal year 2013.

          Under the license agreement, royalty payments for Prostiva products are paid one year in arrears based on the contract year. The royalty payment due during the second quarter of fiscal year 2014 of $650,000 has not been paid as of June 30, 2014 or as of the date of filing this Annual Report on Form 10-K. The $650,000 is included in the short-term deferred acquisition payment liability as of June 30, 2014. In addition, we have not paid, as of June 30, 2014 and as of the date of filing this Annual Report on Form 10-K, the annual $65,000 licensing maintenance fee due on September 6, 2013 which is included in other accrued expenses as of June 30, 2014. The non-payment does not entitle Medtronic to terminate the license agreement unless Medtronic provides written notice and an opportunity to cure the default. The non-payment under the license agreement is also not an event of default under the Note unless Medtronic provides written notice and an opportunity to cure.

          During the quarter ended September 30, 2012, the Company completed a follow-on offering in which we sold 5,980,000 shares of common stock at a price of $0.75 per share which contributed approximately $3.8 million of net proceeds after deducting underwriting discounts and commissions and other expenses payable by the Company. However, as a result of the Company’s history of operating losses and negative cash flows from operations, the $2.0 million payment to Medtronic in June 3013 for liabilities associated with the Prostiva acquisition, and the remaining liabilities related to the Prostiva acquisition and Note owed to Medtronic, there is substantial doubt about our ability to continue as a going concern. In addition, our line of credit with Silicon Valley Bank expired on June 30, 2014, and was not renewed. Our cash and cash generated from operations, if any, may not be sufficient to sustain day-to-day operations for the next 12 months, particularly if product sales do not generate revenues in the amounts currently anticipated, if our operating costs are greater than anticipated or greater than our business can support, or if our cost reduction is not effective. Our ability to continue as a going concern is dependent upon improving our liquidity.

          The Company is considering all available alternatives to improve its cash and liquidity position. The Company implemented restructuring plans in January 2014 and again in April 2014. The Company made the strategic decision to restructure the organization, including deploying a new distribution model and operational structure, to reduce company expenses and focus remaining resources on the most important needs of our business. These changes are designed to improve the Company’s ability to generate positive cash flow from operations. On April 10, 2014, we completed the implementation of this plan. The strategic reorganization included implementing a new sales strategy using a leaner and more efficient sales team which will continue to support our customer base in a deployment designed to create a more profitable sales model. In addition, we are piloting the use of dedicated resources charged with demonstrating our value proposition to large provider organizations such as ACOs and certain hospital systems which are highly-focused on cost-effective treatment alternatives like our in-office BPH technologies. The targeted annual savings from these restructurings total over $4 million when compared to the first half of fiscal year 2014. These savings impact both cost of goods sold and operating expenses. In the fourth quarter we received partial benefit of these changes (see Footnote 6 for further details). The Company may seek to improve its liquidity position by raising capital through additional indebtedness or an offering of its equity securities or both. However, it may be difficult to raise additional capital through a debt offering due to the debt outstanding with Medtronic and their position as a secured lender.

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          Our financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary as a result of this uncertainty.

Critical Accounting Policies and Estimates:

          In accordance with Securities and Exchange Commission guidance, we set forth below those material accounting policies that we believe are the most critical to an investor’s understanding of our financial results and condition, and require complex management judgment.

Revenue Recognition

          We recognize revenue from the sale of Cooled ThermoTherapy control units upon delivery to the customer, which include urologists, urology practices, mobile units, clinics and hospitals. We recognize revenue from the sale of Prostiva generators upon shipment to the customer. Revenue is recognized in accordance with generally accepted accounting principles as outlined in Accounting Standards Codification (“ASC”) 605-10-S99, Revenue Recognition, which requires that four basic criteria be met before revenue can be recognized: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) product delivery has occurred or services have been rendered. The Company recognizes revenue as products are shipped based on FOB shipping point terms when title passes to customers. In addition to our sales of Cooled ThermoTherapy control units and Prostiva generators, we place our control units and generators with customers free of charge under a variety of programs for both evaluation and long-term use, and also provide access to Cooled ThermoTherapy and Prostiva RF Therapy treatments via our Urologix mobile service. We retain title to the control units and generators placed with our customers for evaluation and longer-term use. These programs, as well as our Urologix mobile service, are designed to expand access to our technology, and thus expand the market for our single-use treatment catheters and Prostiva handpieces. The free use of our Cooled ThermoTherapy control units and Prostiva generators are bundled with the sale of single-use treatment catheters or Prostiva handpieces and scopes, respectively, and are considered a single unit of accounting. Revenue from the bundled sales is recognized when the single-use treatment catheters or handpieces and scopes are shipped to our customers. Revenue from our mobile service is recognized upon treatment of the patient. Revenue for extended warranty service contracts is deferred and recognized over the contract period on a straight-line basis. We record a provision for estimated sales returns on product sales in the same period as the related revenue is recorded. The provision for estimated sales returns is based on historical sales returns, analysis of credit memo data and specific customer-based circumstances. Should actual sales returns differ from our estimates, revisions to the sales return reserve would be required. Sales and use taxes are reported on a net basis, excluding them from revenue.

Inventories

          We value our inventories, consisting primarily of control units, single-use treatment catheters, and raw materials to produce the control units and treatment catheters, at the lower of cost or market value on a first-in, first-out (“FIFO”) basis. The inventory cost includes merchandise, labor, overhead and freight. A periodic review of the inventory on hand is performed to determine if the inventory is properly stated at the lower of cost or market. In performing this analysis we consider, at a minimum, the following factors: average selling prices, reimbursement changes, and changes in demand for our products due to competitive conditions or market acceptance. Each type of inventory is analyzed to determine net realizable values. A provision is recorded to reduce the cost of inventories to the estimated net realizable values, if required (a new cost basis).

          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.

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Valuation of Long-Lived Assets and Goodwill

          We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset or asset group is considered impaired if its carrying amount exceeds the undiscounted future net cash flows the asset or asset group is expected to generate. If an asset or asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. If estimated fair value is less than the book value, the asset is written down to the estimated fair value and an impairment loss is recognized.

          Goodwill is tested for impairment annually on April 30th or more frequently if changes in circumstance or the occurrence of events suggests an impairment may exist. To determine if there is goodwill impairment, the fair value of the reporting unit is compared to its carrying amount. If the fair value of a reporting unit is less than its carrying value, or if there is a shareholders’ deficit, an impairment loss is recorded to the extent that the fair value of the goodwill is less than the carrying value of the goodwill. The test for impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows.

          Considerable management judgment is necessary in estimating future cash flows and other factors affecting the valuation of long-lived assets and goodwill, including the operating and macroeconomic factors that may affect them. We use historical financial information, internal plans and projections and industry information in making such estimate.

          As a result of the delisting of our common stock from the NASDAQ exchange on June 7, 2013 and the continued decline of our stock price, we tested our long-lived assets and goodwill for impairment as of June 30, 2013. Based on this impairment testing it was determined that our intangible assets acquired as part of the Prostiva acquisition were impaired. As a result, we recorded an impairment charge of $274,000 on our developed technology asset which was recorded in cost of goods sold, a $95,000 impairment charge on our customer base asset and a $65,000 impairment charge on trademarks both of which were recorded in operating expense. There was no impairment of goodwill as it was determined that the fair value of the reporting unit exceeded its carrying amount as of June 30, 2013. See Footnote 11 for a description of our intangible assets.

          We tested our intangible assets and goodwill for impairment as of April 30, 2014, our annual testing date. We tested our intangible assets and goodwill for impairment due to our continued significant operating losses, negative cash flows, the estimated fair value of obligations due to Medtronic and due to the fact that we had a shareholders’ deficit as of the testing date. As part of this testing we fair valued all of our assets and liabilities as of this date using discounted cash flow analysis and forecasted future operating results. Based on this testing, we determined that the fair value of the Company could no longer support the carrying value of the goodwill acquired as part of the Prostiva acquisition. As a result, we recorded a non-cash impairment charge of $3,036,000 to fully impair our goodwill. See footnote 10 for a description of our goodwill and related impairment charge. There was no additional impairment of our long-lived assets as their estimated fair value exceeded their carrying values at that date.

Income Taxes

          We utilize the asset and liability method of accounting for income taxes. We recognize deferred tax liabilities or assets for the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities. We regularly assess the likelihood that our deferred tax assets will be recovered from future taxable income. We consider projected future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance necessary to offset our deferred tax assets that will not be recoverable. We have recorded and continue to carry a full valuation allowance against our gross deferred tax assets that will not reverse against deferred tax liabilities within the scheduled reversal period. If we determine in the future that it is more likely than not that we will realize all or a portion of our deferred tax assets, we will adjust our valuation allowance in the period we make the determination. We expect to provide a full valuation allowance on our future tax benefits until we can sustain a level of profitability that demonstrates our ability to realize these assets. As of June 30, 2014, we carried a valuation allowance of $31.5 million against our net deferred tax assets.

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Table of Contents


Stock-Based Compensation

          Stock-based 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 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. The Company also grants restricted stock awards which typically vest over a period of one to four years. Fair value for restricted stock is based on the market price on the day of grant.

Fair Value of Contingent Consideration

          Contingent consideration is recorded at the acquisition date at the estimated fair value of the future royalty payments in excess of contractual minimums. The acquisition date fair value is measured based on the consideration expected to be transferred discounted back to present value. The discount rate used is determined at the time of measurement in accordance with accepted valuation methods. The fair value of the contingent consideration is remeasured to the estimated fair value at each reporting period with the change in fair value recognized as gain or loss in our statement of operations. Changes to the fair value of the contingent consideration liability occur as a result of changes in discount rates and changes in the timing and amount of projected payments.

Results of Operations

Fiscal Years Ended June 30, 2014 and 2013

Net Sales

          Net sales decreased 14 percent to $14.2 million in fiscal year 2014 from $16.6 million in fiscal year 2013. The decrease in sales from fiscal year 2013 is due to a decline in the number of units sold of both our Cooled ThermoThearpy and Prostiva products.

Cost of Goods Sold and Gross Profit

          Cost of goods sold includes raw materials, labor, and overhead, incurred in connection with the production of our Cooled ThermoTherapy system control units and single-use treatment catheters, amortization related to developed technologies, costs associated with the delivery of our Cooled ThermoTherapy mobile service, as well as costs for the Prostiva products. Cost of goods sold for fiscal year 2014 decreased $265,000 or 3 percent to $8.1 million, from $8.4 million in fiscal year 2013. This decrease in cost of goods sold is a result of the decrease in sales year over year, partially offset by a $739,000 non-cash charge associated with the write-down of Prostiva capital equipment inventory, as well as higher manufacturing costs due to lower production. Fiscal year 2013 costs of goods sold also included a $274,000 impairment charge related to the developed technologies acquired in the Prostiva acquisition. Excluding the $739,000 write-down of Prostiva inventory in fiscal year 2014 and the $274,000 developed technology impairment charge in fiscal year 2013, cost of goods sold would have decreased by $730,000 or 9 percent year over year.

          Gross profit as a percentage of sales decreased to 43 percent from 49 percent in fiscal years 2013. The fiscal year 2014 gross margin was impacted by 5 percentage points due to the $739,000 charge associated with the write-down of Prostiva inventory noted above. Gross margin was also impacted by higher warranty expenses on the Prostiva product line and lower margins on the CTT product line due to higher manufacturing costs due to lower production. The fiscal year 2013 gross margin percentage was impacted by 2 percentage points as a result of the $274,000 developed technology impairment charge mentioned above.

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Sales and Marketing

          Sales and marketing expenses in fiscal year 2014 decreased $1.9 million, or 24 percent, to $5.9 million from $7.7 million in fiscal year 2013. The decrease in sales and marketing expense is the result of a $1.0 million decrease in wages and benefits, including commissions, as a result of the restructuring activities in January and April of 2014. In addition, advertising and promotions spending decreased by $429,000, travel and entertainment decreased by $240,000 due to lower headcount, and meeting expenses decreased by $162,000.

General & Administrative

          General and administrative expense in fiscal year 2014 decreased $216,000, or 9 percent, to $2.3 million from $2.5 million in fiscal year 2013. The decrease in general and administrative expense is mainly a result of a decrease in wages and benefits of $307,000 due to lower headcount, partially offset by an $81,000 increase in consulting expenses.

Research and Development

          Research and development expenses, which include expenditures for product development, regulatory compliance and clinical studies, decreased to $1.6 million for fiscal year 2014, from $2.3 million in fiscal year 2013. The $644,000, or 28 percent, decrease in research and development expense is due to a $360,000 decrease in transition service fees related to the Prostiva acquisition which were paid in the prior year period. In addition, wages and benefits decreased by approximately $130,000 due to lower headcount and consulting expenses decreased by approximately $90,000.

Change in Value of Acquisition Consideration

          The change in the value of acquisition consideration of $105,000 for the fiscal year ended June 30, 2014 represents the reduction in fair value of contingent consideration as a result of the reduction in projected royalty payments in excess of contractual minimums in earlier years. For the fiscal year period ended June 30, 2013, the change in value of acquisition consideration of $447,000 represents the net effect of a reduction in fair value of contingent consideration of $1.4 million prior to payments made in fiscal year 2013, partially offset by an increase of $933,000 in non-contingent consideration. These changes are due to an increase in the projected time it will take the Company to reach the cumulative $10 million of royalty and license fees owed on the Prostiva acquisition, and reduced the projected royalty payments in excess of contractual minimums in earlier years.

Impairment of Goodwill

          We recorded a $3.0 million charge to fully impair our goodwill obtained in the Prostiva acquisition. As part of our annual impairment test, we fair valued all of our assets and liabilities and determined the fair value of the Company could no longer support the carrying value of goodwill on our balance sheet due to the continued operating losses of the Company along with the significant amount due Medtronic and the estimated fair value of these obligations.

Gain on Demutualization

          The one-time gain on demutualization of $321,000 for the fiscal year ended June 30, 2013 represents the gain resulting from the demutualization of our products liability insurance carrier.

Medical Device Tax

          The medical device excise tax represents the excise tax imposed beginning January 1, 2013 on all U.S. medical device sales as part of the Federal health care reform legislation. The increase in the medical device tax expense of $117,000 from $106,000 in fiscal year 2013 to $223,000 in fiscal year 2014 is a result of the medical device tax not being implemented until January, 2013 and therefore only represents 6 months of expenses in the prior year period versus 12 months in fiscal year 2014.

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Amortization of Identifiable Intangible Assets

          Amortization of identifiable intangible assets was approximately $95,000 in fiscal year 2014 compared to $104,000 in fiscal year 2013. The slight decrease in the amortization expense is a result of the $160,000 impairment charge related to intangible assets acquired as part of the Prostiva acquisition in the fourth quarter of fiscal year 2013 which resulted in lower amortization expense over the assets remaining useful lives.

Impairment of Identifiable Intangible Assets

          We recorded an impairment charge of $160,000 on identifiable intangible assets in fiscal year 2013. The impairment charge relates to a $95,000 write-down of the customer base and a $65,000 write-down of the trademarks acquired as part of the Prostiva acquisition.

Net Interest Income/(Expense)

          Interest expense is the result of non-cash interest accretion on the deferred acquisition payments for the Prostiva business as well as the interest expense accrued on the Note entered into with Medtronic on June 28, 2013. Net interest expense of approximately $693,000 for the fiscal year ended June 30, 2014, increased $138,000 over interest expense of $555,000 for the fiscal year ended June 30, 2013. The increase in interest expense is due to accrued interest on the Medtronic Note signed at the end of fiscal year 2013, partially offset by lower accretion expense related to the restructuring of the license agreement with Medtronic which resulted in the re-measurement of the contingent consideration.

Gain on Debt Extinguishment

          The gain on debt extinguishment of $206,000 is a result of the Restructuring Agreement entered into on June 28, 2013 with Medtronic which resulted in the restructuring of $7.5 million in outstanding Prostiva liabilities into a $2.0 million cash payment and a $5.3 million promissory note.

Provision for Income Taxes

          We recorded $16,000 of income tax benefit for the fiscal year ended June 30, 2014 compared to income tax expense of $14,000 for the fiscal year ended June 30, 2013. The $16,000 income tax benefit is the result of the reversal of the deferred tax liability resulting from the impairment of goodwill created in the Prostiva acquisition in the current fiscal year, partially offset by state taxes. The income tax expense of $14,000 in fiscal year 2013 represents deferred tax expense recorded on the amortization for tax purposes of indefinite-lived goodwill as well as state taxes.

          The Company utilizes the asset and liability method of accounting for income taxes. The Company recognizes 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 have recorded and continue to carry a full valuation allowance against our gross deferred tax assets that will not reverse against deferred tax liabilities. We will continue to assess the assumptions used to determine the amount of our valuation allowance and may adjust the valuation allowance in future periods based on changes in assumptions of estimated future income and other factors.

Liquidity and Capital Resources

          We have financed our operations since inception through sales of equity securities and, to a lesser extent, sales of our Cooled ThermoTherapy products and, beginning September 6, 2011, sales of the Prostiva RF Therapy System product. As of June 30, 2014, we had cash of $718,000 compared to cash of $2.3 million as of June 30, 2013. The decrease in cash of $1.6 million is the result of the use of $1.6 million of net cash for operating and investing activities.

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          During the first quarter of fiscal 2012, the Company entered into a license agreement with Medtronic for the Prostiva RF Therapy System. The Company paid Medtronic $500,000 on September 6, 2011 for half of the $1,000,000 initial license fee, with the remaining $500,000 payable on September 6, 2012. On June 28, 2013, we entered into a Restructuring Agreement with Medtronic related to the $7.5 million we owed to Medtronic under the Transaction Documents. As part of this agreement we paid Medtronic $2.0 million in satisfaction of royalties earned for the 12 months ended September 6, 2012, the second half of the initial licensing fee, the license maintenance fee for the 12 month period ended September 6, 2012, for outstanding transition services fees, and for Prostiva inventory included as part of the acquisition and purchased subsequent to the acquisition. In addition, we entered into a promissory note (the “Note”) with Medtronic for $5.3 million for the remaining amounts owed on Prostiva inventory acquired as part of the acquisition and purchased subsequent to the acquisition. Interest on the Note accrues at a rate of 6 percent, compounded annually and is payable in five equal installments of principal and accrued interest, on March 31st of each year beginning on March 31, 2015. The $206,000 difference between the $7.5 million in obligations owed to Medtronic and the $2.0 million paid and the $5.3 million Note was recorded as a gain on debt extinguishment in fiscal year 2013. The Company does not have adequate cash to repay the full outstanding principal amount of $5.3 million on the Note. Any event of default under the Note may result in a loss of control of our business or bankruptcy.

          Under the license agreement, royalty payments for Prostiva products are paid one year in arrears based on the contract year. The royalty payment due during the second quarter of fiscal year 2014 of $650,000 has not been paid as of June 30, 2014 or as of the date of filing this Annual Report on Form 10-K. The $650,000 is included in the short-term deferred acquisition payment liability as of June 30, 2014. In addition, we did not pay, as of June 30, 2014 and as of the date of filing this Annual Report on Form 10-K, the annual $65,000 licensing maintenance fee due on September 6, 2013 which is included in other accrued expenses as of June 30, 2014. The non-payment does not entitle Medtronic to terminate the license agreement unless Medtronic provides written notice and an opportunity to cure the default. The non-payment under the license agreement is also not an event of default under the Note unless Medtronic provides written notice and an opportunity to cure. In the event of a material breach of the licensing agreement or other transaction documents, and Medtronic provides written notice to the Company and the Company fails to cure the breach, Medtronic may terminate the license agreement. If the license agreement is terminated, the Company’s rights to sell the Prostiva product would be terminated.

          During the first quarter of fiscal year 2013 the Company completed a follow-on offering which contributed approximately $3.8 million of net proceeds. However, as a result of the Company’s history of operating losses and negative cash flows from operations there is substantial doubt about our ability to continue as a going concern. In addition, our line of credit with Silicon Valley Bank expired on June 30, 2014, and was not renewed. It also may be difficult to raise additional capital through a debt offering due to the debt outstanding with Medtronic and their position as a secured lender. As of June 30, 2014, the Company’s cash may not be sufficient to sustain day-to-day operations for the next 12 months.

          On April 10, 2014, management completed the implementation of a strategic restructuring plan which included deploying a new distribution model and operational structure to refocus the allocation of company resources and improve the Company’s ability to achieve profitability and generate positive cash flow from operations. As a result of this restructuring, cash utilization in the fourth quarter of fiscal year 2014 was $98,000, which included $80,000 of cash payments related to the restructuring for payments related to severance and accrued vacation. The targeted annual savings from this restructuring total over $4 million when compared to the first half of fiscal year 2014. However, there can be no assurance that we will be successful in improving our business or obtaining positive cash flows from operations.

          The Company’s ability to continue as a going concern is dependent upon our ability to generate positive cash flows from our business and aggressively manage our expenses, including those associated with our acquisition of the Prostiva product line from Medtronic. The Company’s ability to continue as a going concern is also dependent upon avoiding an event of default under the Note and avoiding termination of the license relating to the Prostiva product, whether by negotiation with Medtronic, cure of any non-payment giving rise to an event of default or termination, or otherwise. There is no assurance that our cash and cash generated from operations, if any, will be sufficient to fund our anticipated capital needs, operating expenses (including payments under the license agreement), and Note repayments, particularly if product sales do not generate revenues in the amounts currently anticipated, if our operating costs are greater than anticipated or greater than our business can support. 

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          If the Company is unable to generate sufficient liquidity to meet its needs and in a timely manner, the Company may be required to further reduce expenses and curtail capital expenditures, sell assets, or suspend or discontinue operations.

          There can be no assurance that the Company will be able to cure any potential event of default of the Note or cure any breach of any agreement with Medtronic, maintain compliance with its agreements with Medtronic, raise additional capital, or improve its operating or financial performance.

          The fiscal year 2014 financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

Cash Provided by Operating Activities

          During fiscal year 2014, we used $1.5 million of cash from operating activities compared to $2.0 million in fiscal year 2013. The net loss of $7.6 million included non-cash charges of $3.0 million for the impairment of goodwill, $587,000 from depreciation and amortization expense, $739,000 related to the Prostiva inventory reserve, $211,000 from stock-based compensation expense and $467,000 of accreted interest expense, which was partially offset by a $105,000 gain as a result of a fair value adjustment to deferred acquisition payments. Changes in operating items resulted in the generation of $1.2 million of operating cash flow for the period as a result of lower accounts receivable of $620,000, lower inventories of $267,000, higher accounts payable of $264,000 and interest payable of $322,000. These increases were partially offset by $375,000 of lower accrued expenses and deferred income.

          The decrease in accounts receivable is due to a decrease in revenue. The decrease in inventories is due to lower volumes of CTT inventory on hand due to an effort to decrease the days inventory on hand, and the increase in accounts payable is the result of the timing of receipts and services versus payment. The increase in interest payable represents the 6 percent interest accrued on the Note agreement entered into with Medtronic in June, 2013. The decrease in accrued expenses and deferred income is a result of a decrease in the commission accrual due to lower sales and lower headcount.

Cash Used for Investing Activities

          We used $42,000 for investing activities related to the purchase of property and equipment to support our business operations and investments in intellectual property.

Cash Provided by Financing Activities

          During fiscal year 2014 we did not generate any cash from financing activities.

Contractual Commitments

          We plan to continue offering customers a variety of programs for both evaluation and longer-term use of our Cooled ThermoTherapy system control units and Prostiva RF Therapy System generators and scopes in addition to purchase options. We also will continue to provide physicians and patients with efficient access to our Cooled ThermoTherapy system control units and Prostiva RF Therapy System generators and scopes on a pre-scheduled basis through our mobile service. As of June 30, 2014, our property and equipment, net, included approximately $311,000 of control units, generators and scopes 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.

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          Future contractual commitments that will affect cash flows are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2016

 

2017

 

2018

 

2019

 

Building and equipment leases

 

$

228

 

$

231

 

$

32

 

$

5

 

$

-

 

Prostiva Payments

          Prostiva payments are commitments related to the acquisition of the Prostiva RF Therapy product line from Medtronic on September 6, 2011. Royalty obligations represent royalties, including minimum royalty obligations, based on management’s estimates of future revenues to be generated through sales of Prostiva products. Actual revenues generated through sales of Prostiva product and actual royalty payments may differ from these estimates. In addition, on June 28, 2013, we entered into a promissory note (the “Note”) with Medtronic for $5.3 million for the remaining amounts owed on Prostiva inventory acquired as part of the acquisition and purchased subsequent to the acquisition. Interest on the Note will accrue at a rate of 6 percent, compounded annually and is payable in five equal installments of principal and accrued interest on March 31st of each year beginning on March 31, 2015 (see Footnote 12 for more details).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years

 

 

 

2015

 

2016

 

2017

 

2018

 

2019

 

Prostiva Payments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Annual license maintenance fee

 

$

65

 

$

65

 

$

65

 

$

65

 

$

65

 

Royalty obligations

 

 

650

 

 

650

 

 

650

 

 

650

 

 

650

 

Note payments, including interest

 

 

1,323

 

 

1,323

 

 

1,323

 

 

1,323

 

 

1,323

 

Total contractual Prostiva payments

 

$

2,038

 

$

2,038

 

$

2,038

 

$

2,038

 

$

2,038

 

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.

 

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          Our financial instruments include cash and as a result 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.

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ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

          The following financial statements are included in the Form 10-K:

 

 

 

 

 

Management’s Report on Internal Control over Financial Reporting

 

44

 

Report of Independent Registered Public Accounting Firm

 

45

 

Balance Sheets as of June 30, 2014 and 2013

 

46

 

Statements of Operations for the years ended June 30, 2014 and 2013

 

47

 

Statements of Shareholders’ Equity/(Deficit) for the years ended June 30, 2014 and 2013

 

48

 

Statements of Cash Flows for the years ended June 30, 2014 and 2013

 

49

 

Notes to Financial Statements

 

50

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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/Interim 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, 2014.

*          *          *

This Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm, Baker Tilly Virchow Krause, LLP regarding internal controls over financial reporting. Management’s report was not subject to attestation by Baker Tilly Virchow Krause, 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.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders, Audit Committee and Board of Directors
Urologix, Inc
Minneapolis, MN

We have audited the accompanying balance sheets of Urologix, Inc. as of June 30, 2014 and 2013, and the related statements of operations, shareholders’ equity (deficit) and cash flows for the years then ended. 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. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. 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 audit 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, 2014 and 2013 and the results of their operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the company will continue as a going concern. As discussed in Note 3 to the financial statements, the company has suffered recurring operating losses and negative cash flows from operations, and needs additional working capital to support future operations. These factors raise substantial doubt about its ability to continue as a going concern. Managements’ plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Baker Tilly Virchow Krause, LLP 

Minneapolis, Minnesota
September 19, 2014

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Urologix, Inc.
Balance Sheets
(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

2014

 

2013

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash

 

$

718

 

$

2,290

 

Accounts receivable, net of allowance of $76 and $79, respectively

 

 

1,502

 

 

2,132

 

Inventories

 

 

1,397

 

 

1,571

 

Prepaids and other current assets

 

 

63

 

 

128

 

Total current assets

 

 

3,680

 

 

6,121

 

Property and equipment:

 

 

 

 

 

 

 

Property and equipment

 

 

12,162

 

 

12,165

 

Less accumulated depreciation

 

 

(11,691

)

 

(11,430

)

Property and equipment, net

 

 

471

 

 

735

 

Other intangible assets, net

 

 

1,370

 

 

1,587

 

Goodwill

 

 

-

 

 

3,036

 

Long-term inventories

 

 

141

 

 

1,043

 

Other assets

 

 

5

 

 

5

 

Total assets

 

$

5,667

 

$

12,527

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY/(DEFICIT)

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

892

 

$

628

 

Accrued compensation

 

 

487

 

 

721

 

Deferred income

 

 

6

 

 

5

 

Short-term deferred acquisition payment

 

 

1,339

 

 

681

 

Current portion of long-term debt

 

 

747

 

 

-

 

Interest payable

 

 

322

 

 

-

 

Other accrued expenses

 

 

499

 

 

602

 

Total current liabilities

 

 

4,292

 

 

2,637

 

 

 

 

 

 

 

 

 

Deferred tax liability

 

 

-

 

 

36

 

Long-term deferred acquisition payment

 

 

3,730

 

 

4,026

 

Long-term debt

 

 

4,586

 

 

5,333

 

Other accrued expenses

 

 

36

 

 

75

 

Total liabilities

 

 

12,644

 

 

12,107

 

Commitments and Contingencies (Note 13)

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY/(DEFICIT):

 

 

 

 

 

 

 

Common stock, $.01 par value, 30,000 and 25,000 shares authorized; 21,291 and 20,909 shares issued; and 20,945 and 20,795 shares outstanding

 

 

209

 

 

208

 

Additional paid-in capital

 

 

119,440

 

 

119,230

 

Accumulated deficit

 

 

(126,626

)

 

(119,018

)

Total shareholders’ equity/(deficit)

 

 

(6,977

)

 

420

 

Total liabilities and shareholders’ equity/(deficit)

 

$

5,667

 

$

12,527

 

The accompanying notes to financial statements are an integral part of these statements.

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Urologix, Inc.
Statements of Operations
(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

For the Years Ended June 30

 

 

 

2014

 

 

2013

 

SALES

 

$

14,235

 

 

$

16,590

 

COST OF GOODS SOLD

 

 

8,142

 

 

8,407

 

Gross profit

 

 

6,093

 

 

8,183

 

 

 

 

 

 

 

 

 

 

COSTS AND EXPENSES

 

 

 

 

 

 

 

 

Sales and marketing

 

 

5,850

 

 

 

7,719

 

General and administrative

 

 

2,299

 

 

 

2,515

 

Research and development

 

 

1,625

 

 

 

2,269

 

Change in value of acquisition consideration

 

 

(105

)

 

 

(447

)

Goodwill impairment

 

 

3,036

 

 

 

-

 

Gain on demutualization

 

 

-

 

 

 

(321

)

Medical device tax

 

 

223

 

 

 

106

 

Amortization of identifiable intangible assets

 

 

95

 

 

 

104

 

Impairment of identifiable intangible assets

 

 

-

 

 

160

 

Total costs and expenses

 

 

13,023

 

 

12,105

 

OPERATING LOSS

 

 

(6,930

)

 

 

(3,922

)

 

 

 

 

 

 

 

 

 

INTEREST INCOME/(EXPENSE)

 

 

(693

)

 

 

(555

)

GAIN ON DEBT EXTINGUISHMENT

 

 

-

 

 

 

206

 

FOREIGN CURRENCY EXCHANGE LOSS

 

 

(1

)

 

(7

)

LOSS BEFORE INCOME TAXES

 

 

(7,624

)

 

 

(4,278

)

INCOME TAX (BENEFIT)/EXPENSE

 

 

(16

)

 

14

 

NET LOSS

 

$

(7,608

)

$

(4,292

)

 

 

 

 

 

 

 

 

 

NET LOSS PER COMMON SHARE - BASIC

 

$

(0.36

)

$

(0.21

)

 

 

 

 

 

 

 

 

 

NET LOSS PER COMMON SHARE - DILUTED

 

$

(0.36

)

$

(0.21

)

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC

 

 

21,219

 

 

20,703

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED

 

 

21,219

 

 

20,703

 

The accompanying notes to financial statements are an integral part of these statements.

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Urologix, Inc.
Statements of Shareholders’ Equity/(Deficit)
(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional
Paid-In
Capital

 

Accumulated
Deficit

 

Total
Shareholders’
Equity/(Deficit)

 

 

 

Common Stock

 

 

 

 

 

Shares

 

Amount

 

 

 

Balance, June 30, 2012

 

 

14,719

 

$

147

 

$

115,205

 

$

(114,726

)

$

626

 

Net loss

 

 

-

 

 

-

 

 

-

 

 

(4,292

)

 

(4,292

)

Stock options exercised

 

 

20

 

 

-

 

 

15

 

 

-

 

 

15

 

Vesting of restricted stock

 

 

76

 

 

1

 

 

(1

)

 

-

 

 

-

 

Stock-based compensation

 

 

-

 

 

-

 

 

257

 

 

-

 

 

257

 

Issuance of common stock

 

 

5,980

 

 

60

 

 

3,754

 

 

-

 

 

3,814

 

Balance, June 30, 2013

 

 

20,795

 

$

208

 

$

119,230

 

$

(119,018

)

$

420

 

Net loss

 

 

-

 

 

-

 

 

-

 

 

(7,608

)

 

(7,608

)

Vesting of restricted stock

 

 

110

 

 

1

 

 

(1

)

 

-

 

 

-

 

Stock-based compensation

 

 

40

 

 

-

 

 

211

 

 

-

 

 

211

 

Balance, June 30, 2014

 

 

20,945

 

$

209

 

$

119,440

 

$

(126,626

)

$

(6,977

)

The accompanying notes to financial statements are an integral part of these statements

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Table of Contents


Urologix, Inc.
Statements of Cash Flows
(In thousands)

 

 

 

 

 

 

 

 

 

 

For the Years Ended June 30

 

 

 

2014

 

2013

 

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net loss

 

$

(7,608

)

$

(4,292

)

Adjustments to reconcile net loss to net cash used for operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

587

 

 

674

 

Impairment of identifiable intangible assets

 

 

-

 

 

434

 

Impairment of goodwill

 

 

3,036

 

 

-

 

Employee stock-based compensation expense

 

 

211

 

 

257

 

Provision for bad debts

 

 

10

 

 

(23

)

Prostiva inventory reserve

 

 

739

 

 

-

 

Loss on disposal of assets

 

 

6

 

 

7

 

Accretion expense on deferred acquisition payments

 

 

467

 

 

544

 

Net adjustment to acquisition consideration

 

 

(105

)

 

(447

)

Gain on debt extinguishment

 

 

-

 

 

(206

)

Deferred income taxes

 

 

(36

)

 

1

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

620

 

 

23

 

Inventories

 

 

267

 

 

(626

)

Prepaids and other assets

 

 

65

 

 

162

 

Accounts payable

 

 

264

 

 

1,760

 

Accrued expenses and deferred income

 

 

(375

)

 

(227

)

Interest payable

 

 

322

 

 

-

 

Net cash used for operating activities

 

 

(1,530

)

 

(1,959

)

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(32

)

 

(79

)

Acquisition of business

 

 

-

 

 

(1,368

)

Purchases of intellectual property

 

 

(10

)

 

(32

)

Net cash used for investing activities

 

 

(42

)

 

(1,479

)

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

 

-

 

 

15

 

Issuance of common stock

 

 

-

 

 

3,814

 

Net cash provided by financing activities

 

 

-

 

 

3,829

 

 

 

 

 

 

 

 

 

NET INCREASE/(DECREASE) IN CASH

 

 

(1,572

)

 

391

 

 

 

 

 

 

 

 

 

CASH

 

 

 

 

 

 

 

Beginning of year

 

 

2,290

 

 

1,899

 

End of year

 

$

718

 

$

2,290

 

 

 

 

 

 

 

 

 

Supplemental cash-flow information

 

 

 

 

 

 

 

Income taxes paid during the period

 

$

27

 

$

17

 

Net carrying amount of inventory transferred to property and equipment

 

$

70

 

$

202

 

Deferred acquisition payment and accounts payable transferred to long-term debt

 

$

-

 

$

5,333

 

The accompanying notes to financial statements are an integral part of these statements.

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UROLOGIX, INC.
Notes to Financial Statements

 

 

1.

Nature of Business

Description of Operating Activities

          Urologix, Inc. (the “Company,” “Urologix,” “we”) consists of one reportable segment. Urologix is based in Minneapolis and develops, manufactures and markets minimally invasive medical products for the treatment of obstruction and symptoms due to Benign Prostatic Hyperplasia (BPH). Urologix’ Cooled ThermoTherapy™ produces targeted microwave energy combined with a unique cooling mechanism to protect healthy tissue and enhance patient comfort. The Cooled ThermoTherapy™ product line includes the CoolWave® and Targis® Control Units and the CTC Advance® catheter. The Prostiva® RF Therapy System licensed from Medtronic, Inc., delivers radio frequency energy directly into the prostate destroying prostate tissue, reducing constriction of the urethra, and thereby relieving BPH voiding symptoms. Both of these products provide safe, effective and lasting relief of the symptoms and obstruction due to BPH.

 

 

2.

Significant Accounting Policies

Revenue Recognition

          We recognize revenue from the sale of Cooled ThermoTherapy control units upon delivery to the customer, which include urologists, urology practices, mobile units, clinics and hospitals. We recognize revenue from the sale of Prostiva generators upon shipment to the customer. Revenue is recognized in accordance with generally accepted accounting principles as outlined in Accounting Standards Codification (“ASC”) 605-10-S99, Revenue Recognition, which requires that four basic criteria be met before revenue can be recognized: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) product delivery has occurred or services have been rendered. The Company recognizes revenue as products are shipped based on FOB shipping point terms when title passes to customers. In addition to our sales of Cooled ThermoTherapy control units and Prostiva generators, we place our control units and generators with customers free of charge under a variety of programs for both evaluation and long-term use, and also provide access to Cooled ThermoTherapy and Prostiva RF Therapy treatments via our Urologix mobile service. We retain title to the control units and generators placed with our customers for evaluation and longer-term use. These programs, as well as our Urologix mobile service, are designed to expand access to our technology, and thus expand the market for our single-use treatment catheters and Prostiva handpieces. The free use of our Cooled ThermoTherapy control units and Prostiva generators are bundled with the sale of single-use treatment catheters or Prostiva handpieces and scopes, respectively, and are considered a single unit of accounting. Revenue from the bundled sales is recognized when the single-use treatment catheters or handpieces and scopes are shipped to our customers. Revenue from our mobile service is recognized upon treatment of the patient. Revenue for extended warranty service contracts is deferred and recognized over the contract period on a straight-line basis. 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. Invoices are generally due 30 days after presentation. Accounts receivable over 30 days are considered past due. Accounts receivable are written-off after management determines they are uncollectible.

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UROLOGIX, INC.
Notes to Financial Statements

          Bad debt and sales returns provisions and accounts receivable write-offs for the years ended June 30, 2014 and 2013 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended

 

Beginning
Balance

 

Provisions

 

Write-offs

 

Ending
Balance

 

 

 

 

 

 

 

 

 

June 30, 2014

 

$

79

 

$

10

 

$

(13

)

$

76

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

 

 

83

 

 

38

 

 

(42

)

 

79

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, 2014

 

June 30, 2013

 

 

 

 

 

 

 

 

 

Raw materials

 

$

685

 

$

734

 

Work-in-process

 

 

127

 

 

112

 

Finished goods

 

 

726

 

 

1,768

 

Total inventories

 

$

1,538

 

$

2,614

 

          We took a non-cash write-down of our Prostiva capital equipment inventory of approximately $739,000, which included approximately $504,000 of finished goods inventory acquired as part of the September 6, 2011 Prostiva acquisition in the quarter ended March 31, 2014. This inventory continues to be reserved for as of June 30, 2014. The write-down of the Prostiva capital equipment inventory was due to low volume sales of the Prostiva generators and scopes, as well as the implementations of the recent restructurings that occurred in January and April of fiscal year 2014 as a result of our change in sales strategy. In addition, as of June 30, 2014 and 2013, $141,000 and $1,043,000, respectively, of the above finished goods balance represents long-term inventories that the Company does not expect to sell within the next 12 months, however, they are not considered excess or obsolete.

Valuation of Long-Lived Assets and Goodwill

          We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset or asset group is considered impaired if its carrying amount exceeds the undiscounted future net cash flows the asset or asset group is expected to generate. If an asset or asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. If estimated fair value is less than the book value, the asset is written down to the estimated fair value and an impairment loss is recognized.

          Goodwill is tested for impairment annually on April 30th or more frequently if changes in circumstance or the occurrence of events suggests an impairment may exist. To determine if there is goodwill impairment, the fair value of the reporting unit is compared to its carrying amount. If the fair value of a reporting unit is less than its carrying value, or if there is a shareholders’ deficit, an impairment loss is recorded to the extent that the fair value of the goodwill is less than the carrying value of the goodwill. The test for impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows.

          Considerable management judgment is necessary in estimating future cash flows and other factors affecting the valuation of long-lived assets and goodwill, including the operating and macroeconomic factors that may affect them. We use historical financial information, internal plans and projections and industry information in making such estimates.

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UROLOGIX, INC.
Notes to Financial Statements

          As a result of the delisting of our common stock from the NASDAQ exchange on June 7, 2013 and the continued decline of our stock price, we tested our long-lived assets and goodwill for impairment as of June 30, 2013. Based on this impairment testing it was determined that our intangible assets acquired as part of the Prostiva acquisition were impaired. As a result, we recorded an impairment charge of $274,000 on our developed technology asset which was recorded in cost of goods sold, a $95,000 impairment charge on our customer base asset and a $65,000 impairment charge on trademarks both of which were recorded in operating expense. There was no impairment of goodwill as it was determined that the estimated fair value of the reporting unit exceeded its carrying amount as of June 30, 2013. See Footnote 11 for a description of our intangible assets.

          We tested our intangible assets and goodwill for impairment as of April 30, 2014, our annual testing date. We tested our intangible assets and goodwill for impairment due to our continued significant operating losses, negative cash flows, the estimated fair value of obligations due to Medtronic and due to the fact that we had a shareholders’ deficit as of the testing date. As part of this testing we fair valued all of our assets and liabilities as of this date using discounted cash flow analysis and forecasted future operating results. Based on this testing, we determined that the fair value of the Company could no longer support the carrying value of the goodwill acquired as part of the Prostiva acquisition. As a result, we recorded a non-cash impairment charge of $3,036,000 to fully impair our goodwill. See footnote 10 for a description of our goodwill and related impairment charge. There was no additional impairment of our long-lived assets as their estimated fair value exceeded their carrying values at the testing date.

Property and Equipment

          Property and equipment are stated at cost. Company owned Cooled ThermoTherapy control units and Prostiva RF Therapy generators 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 on a straight-line basis 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.

          Property and equipment, net consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

June 30, 2013

 

 

 

 

 

 

 

 

 

Leasehold improvements, equipment, furniture and vehicles

 

$

147

 

$

241

 

Computer equipment

 

 

13

 

 

32

 

Control units, generators and scopes

 

 

311

 

 

462

 

Total property and equipment, net

 

$

471

 

$

735

 

          Depreciation expense for the years ended June 30, 2014 and 2013 was $360,000, and $401,000, respectively.

Contingent Consideration

          Contingent consideration was recorded on the balance sheet at the acquisition date fair value based on the consideration expected to be transferred, discounted back to present value. The discount rate used is determined at the time of measurement in accordance with accepted valuation methods. The fair value of the contingent consideration is remeasured at the estimated fair value at each reporting period with the change in fair value recognized as income or expense in operating loss. Any changes in fair value will impact earnings in such reporting period until the contingencies are resolved.

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UROLOGIX, INC.
Notes to Financial Statements

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, 2014, 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, including the Prostiva 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, 2014 and 2013 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended

 

Beginning
Balance

 

Warranty
Provisions

 

Warranty
Claims

 

Ending
Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

$

58

 

$

36

 

$

(38

)

$

56

 

 

 

 

 

 

 

 

 

June 30, 2013

 

 

47

 

 

63

 

 

(52

)

 

58

Income Taxes

          We utilize the asset and liability method of accounting for income taxes. We recognize deferred tax liabilities or assets for the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities. We regularly assess the likelihood that our deferred tax assets will be recovered from future taxable income. We consider projected future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance necessary to offset our deferred tax assets that will not be recoverable. We have recorded and continue to carry a full valuation allowance against our gross deferred tax assets that will not reverse against deferred tax liabilities within the scheduled reversal period. If we determine in the future that it is more likely than not that we will realize all or a portion of our deferred tax assets, we will adjust our valuation allowance in the period we make the determination. We expect to provide a full valuation allowance on our future tax benefits until we can sustain a level of profitability that demonstrates our ability to realize these assets. As of June 30, 2014, we carried a valuation allowance of $31.5 million against our net deferred tax assets.

Stock-Based Compensation

          Stock-based 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 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. The Company also grants restricted stock awards which typically vest over a period of one to four years. Fair value for restricted stock is based on the market price on the day of grant. See Note 5 for additional discussion.

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UROLOGIX, INC.
Notes to Financial Statements

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 and participating securities outstanding during the periods presented. Diluted net loss per share is 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, unless there is a net loss position, in which case diluted loss per share is the same as basic loss per share. The number of shares used in earnings per share computations is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

For the years ended June 30,

 

 

 

2014

 

2013

 

Weighted average common shares outstanding - basic

 

 

21,219

 

 

20,703

 

Dilutive effect of stock options

 

 

-

 

 

-

 

Weighted average common shares outstanding - diluted

 

 

21,219

 

 

20,703

 

          The dilutive effect of stock options in the above table excludes 1.7 million and 1.7 million of underlying options for which the exercise price was higher than the average market price for the years ended June 30, 2014 and 2013, respectively. In addition, there were no potentially dilutive stock options where the exercise price was lower than the average market price for the fiscal year ended June 30, 2014. For the fiscal year ended June 30, 2013, there were dilutive potential common shares of 1,061 shares, where the exercise price was lower than the average market price and were excluded from diluted weighted average common shares outstanding as they would be anti-dilutive due to our net loss.

Research and Development Costs

          Research and development costs are charged to expense as incurred.

Shipping and Handling Costs

          The Company includes shipping and handling revenues in sales and shipping and handling costs in cost of goods sold.

Concentration of Cash

          The Company deposits its cash in what management believes are high credit quality financial institutions. The balance, at times, may exceed federally insured limits.

Financial Instruments

          The carrying amounts of our accounts receivable and accounts payable approximate fair value due to their short-term nature. The fair value of the Company’s short and long-term debt, including deferred acquisition payments, is estimated based on our future projected cash flow streams which would be used to pay down the debt. As of June 30, 2014, the fair value of the Company’s short and long-term debt for purposes of the Company’s goodwill impairment analysis, including the deferred acquisition payments, was estimated at $1.9 million versus a carrying value of $10.4 million based on a market participant basis as required under the goodwill step 2 impairment test guidance. The fair value of contingent consideration as disclosed in footnote 4 and the carrying amount of debt as disclosed in footnotes 12 and 13 are based on using the contractual obligations due under the terms of the agreement.

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UROLOGIX, INC.
Notes to Financial Statements

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 change in the Prostiva capital equipment inventory as noted earlier, the continued difficult economic conditions, tight credit markets, Medicare reimbursement rate uncertainty, 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.

Reclassification

          The balance sheet includes the reclassification of prior year inventory from current inventories to long-term inventories to conform with current year presentation. The reclassification is related to additional inventories received subsequent to the Prostiva acquisition that should have been classified as long-term, as we do not expect to sell them within the next 12 months, which had been classified in current inventories.

Recently Issued Accounting Standard

          In May 2014, the FASB issued amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The requirements are effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. We are evaluating the impact of the amended revenue recognition guidance on our financial statements.

 

 

3.

Liquidity

          As of June 30, 2014, the Company had cash of $718,000. The Company incurred net losses of $7,608,000 in fiscal year 2014 and $4,292,000 in the fiscal year ended 2013. In addition, the Company has accumulated aggregate net losses from the inception of business through June 30, 2014 of $126.6 million.

          During the first quarter of fiscal 2012, the Company entered into a license agreement with Medtronic for the Prostiva RF Therapy System. The Company paid Medtronic $500,000 on September 6, 2011 for half of the $1,000,000 initial license fee, with the remaining $500,000 payable on the one-year anniversary of this date, September 6, 2012. On June 28, 2013, we entered into a Restructuring Agreement with Medtronic related to the $7.5 million we owed to Medtronic under the Transaction Documents. As part of this agreement we paid Medtronic $2.0 million in satisfaction of royalties earned for the 12 months ended September 6, 2012, the second half of the initial licensing fee, the license maintenance fee for the 12 month period ended September 6, 2012, for outstanding transition services fees, and for Prostiva inventory included as part of the acquisition and purchased subsequent to the acquisition. In addition, we entered into a promissory note (the “Note”) with Medtronic for $5.3 million for the remaining amounts owed on Prostiva inventory acquired as part of the acquisition and purchased subsequent to the acquisition. Interest on the Note accrues at a rate of 6 percent, compounded annually and is payable in five equal installments of principal plus accrued interest on March 31st of each year beginning on March 31, 2015. The $206,000 difference between the $7.5 million in obligations owed to Medtronic and the $2.0 million paid and the $5.3 million Note was recorded as a gain on debt extinguishment in fiscal year 2013. The Company does not have adequate cash to repay the full outstanding principal amount of $5.3 million on the Note. Any event of default under the Note may result in a loss of control of our business or bankruptcy.

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UROLOGIX, INC.
Notes to Financial Statements

          Under the license agreement, royalty payments for Prostiva products are paid one year in arrears based on the contract year. The royalty payment due during the second quarter of fiscal year 2014 of $650,000 has not been paid as of June 30, 2014 or as of the date of filing this Annual Report on Form 10-K. The $650,000 is included in the short-term deferred acquisition payment liability as of June 30, 2014. In addition, we have not paid, as of June 30, 2014 or as of the date of filing this Annual Report on Form 10-K, the annual $65,000 licensing maintenance fee due on September 6, 2013 which is included in other accrued expenses as of June 30, 2014. The non-payment does not entitle Medtronic to terminate the license agreement unless Medtronic provides written notice and an opportunity to cure the default. The non-payment under the license agreement is also not an event of default under the Note unless Medtronic provides written notice and an opportunity to cure. In the event of a material breach of the licensing agreement or other transaction documents, and Medtronic provides written notice to the Company and the Company fails to cure the breach, Medtronic may terminate the license agreement. If the license agreement is terminated, the Company’s rights to sell the Prostiva product would be terminated.

          During the first quarter of fiscal 2013, the Company completed a follow-on offering in which we sold 5,980,000 shares of common stock at a price of $0.75 per share which contributed approximately $3.8 million of net proceeds after deducting underwriting discounts and commissions and other expenses payable by the Company. However, as a result of the Company’s history of operating losses and negative cash flows from operations, and the need for additional working capital to support future operations, there is substantial doubt about our ability to continue as a going concern. In addition, our line of credit with Silicon Valley Bank expired on June 30, 2014, and was not renewed.

          The Company’s cash may not be sufficient to sustain day-to-day operations for the next 12 months. The Company’s ability to continue as a going concern is dependent upon our ability to generate positive cash flows from our business and aggressively manage our expenses, including those associated with our acquisition of the Prostiva product line from Medtronic. The Company’s ability to continue as a going concern is also dependent upon avoiding an event of default under the Note and avoiding termination of the license relating to the Prostiva product, whether by negotiation with Medtronic, cure of any non-payment giving rise to an event of default or termination, or otherwise.

          The Company is considering all available alternatives to improve its cash and liquidity position. In particular, the Company implemented a new sales strategy using a leaner and more efficient sales team which will continue to support our current customer base while also targeting new accounts which align with our value proposition of strong clinical outcomes and low costs in an attempt to generate revenues both from sales of our Cooled ThermoTherapy and Prostiva products in an amount sufficient to improve cash flow from our business. The Company also implemented restructuring plans in January 2014 and again in April 2014 to reduce our cash utilization. The targeted annual savings from these restructurings total over $4 million, compared with the first half of fiscal year 2014. In the fourth quarter, we received partial benefit of these changes (see Footnote 6 for further details). The Company may also seek to improve its liquidity position by raising capital through additional indebtedness or an offering of its equity securities or both. However, it may be difficult to raise additional capital through a debt offering due to the debt outstanding with Medtronic and their position as a secured lender.

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UROLOGIX, INC.
Notes to Financial Statements

          There is no assurance that our cash, cash generated from operations, if any, will be sufficient to fund our anticipated capital needs, operating expenses, (including payments under the licensing agreement), and Note repayments, particularly if product sales do not generate revenues in the amounts currently anticipated, if our operating costs are greater than anticipated or greater than our business can support.

          If the Company is unable to generate sufficient liquidity to meet its needs and in a timely manner, the Company may be required to further reduce expenses and curtail capital expenditures, sell assets, or suspend or discontinue operations. In addition, there can be no assurance that the Company will be able to cure any potential event of default of the Note or cure any breach of any agreement with Medtronic, maintain compliance with its agreements with Medtronic, raise additional capital, or improve its operating or financial performance.

          The financial statements as of and for the year ended June 30, 2014 do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

 

 

4.

Fair Value Measurements

          The Company follows the authoritative guidance on fair value measurements and disclosures with respect to assets and liabilities that are measured at fair value on both a recurring and non-recurring basis. Under this guidance, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The authoritative guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels defined as follows:

 

 

 

 

Level 1 - Inputs are quoted prices in active markets for identical assets or liabilities.

 

 

 

 

Level 2 - Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly.

 

 

 

 

Level 3 - Inputs are unobservable for the asset or liability.

          As part of the consideration for the Prostiva acquisition, the estimated royalty payments between the minimum and maximum amounts are considered contingent consideration. The contingent consideration, including the payment up to the minimum obligation to transfer the license, is measured at fair value at the acquisition date and is remeasured to fair value at each reporting date until the contingency is resolved using Level 3 inputs. The Level 3 inputs consist of the projected fiscal year of payments based on projected revenues and an estimated discount rate. The fair value is determined by applying an appropriate discount rate that reflects the risk factors associated with the payment streams. The changes in fair value that do not relate to the initial recognition of the liability as of the acquisition date are recognized in earnings. The Company estimates the fair value of the future contingent consideration at $953,000 at June 30, 2014. The Company recognized a reduction in fair value of contingent consideration of $105,000 during the fiscal year ended June 30, 2014 as a result of the reduction in the projected royalty payments in excess of contractual minimums. There was no change in the fair value of non-contingent consideration. The following table provides a reconciliation of the beginning and ending balances of the contingent consideration liability:

 

 

 

 

 

 

 

 

(in thousands)

 

Fiscal Year
2013

 

Fiscal Year
2014

 

Beginning Balance - Contingent Consideration Liability

 

$

2,862

 

$

962

 

Accretion expense

 

 

(11

)

 

96

 

Change in fair value of contingent consideration

 

 

(1,380

)

 

(105

)

Payments

 

 

(509

)

 

-

 

Ending Balance - Contingent Consideration Liability

 

$

962

 

$

953

 

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UROLOGIX, INC.
Notes to Financial Statements

          As part of our annual testing, we tested our goodwill for impairment as of April 30, 2014. As part of this impairment testing, we fair valued all of our assets and liabilities, many of which were based on discounted cash flows analysis and forecasted future operating results which represent Level 3 inputs. As a result of our testing, we recorded a non-cash impairment charge of $3,036,000 to fully impair our goodwill. The following table provides a reconciliation of the beginning and ending balances of our goodwill intangible asset:

 

 

 

 

 

(in thousands)

 

Fiscal Year
2014

 

Beginning Balance - Goodwill

 

$

3,036

 

Impairment charge

 

 

(3,036

)

Ending Balance - Goodwill

 

$

-

 

          As a result of the delisting of our common stock from the NASDAQ exchange at the start of trading on June 7, 2013 and the continued decline of our stock price, we tested our long-lived assets and goodwill for impairment as of June 30, 2013. Based on this impairment testing it was determined that our intangible assets acquired as part of the Prostiva acquisition with carrying amount of $1.9 million were impaired (See Note 11). As a result, we wrote the intangible assets down to their implied fair value of $1.5 million and recorded an impairment charge of $434,000. The fair value of patents and technology, customer base and trademark intangible assets was determined based on a discounted cash flow analysis of forecasted future operating results, which represents Level 3 assets measured at fair value on a nonrecurring basis subsequent to its original recognition. The following table provides a reconciliation of the beginning and ending balances of intangible assets:

 

 

 

 

 

 

 

 

(in thousands)

 

Fiscal Year
2013

 

Fiscal Year
2014

 

Beginning Balance - Intangible Assets

 

$

2,177

 

$

1,495

 

Amortization expense

 

 

(248

)

 

(194

)

Impairment charge

 

 

(434

)

 

-

 

Ending Balance - Intangible Assets

 

$

1,495

 

$

1,301

 


 

 

5.

Stock Options and Restricted Stock Awards

          On November 16, 2012, our shareholders approved a new equity compensation plan, the Urologix, Inc. 2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan replaced our Amended and Restated 1991 Stock Option Plan (the “1991 Plan”) and provides stock incentive awards in the form of options (incentive and non-qualified), stock appreciation rights, restricted stock, restricted stock units, performance stock, performance units, and other awards in stock and/or cash. As of June 30, 2014, we had reserved 1,860,328 shares of common stock under the 2012 Plan, which includes 260,328 expired and forfeited shares from the 1991 Plan and 1,319,354 shares were available for future grants. The number of shares available under the 2012 Plan will be increased by an amount equal to the number of shares subject to awards or options granted under the 1991 Plan, which would have become available for additional awards under the 1991 Plan by reason of the forfeiture, cancellation, expiration or termination of those awards. Options expire 10 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. The Company issues new shares when stock options are exercised.

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UROLOGIX, INC.
Notes to Financial Statements

          Amounts recognized in the financial statements related to stock-based compensation for the fiscal years ended June 30, 2014 and 2013 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

Cost of goods sold

 

$

12

 

$

19

 

Sales and marketing

 

 

53

 

 

46

 

General and administrative

 

 

132

 

 

164

 

Research and development

 

 

14

 

 

28

 

Total cost of stock-based compensation

 

$

211

 

$

257

 

          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, 2014 and 2013 using the Black-Scholes option-pricing model:

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

Volatility

 

 

84.00%

 

 

72.00%

 

Risk-free interest rate

 

 

0.7%

 

 

0.4%

 

Expected option life

 

 

3.1 years

 

 

3.4 years

 

Stock dividend yield

 

 

-

 

 

-

 

          A summary of our options and option activity for the fiscal year ended June 30, 2014 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Outstanding

 

 

Options Exercisable

 

Range of Exercise Prices

 

Outstanding as of
June 30, 2014

 

Weighted
Avg.
Remaining
Contractual
Life

 

Weighted
Avg. Exercise
Price

 

 

Exercisable as of
June 30, 2014

 

Weighted
Avg. Exercise
Price

 

$

0.00

 

$

2.43

 

 

1,631,542

 

 

4.9

 

$

1.21

 

 

 

1,331,973

 

$

1.34

 

$

2.44

 

$

4.86

 

 

57,500

 

 

2.1

 

$

3.20

 

 

 

57,500

 

$

3.20

 

$

4.87

 

$

7.29

 

 

7,500

 

 

1.0

 

$

5.47

 

 

 

7,500

 

$

5.47

 

$

7.30

 

$

14.58

 

 

7,500

 

 

0.1

 

$

12.23

 

 

 

7,500

 

$

12.23

 

 

 

 

 

 

 

 

1,704,042

 

 

4.8

 

$

1.35

 

 

 

1,404,473

 

$

1.50

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of
Options

 

 

Weighted-avg.
Exercise Price
Per Option

 

Weighted-avg.
Remaining
Contractual
Term

 

Aggregate
Intrinsic Value

 

Outstanding at July 1, 2013

 

 

1,711,430

 

 

$

1.43

 

 

 

 

$

-

 

Options granted

 

 

191,500

 

 

 

0.38

 

 

 

 

 

 

 

Options forfeited

 

 

(88,063

)

 

 

0.66

 

 

 

 

 

 

 

Options expired

 

 

(110,825

)

 

 

1.49

 

 

 

 

 

 

 

Outstanding at June 30, 2014

 

 

1,704,042

 

 

$

1.35

 

 

4.79

 

$

-

 

Exercisable at June 30, 2014

 

 

1,404,473

 

 

$

1.50

 

 

4.02

 

$

-

 

          There is no aggregate intrinsic value in the table above as our closing stock price of $0.18 and $0.17 on June 30, 2014 and June 28, 2013, respectively, the last trading day prior to June 30, 2013, was lower than all options outstanding and exercisable as of that date.

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UROLOGIX, INC.
Notes to Financial Statements

          The weighted average fair value of our options at their grant date was approximately $0.21 and $0.40 for options granted during the fiscal years ended June 30, 2014 and 2013, respectively. No options were exercised in fiscal year 2014. There was a negative intrinsic value of approximately $600 on options exercised during fiscal year 2013, as some options were exercised at a market price lower than the exercise price.

          A summary of the status of our non-vested options as of June 30, 2014 is as follows:

 

 

 

 

 

 

 

 

 

 

 

Number of
Options

 

 

Weighted-avg.
Grant-Date
Fair Value

 

Non-vested at June 30, 2013

 

 

383,115

 

 

$

0.46

 

Options granted

 

 

191,500

 

 

 

0.21

 

Options forfeited

 

 

(88,063

)

 

 

0.34

 

Options vested

 

 

(186,983

)

 

 

0.48

 

Non-vested at June 30, 2014

 

 

299,569

 

 

$

0.32

 

          A summary of restricted stock award activity is as follows:

 

 

 

 

 

 

 

 

 

 

 

Number of
Restricted
Stock Awards

 

 

Weighted-avg.
Grant-Date
Fair Value

 

Non-vested at June 30, 2013

 

 

113,667

 

 

$

0.68

 

Awards granted

 

 

377,500

 

 

 

0.28

 

Awards forfeited

 

 

(35,000

)

 

 

0.38

 

Awards vested

 

 

(109,865

)

 

 

0.67

 

Non-vested at June 30, 2014

 

 

346,302

 

 

$

0.28

 

          As of June 30, 2014, total unrecognized compensation cost related to non-vested stock options and restricted stock awards granted under our plan was $86,000 and $24,000, respectively. That cost is expected to be recognized over a weighted-average period of 2.0 years for non-vested stock options and 0.36 years for restricted stock awards. The total fair value of options vested during the fiscal years ended June 30, 2014 and 2013 was $89,000 and $140,000, respectively.

 

 

6.

Restructuring

          On January 3, 2014, the Company implemented a restructuring plan, reorganizing the Company’s operations and sales departments. The restructuring expenses totaled approximately $41,000. On April 10, 2014, the Company implemented a second restructuring plan, making additional changes to the Company’s operations and sales departments. The restructuring included another reduction in work force and severance payments of approximately $45,000. Of the $86,000 of expenses related to the two restructurings, approximately $26,000 was included in cost of goods sold and $60,000 was included in operating expense in fiscal year 2014. A summary of the restructuring activity is as follows:

 

 

 

 

 

 

 

Employee
Termination
Costs

 

 

 

 

 

 

Balance as of June 30, 2013

 

$

-

 

Restructuring charges

 

 

86

 

Payments

 

 

(86

)

Balance as of June 30, 2014

 

$

-

 


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Table of Contents


UROLOGIX, INC.
Notes to Financial Statements

          The Company made the strategic decision to restructure the organization, including deploying a new distribution model and operational structure to refocus the allocation of company resources and improve the Company’s ability to achieve profitability and generate positive cash flow from operations. The strategic reorganization included implementing a leaner and more efficient sales team which will continue to support our customer base in a deployment designed to create a more profitable sales model.

          As a result of these restructurings cash utilization in the fourth quarter of fiscal year 2014 was $98,000, which included $80,000 of cash payments related to the April 10th restructuring for payments related to severance and accrued vacation.

 

 

7.

Other Accrued Expenses

          Other accrued expenses is comprised of the following as of June 30 (in thousands):

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

Sales tax accrual

 

$

79

 

$

126

 

Other

 

 

420

 

 

476

 

Total other accrued expenses

 

$

499

 

$

602

 


 

 

8

Income Taxes

          The components of income tax expense (benefit) for the periods ended June 30, 2014 and 2013 consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the fiscal year ended June 30,

 

 

 

2014

 

2013

 

 

 

Current

 

Deferred

 

Total

 

Current

 

Deferred

 

Total

 

Federal

 

$

-

 

$

(33

)

$

(33

)

$

-

 

$

1

 

$

1

 

State

 

 

20

 

 

(3

)

 

17

 

 

13

 

 

-

 

 

13

 

Total

 

$

20

 

$

(36

)

$

(16

)

$

13

 

$

1

 

$

14

 

          A reconciliation of our statutory tax expense (benefit) to our actual tax expense (benefit) is as follows:

 

 

 

 

 

 

 

 

 

 

For the years ended June 30,

 

 

 

2014

 

2013

 

Federal statutory rate at 34 percent

 

$

(2,592

)

$

(1,459

)

State taxes, net of federal tax expense (benefit) and state valuation allowance

 

 

(231

)

 

(128

)

Nondeductible expenses

 

 

34

 

 

17

 

Stock-based compensation

 

 

29

 

 

55

 

Adjustments to net operating losses and credits

 

 

918

 

 

5,562

 

Adjustments to deferred tax assets

 

 

485

 

 

-

 

Other

 

 

1

 

 

3

 

Change in valuation allowance

 

 

1,340

 

 

(4,036

)

 

 

$

(16

)

$

14

 


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Table of Contents


UROLOGIX, INC.
Notes to Financial Statements

          The components of our net deferred tax assets and liabilities are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

2014

 

2013

 

Deferred Tax Assets:

 

 

 

 

 

 

 

Non-Current:

 

 

 

 

 

 

 

Net operating loss carry forward

 

$

27,861

 

$

27,131

 

Definite-lived intangibles

 

 

2,851

 

 

2,414

 

Alternative minimum tax credit

 

 

3

 

 

3

 

Federal and state general business credits

 

 

886

 

 

865

 

Non-qualified stock-based compensation

 

 

153

 

 

536

 

Property, plant and equipment

 

 

80

 

 

64

 

Current:

 

 

 

 

 

 

 

Accrued expenses

 

 

582

 

 

318

 

Gross deferred tax assets

 

 

32,416

 

 

31,331

 

Deferred Tax Liabilities:

 

 

 

 

 

 

 

Non-Current:

 

 

 

 

 

 

 

Amortization of indefinite-lived intangible

 

 

-

 

 

(36

)

Contingent consideration on acquisition

 

 

(900

)

 

(1,155

)

Gross deferred tax liabilities

 

 

(900

)

 

(1,191

)

Net deferred tax assets before valuation allowance

 

 

31,516

 

 

30,140

 

Less: valuation allowance

 

 

(31,516

)

 

(30,176

)

Total net deferred tax liability

 

$

-

 

$

(36

)


          The valuation allowance for deferred tax assets as of June 30, 2014 and 2013 was $31,516,000 and $30,176,000, respectively. The total valuation allowance increased by $1,340,000 for the year ended June 30, 2014. The total valuation allowance decreased $4,087,000 for the year ended June 30, 2013. A significant portion of the current year increase in valuation allowance is attributable to generating NOL carryforward tax benefits. In assessing the need for a valuation allowance, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realized of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

          Deferred tax assets relating to the tax benefits of employee stock option grants have been reduced to reflect exercises through the year ended June 30, 2014. Certain exercises resulted in tax deductions in excess of previously recorded tax benefits. The Company’s Federal NOL carryforwards of $77,534,000 referenced below as of June 30, 2014 include $541,000 of income tax deductions in excess of previously recorded tax benefits. Although these additional tax deductions are reflected in NOL carryforwards referenced below, the related tax benefit of $184,000 will not be recognized until the deductions reduce taxes payable. Accordingly, since the tax benefit does not reduce the Company’s current taxes payable in 2014, these tax benefits are not reflected in the Company’s deferred tax assets presented above. The tax benefit of these excess deductions will be reflected as a credit to additional paid-in capital when and if recognized.

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UROLOGIX, INC.
Notes to Financial Statements

          As of June 30, 2014, 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

 

Net Operating
Loss

 

Credits

 

June 30, 2015

 

$

-

 

$

-

 

June 30, 2016 – June 30, 2020

 

 

21,389

 

 

-

 

June 30, 2021 – June 30, 2025

 

 

19,481

 

 

115

 

June 30, 2026 – June 30, 2034

 

 

36,664

 

 

552

 

 

 

 

 

 

 

 

 

 

 

$

77,534

 

$

667

 

          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 June 30, 2014, the Company had approximately $14,000 of unrecognized tax benefits related to state tax liabilities which would favorably impact the effective income tax rate in any future period, if recognized. During the year ended June 30, 2014, 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.

          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 1998 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.

 

 

9.

Deferred Income

          Deferred income as of June 30, 2014 and 2013 consists of deferred warranty service income of $6,000 and $5,000, respectively. 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.

 

 

10.

Goodwill

          The Company had approximately $3,036,000 of goodwill as of June 30, 2013, related to the acquisition of the Prostiva RF Therapy System on September 6, 2011. Goodwill is tested for impairment annually on April 30th or more frequently if changes in circumstance or the occurrence of events suggests an impairment may exist. We tested our goodwill for impairment due to our continued significant operating losses, negative cash flows, the estimated fair value of obligations due to Medtronic and due to the fact that we had a shareholders’ deficit as of the testing date. As part of this testing we fair valued all of our assets and liabilities as of this date using discounted cash flow analysis and forecasted future operating results. Based on this testing it was determined that the fair value of the Company could no longer support the carrying value of the goodwill. As a result, we recorded a non-cash impairment charge of $3,036,000 to write off the full balance of goodwill as of the testing date.

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Table of Contents


UROLOGIX, INC.
Notes to Financial Statements

 

 

11.

Intangible Assets

          Intangible assets as of June 30, 2014 and 2013 consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

June 30, 2013

 

 

 

Carrying
Value

 

Accumulated
Amortization

 

Impairment

 

Net
Carrying
Value

 

Carrying
Value

 

Accumulated
Amortization

 

Impairment

 

Net
Carrying
Value

 

Prostiva Acquisition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents and Technology

 

$

1,529

 

$

(443

)

$

(274

)

$

812

 

$

1,529

 

$

(311

)

$

(274

)

$

944

 

Customer Base

 

 

531

 

 

(154

)

 

(95

)

 

282

 

 

531

 

 

(108

)

 

(95

)

 

328

 

Trademarks

 

 

325

 

 

(53

)

 

(65

)

 

207

 

 

325

 

 

(37

)

 

(65

)

 

223

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EDAP Acquisition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer Base

 

 

2,300

 

 

(2,294

)

 

-

 

 

6

 

 

2,300

 

 

(2,270

)

 

-

 

 

30

 

Other

 

 

74

 

 

(11

)

 

-

 

 

63

 

 

64

 

 

(2

)

 

-

 

 

62

 

Total intangible assets

 

$

4,759

 

 

(2,955

)

$

(434

)

$

1,370

 

$

4,749

 

 

(2,728

)

$

(434

)

$

1,587

 

          Amortization expense associated with intangible assets for the fiscal years ended June 30, 2014 and 2013 was $227,000 and $274,000, respectively and includes amortization expense recorded in cost of goods sold. As a result of the delisting of our common stock from the NASDAQ exchange at the start of trading on June 7, 2013 and the continued decline of our stock price, we tested our long-lived assets and goodwill for impairment as of June 30, 2013. Based on this impairment testing it was determined that our intangible assets acquired as part of the Prostiva acquisition were impaired. As a result, we recorded an impairment charge of $274,000 on our developed technology asset which was recorded in cost of goods sold, a $95,000 impairment charge on our customer base asset and a $65,000 impairment charge on trademarks both of which were recorded in operating expense. The fair value of patents and technology, customer base and trademark intangible assets was determined based on a discounted cash flow analysis of forecasted future operating results.

          All intangible assets are amortized using the straight-line method over their estimated remaining useful lives. Patents and technology, customer base and trademarks related to the Prostiva acquisition are being amortized over 9 years, 9 years, and 16 years, respectively. The customer base related to the EDAP acquisition is being amortized over its remaining useful life of 0.25 years, and other intangible assets related to patent costs are amortized upon issuance over their estimated useful lives.

          Future amortization expense related to the net carrying amount of intangible assets is estimated to be as follows (in thousands):

 

 

 

 

 

Fiscal Years

 

 

 

 

2015

 

$

205

 

2016

 

 

199

 

2017

 

 

199

 

2018

 

 

198

 

2019

 

 

196

 


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UROLOGIX, INC.
Notes to Financial Statements

 

 

12.

Financing Arrangement

Promissory Note

          On June 28, 2013, the Company entered into a promissory note (the “Note”) with Medtronic for $5.3 million for the remaining amounts owed on Prostiva inventory acquired as part of the acquisition and purchased subsequent to the acquisition. Interest on the principal amount of the Note will accrue at the annual rate of 6%, compounded annually. The Note requires that the Company make five equal annual payments of principal and accrued interest on March 31 of each year beginning March 31, 2015. All amounts under the Note are due and payable on March 31, 2019 or earlier upon a Change of Control (as defined in the Note). The Company may prepay the Note without penalty at any time. The Note is junior to a new lender that provides certain refinancing, but is senior in all respects (including right of payment) to all other existing or future indebtedness. The Note also specifies certain customary events of default that will entitle Medtronic, after any required notice, to declare the outstanding obligations immediately due and payable. The Note contains customary representations, warranties and covenants by the Company.

          Pursuant to the terms of a Security Agreement dated as of June 28, 2013 by and between Urologix and Medtronic, the Company’s obligations under the Note are secured by a security interest in all of the Company’s assets, specifically excluding intellectual property (but including accounts receivable and proceeds of intellectual property).

 

 

13.

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 2018. Rent expense related to operating leases was approximately $229,000 and $227,000 for the years ended June 30, 2014 and 2013, 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 as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2016

 

2017

 

2018

 

2019

 

Building and equipment leases

 

$

228

 

$

231

 

$

32

 

$

5

 

$

-

 


Prostiva Payments

          Prostiva payments are commitments related to the acquisition of the Prostiva RF Therapy product line from Medtronic on September 6, 2011. In addition, on June 28, 2013, we entered into a promissory note (the “Note”) with Medtronic for $5.3 million for the remaining amounts owed on Prostiva inventory acquired as part of the acquisition and purchased subsequent to the acquisition.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years

 

 

 

2015

 

2016

 

2017

 

2018

 

2019

 

Prostiva Payments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Annual license maintenance fee

 

$

65

 

 

65

 

 

65

 

 

65

 

 

65

 

Royalty obligations

 

 

650

 

 

650

 

 

650

 

 

650

 

 

650

 

Note payments, including interest

 

 

1,323

 

 

1,323

 

 

1,323

 

 

1,323

 

 

1,323

 

 

 

$

2,038

 

$

2,038

 

$

2,038

 

$

2,038

 

$

2,038

 


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UROLOGIX, INC.
Notes to Financial Statements

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.

Major Vendor

          During the fiscal year ended June 30, 2014, the Company had purchases from one vendor that accounted for approximately 70 percent of total inventory purchases. This vendor is the supplier of our Prostiva handpieces which accounted for approximately one-third of our revenue in fiscal year 2014.

 

 

14.

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.

 

 

15.

Gain on Demutualization

          Urologix’s primary product liability insurance carrier since July 1, 2006 has been Medmarc Mutual Insurance Company (“Medmarc”). On June 27, 2012, Medmarc announced that it would become part of ProAssurance Corporation (“PRA”). In order for Medmarc to be acquired by PRA, it was required to convert from a mutual insurance company to a stock insurance company through a demutualization process. Concurrently, upon demutualization, PRA would purchase the newly-issued shares of Medmarc common stock. Under the terms of the demutualization, Urologix’s calculated portion of the cash consideration to be received was approximately $321,000. The receipt of the consideration had no direct effect on the Company’s existing insurance policy or coverage. On December 4, 2012, the majority of eligible members voted to approve the demutualization of Medmarc, and in accordance with the Plan of Conversion agreement, Urologix was eligible to receive the cash consideration upon the completion of the acquisition, or January 1, 2013. Urologix received the cash consideration of $321,000 for the demutualization in January, 2013 and recognized a gain from the demutualization in fiscal year 2013.

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ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

 

ITEM 9A.

CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

          The Company’s Chief Executive Officer and Interim Chief Financial Officer, Gregory J. Fluet, has evaluated the Company’s disclosure controls and procedures as of June 30, 2014. Based upon his review, he has concluded that these controls and procedures are effective.

          The Company’s Chief Executive Officer and Interim 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 his 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, 2014 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.

OTHER INFORMATION

None.

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PART III

 

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

          Information required under this item is contained in the following sections of the Company’s Proxy Statement for the 2014 Annual Meeting of Shareholders (the “2014 Proxy Statement”), a definitive copy of which will be filed with the Commission within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K and is incorporated herein by reference: Election of Directors, Information Regarding Executive Officers, Section 16(a) Beneficial Ownership Reporting Compliance, Corporate Governance, and Code of Ethics.

 

 

ITEM 11.

EXECUTIVE COMPENSATION

          Information required under this item is contained in the following sections of the Company’s 2014 Proxy Statement and is incorporated herein by reference: Executive Compensation, Compensation of Directors, and Employment and Change in Control Arrangements.

 

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

          The information required under this item with respect to Item 403 of Regulation S-K is contained in the following sections of the Company’s 2014 Proxy Statement and is incorporated herein by reference: Security Ownership of Principal Shareholders and Management. The information required under this item with respect to Item 201(d) of Regulation S-K is contained in Item 5 of this Annual Report on Form 10-K.

 

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

          Information required under this item is contained in the following sections of the Company’s 2014 Proxy Statement and is incorporated herein by reference: Certain Relationships and Related Persons Transactions, Policy Regarding Transactions with Related Persons, and Corporate Governance.

 

 

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

          Information required under this item is contained in the following sections of the Company’s 2014 Proxy Statement and is incorporated herein by reference: Independent Registered Public Accountants.

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PART IV

 

 

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES


 

 

 

(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, 2014 and 2013.

 

 

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

 

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.

 

 

 

 

 

10.3

 

Amended and Restated Letter Agreement Regarding Change In Control Benefits between Urologix, Inc. and Certain Executive Officers dated April 23, 2012.

 

Exhibit 10.1 to Current Report on Form 8-K dated April 19, 2012.

 

 

 

 

 

10.4

 

First Amended and Restated Lease by and between Parkers Lake I Realty LLC and Urologix, Inc. dated as of August 1, 2010

 

Exhibit 10.1 to Current Report on Form 8-K dated September 9, 2010.

 

 

 

 

 

10.5

 

Letter Agreement regarding Offer of Employment entered into effective June 3, 2011 between Urologix, Inc. and Lisa Ackermann

 

Exhibit 10.1 to Current Report on Form 8-K dated June 3, 2011

 

 

 

 

 

10.6

 

License Agreement dated as of September 6, 2011 by and among Medtronic, Inc., Medtronic VidaMed, Inc., and Urologix, Inc. **

 

Exhibit 10.1 to Current Report on Form 8-K dated September 6, 2011

 

 

 

 

 

10.7

 

Transition Services and Supply Agreement dated as of September 6, 2011 by and among Medtronic, Inc. and Urologix, Inc. **

 

Exhibit 10.2 to Current Report on Form 8-K dated September 6, 2011

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Exhibit Number

 

Document

 

Incorporated by Reference To:

 

 

 

 

 

10.8

 

Acquisition Option Agreement dated as of September 6, 2011 by and among Medtronic VidaMed, Inc., Medtronic, Inc., and Urologix, Inc.

 

Exhibit 10.3 to Current Report on Form 8-K dated September 6, 2011

 

 

 

 

 

10.9

 

Asset Purchase Agreement dated as of September 6, 2011 by and among Medtronic VidaMed, Inc., Medtronic, Inc., and Urologix, Inc.

 

Exhibit 10.4 to Current Report on Form 8-K dated September 6, 2011

 

 

 

 

 

10.10

 

Urologix, Inc. 2012 Stock Incentive Plan

 

Appendix A to the Company’s Proxy Statement for the 2012 Annual Meeting of Shareholders held on November 16, 2012

 

 

 

 

 

10.11

 

Restructuring Agreement and Amendment to Transaction Documents dated June 28, 2013 by and among Urologix, Inc., Medtronic, Inc. and Medtronic VidaMed, Inc.

 

Exhibit 10.1 to Current Report on Form 8-K dated June 28, 2013

 

 

 

 

 

10.12

 

Promissory Note dated June 28, 2013 by Urologix, Inc. as borrower to Medtronic, Inc. as holder in principal amount of $5,332,537.72

 

Exhibit 10.2 to Current Report on Form 8-K dated June 28, 2013

 

 

 

 

 

10.13

 

Security Agreement dated as of June 28, 2013 by and between Urologix, Inc. and Medtronic, Inc.

 

Exhibit 10.3 to Current Report on Form 8-K dated June 28, 2013

 

 

 

 

 

10.14

 

First Amendment of the Transition Services and Supply Agreement effective as of March 1, 2013 by and between Urologix, Inc. and Medtronic, Inc.

 

Exhibit 10.4 to Current Report on Form 8-K dated June 28, 2013

 

 

 

 

 

10.15

 

First Amendment of the License Agreement effective as of March 1, 2013 by and among Urologix, Inc., Medtronic, Inc. and Medtronic VidaMed, Inc. **

 

Exhibit 10.5 to Current Report on Form 8-K dated June 28, 2013

 

 

 

 

 

23.1

 

Consent of Baker Tilly Virchow Krause, LLP, Independent Registered Public Accounting Firm

 

Attached hereto.

 

 

 

 

 

31.1

 

Certification of Chief Executive Officer (principal executive officer) pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act.

 

Attached hereto.

 

 

 

 

 

31.2

 

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.

 

Attached hereto.

 

 

 

 

 

32

 

Certification pursuant to 18 U.S.C. §1350.

 

Attached hereto.


 

 

 

*          Indicates a management contract or compensatory plan or arrangement.

 

**        Certain portions of this exhibit have been deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2. Spaces corresponding to the deleted portions are represented by brackets with asterisks.

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SIGNATURES

          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 19, 2014

 

 

 

 

 

UROLOGIX, INC.

 

 

 

By:

/s/ Gregory J. Fluet

 

 

Gregory J. Fluet, Chief Executive Officer

 

(principal executive officer)

          Each person whose signature appears below hereby constitutes and appoints Gregory J. Fluet 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 attorney-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 attorney-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 19, 2014.

 

 

 

Signature

 

Title

 

 

 

/s/ Gregory J. Fluet

 

Chief Executive Officer, Interim Chief Financial Officer and Director
(principal executive officer, principal financial officer and principal accounting officer)

Gregory J. Fluet

 

 

 

 

/s/ Mitchell Dann

 

Director

Mitchell Dann

 

 

 

 

 

/s/ Sidney W. Emery, Jr.

 

Director

Sidney W. Emery, Jr.

 

 

 

 

 

/s/ Christopher R. Barys

 

Director

Christopher R. Barys

 

 

 

 

 

/s/ Patrick D. Spangler

 

Director

Patrick Spangler

 

 

71