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Uroplasty, Inc. (NASDAQ:UPI)

F1Q14 Earnings Conference Call

August 1, 2013 4:30 AM ET

Executives

Douglas Sherk – EVC Group

Robert Kill – President and Chief Executive Officer

Darin Hammers – Vice President of Sales

Analysts

Christopher Lewis – Roth Capital Partners

Chris Cooley – Stephens Inc.

Charles Haff – Craig-Hallum Capital Group

Jose Haresco– JMP Securities

David Musket – ProMed

Joe First – First Associates

Charles Haff – Craig-Hallum Capital Group

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Uroplasty’s Q1 Fiscal 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct the question-and-answer session and instructions will be provided at that time. (Operator Instructions) I would like to remind everyone that this conference call is being recorded today August 1, 2013.

I will now turn the conference over to Doug Sherk with the EVC Group. Please go ahead Sir

Douglas Sherk

Thank you, Angel, and good afternoon everyone. Thank you for joining us for the Uroplasty conference call to review the financial results for the fiscal First Quarter of 2014 which ended June 30, 2013.

The news release announcing the results crossed the wire this afternoon shortly after the market close and is currently available on the company's website. We have arranged for a taped replay of this call which can be accessed by phone. This call is also being streamed live on the Investor Relations section of our webcast at www.uroplasty.com and it will be archived there.

Before we get started, during the course of this conference call the company will make projections and other looking forward-looking statements regarding future events including statements about sales, reimbursement for procedures performed with our products, the potential market opportunities for our products and new product initiatives. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the anticipated results. These risks and uncertainties are more fully discussed in the company's annual report on Form 10-K and other quarterly reports filed with the SEC.

Additionally, the statements made on this conference call are made only as of today August 1, 2013 and we assume no obligation to update these forward-looking statements to reflect future events or actual outcomes, and do not intend to do so.

And with that, I'd like to turn the call over to Rob Kill, President and Chief Executive Officer of Uroplasty.

Robert Kill

Thank you, Doug, and good afternoon everyone. Thank you for joining us today to review Uroplasty's fiscal first quarter 2014 financial results as well as recent corporate developments.

With me is Darin Hammers, our Vice President of Sales. And I’d like to start with a brief overview of our recent performance, then I’ll turn the call over to Darin for an update on our sales strategy and progress on driving growth of Urgent PC and I’ll conclude with some additional remarks on our goals and how we see the rest of this fiscal year evolving and then we’ll open the call up for your questions.

I’m encouraged that we were able to see tangible results from the sales strategy we laid out last quarter to we regain momentum of Urgent PC sales in the U.S. Darin will provide more specifics on our activities in a moment, and first I’d like to quickly recap our financial results for the quarter.

Global sales increased 5% to $5.8 million for the first quarter of fiscal 2014 and the U.S. total sales increased 6% driven by a 10% increase in sales in our Urgent PC system. U.S. Urgent PC sales in the fiscal first quarter of 2014 were $2.8 million. This was the first sequential quarterly growth we’ve achieved in the three quarters and there is a positive indication that the changes we made in the sales organization are beginning to gain traction.

Gross margin increased to 87.2% for the first quarter from 86.5% last year, the result of an improved product mix. We reported an operating loss for the quarter of $1.6 million, compared with $1 million in the same quarter last year primarily attributable to an increase in operating expenses.

We ended the fiscal first quarter with cash, cash equivalents and investments of $14.1 million compared with $14.9 million at the end of March. We believe that we have adequate cash reserves necessarily for us to build and grow our business.

Turning to operations, we are pleased to announce that effective today, medicare administrative contractor, Novitas Solutions has expanded its coverage of PTNS using Urgent PC.

This increased coverage includes additional diagnostic codes as well as expansion of ongoing therapy from 12 months to up to two years. Novitas provides benefits to approximately $11 million Medicare beneficiaries in 11 states plus the District of Columbia. We believe that PTNS coverage today reaches approximately 140 million private coverage and Medicare beneficiaries. Gaining additional reimbursement coverage continues to be a key component of our strategy moving forward.

I’d now like to turn the call over to Darin to provide details on our sales progress and future initiatives. Darin?

Darin Hammers

Thank you, Rob. It has been exciting couple of quarters since I joined the company earlier this year. I’ve had the opportunity to talk to many physicians and other clinicians about Uroplasty and particularly Urgent PC.

What I’ve learned is that, it is truly an outstanding product with tremendous opportunity for growth and the treatment of their symptoms of OAB. And as I mentioned last quarter, the first step in driving our success is ensuring that we have the right sales reps on the team.

Since I’ve been here, we’ve hired a total of 15 new reps that bring direct device for business-to-business sales experience to the respective territories. These new sales reps are working in step with the more tenured reps that have been with Uroplasty for more than two years, and have continued to have success in the respective territories bringing continuity to our brand and maintaining strong relationships with the physicians.

As of today, just over 50% of our sales team has been with us for less than two years. We anticipate productivity of our new reps will grow quickly as they spend more time in their territories and this will drive continued sales traction with Urgent PC.

To support our sales team, we’ve hired our first two clinical specialist to help train physician practices on how to identify patients that will benefit from Urgent PC, as well as, how to administer the treatment and support patients.

We’re in the process of recruiting in three other markets to further expand this team and we believe this effort will have a positive impact on attracting new customers, as well as our customer retention. As I mentioned on the previous call, in Q1 we initiated a project to help us better understand our current customers and to help identify high potential practices. We are currently using the output as our targeting tool for the sales team.

And we are already seeing a significant impact as a result. We brought on a record number of new accounts this past quarter and we are seeing improvement in utilization from our existing customers. As our new area managers continue to gain experience in the field, I expect to see more of the same in the coming months.

And finally, our focus remains on growing Urgent PC sales particularly in the U.S. Today we have 40 area managers serving 45 active territories. In addition, we have four area managers in training in one open territory which I expect to fill in the next 30 days. The sales organization is energized and excited about the opportunities ahead and we look forward to continue to sell momentum.

I will now turn the call back over to Rob for some closing remarks.

Robert Kill

Thanks Darin. You know we now have the uncertainty of the 10-K filing and the open CEO position behind us. We’re highly confident that we will have a talented CFO on Board by mid August and we’re now completely focused on growing sales, especially Urgent PC here in the U.S. and generating higher return for our shareholders.

Over the past several months, I’ve had the opportunity to work closely with the team at Uroplasty and I’m very optimistic about the opportunity for Urgent PC globally. I’m confident it’s the best product available for treating OAB. And I really look forward to leading Uroplasty as its CEO in the next stage of growth.

That concludes our formal remarks and Darin and I are now happy to take your questions, so operator if you could open the call for Q&A.

Question-and-Answer Session

Operator

And our first question will come from the line of Mr. Chris Lewis from Roth Capital Partners. Please go ahead.

Christopher Lewis – Roth Capital Partners

Hi, guys thanks for taking the questions.

Robert Kill

Hi, Chris.

Christopher Lewis – Roth Capital Partners

Hi, Rob. Congrats on the new role first of all.

Robert Kill

Thank you.

Christopher Lewis – Roth Capital Partners

Rob I was hoping you could just provide a bit more detail on what attracted you to make the move into the permanent role after your interim run. And then going forward, you know what areas you think you’ll devote most of your initial timing focus to.

Robert Kill

Yeah, so Chris, you get a very different view when you are inside a business than when you are maybe on the outside even as a Board member, and I just – the longer I was here and got to know the team and the opportunity the more excited I got and if you look at this market it’s a large market that’s under penetrated and we have a very – a couple of very innovative products that really still [unique] and to put that together with good reimbursement the fees to get better and there is just a really opportunity here and I'm excited about the potential for Uroplasty in that market.

In terms of focus it really is on execution right now. We’ve got the innovative products, we have reimbursement, now we’ve got to grow the business and Darin outlined some of the things that he his working on but obviously continued penetration in the marketplace and growth of Urgent PC is of high importance to us.

Christopher Lewis – Roth Capital Partners

Great it’s nice to see a pickup there in Urgent PC. So I guess going forward how should we expect that that Urgent PC growth both on sequentially and year-over-year to track from here as some other sales force changes become fully realized and as you get fully up to speed.

Robert Kill

I think it’s a great question and I don’t have the crystal ball, but what I could tell you is Darin and his team have really done an outstanding job in a short amount of time to change the trajectory, you identified that in the results, obviously 50% of our sales team has been here less than two years, and the longer they spend time in their territory, the more beneficial that is to sales growth and then obviously the greater penetration we get out in the – the reach we have out in the marketplace to reach new customers. So we feel good about the traction we have and the momentum we are gaining.

Christopher Lewis – Roth Capital Partners

Great and then you know just quickly on the operating expense structure both G&A and sales and marketing kind of ticked up there here in the first quarter. So are those more normalized levels that we should expect going forward. Thanks.

Robert Kill

Good question, we obviously had some expenses associated with the review, so our bills will go away.

Christopher Lewis – Roth Capital Partners

Okay, how much for those?

Robert Kill

Slightly north of 500K, and then we obviously had that…

Christopher Lewis – Roth Capital Partners

Okay, Thanks.

Robert Kill

On top of that we had the expenses for the CEO search. So they were close to $700,000 in what I would consider one time expenses.

Operator

And your next question comes from the line of Mr. Chris Cooley from Stephens. Please go ahead.

Chris Cooley – Stephens Inc.

Good afternoon and thanks for taking the questions.

Robert Kill

Hey Chris.

Chris Cooley – Stephens Inc.

If you could, you know congratulations on establishing some positive momentum there during the quarter, but help us think, I know you don’t give corporate guidance for – at this point, but what are some metrics that – maybe you could give us color around that you had there internally so that we kind of think about how you are progressing towards the goal. In the past we have had things like lead sets of old interactive account, I don’t know if you are willing to steer away from that and just focus on the aggregate revenue number, but help us think about some like in some milestones that we can be watching so we can see how you are progressing towards your goals. Then I have one quick follow-up.

Robert Kill

Yeah Chris, that’s a great question and you’re right in the past we’ve talked about customers in lead sets, we did have over 660 active customers and 1211 lead sets, but one of the things we’ve found as we’ve dug deeper is, it might be time to take a step back and look at some of those key drivers as well as definitions.

In the past in active customer somebody ordered in the past quarter, there are lots of active customers that may not have ordered in a specific quarter and so Darin and I and the new CFO are going to take a step back during the month of August and really make sure that we’ve got the right metrics that we present to you to give you a sense of where the business is headed.

Chris Cooley – Stephens Inc.

Okay, superb that makes sense and then maybe for Darin, if you could just kind of give us some color around what you kind of see as your greatest challenges there in the field, I mean clearly you aim to bring on a talented team in a short – relatively short notice, but as you’re getting out there telling the Urgent PC story, what are the push backs that you are going into? Thank you so much.

Darin Hammers

Sure. You know you started and alluded to that at the beginning, the key for us is we have of lot of new reps, but there are a lot of talented reps, our biggest challenge right now is just helping these area managers get educated on Urgent PC and out in the market. The team that we have in place, the existing area managers are fantastic, they’ve been presenting this product for over two years and we’re executing at the right level for where we are.

The objections that we see in the market are the same ones that we’ve seen for the last several years around how do we identify patients that are right for this technology and implementing into these practices and as Rob mentioned we’re gaining traction and we expect that to continue over the next quarters.

Chris Cooley – Stephens Inc.

Thank you.

Operator

Your next question will come from the line of Mr. Charles Haff from Craig-Hallum. Please go ahead.

Charles Haff – Craig-Hallum Capital Group

Hi thanks for taking my questions. Sorry if I’m breaking up here, I’m on the cellphone. But for the OUS Urgent PC number this quarter historically most of that OUS Urgent PC has been fecal incontinence, was that the case again this quarter or did you have some urinary incontinence in that growth for this quarter?

Robert Kill

Charles, that’s the great question. I don’t have the answer on top of my head. I don’t think, the answer is yes, we had urinary incontinence. So I don’t know the specifics though and I can get back to you on that.

Charles Haff – Craig-Hallum Capital Group

Okay, sure. No problem. And then I apologize if you answered this earlier, but I joined a little bit late. Did you discussed Kaiser and any progression there, since you had the big news for the Kaiser coverage or the preferred status share with Kaiser?

Darin Hammers

No, hey Charles it’s Darin. We didn’t discussed it earlier, but we’ve seen tremendous progress with Kaiser. We’re not getting into specific number of accounts we’re actually ahead of what we targeted in that group. And we’re very pleased with the uptake of the technology and just look forward to that continuing.

Charles Haff – Craig-Hallum Capital Group

And can you just frame that for us Darin in terms of how big the Kaiser opportunity is obviously they have a very large footprint, but are they also doing Botox or they doing Interstim, just any way to help us kind of frame the potential materiality of the Kaiser relationship?

Darin Hammers

It’s hard to quantify, of course they’re doing Interstim and they’re doing Botox as well. But I will tell you, no there is a lot of emphasis within that system on how do we implement Urgent PC into the satellite offices and that’s where our success is, you’re being able to put a number to the market opportunity, it’s kind of like what we talked about with the market in general. So it’s a big market and it’s underpenetrated in the holds true for Kaiser.

Charles Haff – Craig-Hallum Capital Group

Okay, great. And then my last question is on the clinical in R&D side. I realized it’s a little bit early Rob, maybe to ask you this question. But perhaps you’ve had a chance to kind of assess that, previously there has been communication around the implantable PT device for both urinary and then fecal program in the U.S. for the external PTNS, any changes so far to the clinical plan for those programs? Thanks

Robert Kill

Definitely Charles, great question, on a fecal incontinence side, we’re in the limitation and initiation phase of the trial. The earlier question of investigators, they’re pleased to have a minimally invasive therapy were really in facilitating condition and there is not many truth and options out there.

So we’re early there, staying with the implantable, we’re in the process of negotiating contrast with partners and we got to complete this before any move to the CE Marker is there. So we’re still trying to moving. We’re still moving forward. But I think it’s important to note that, they’re not next quarter revenue generators.

Charles Haff – Craig-Hallum Capital Group

Of course, thanks for taking my questions

Robert Kill

Yeah, great question.

Operator

And your next question will come from the line of Mr. Jose Haresco from JMP Securities. Please go ahead.

Jose Haresco– JMP Securities

Hi guys, good afternoon.

Robert Kill

Hi, Jose.

Jose Haresco– JMP Securities

First question Darin, I’m sorry if you mentioned this earlier. But could you go through the numbers again for how many salespeople you have right now, who were tenured, was over two years experience, how many you have under two years experience? And where you hope to hand up at the end of the year in total? And then I guess, as we figure out 2014, should we expect a pause in hiring at the end of the year? Is it just something as (inaudible) we get and as of footprint out there.

Robert Kill

Sure, Jose that right now I have 22 area managers with 24 months or less tenure, I have A little bit here more than two years. As I mentioned earlier, we have four that are in training right now, so I wouldn’t have one open territory. So I expect that hiring will come to a halt very quickly, within the next 30 days hopefully we will get that filled. The great news is that we’re seeing an uptick in these newer area managers territories almost immediately so very encouraged by the team and the level of talent that we bring on, but we still have a very talented group A team that have been over two years are very successful and will continue to be successful.

Jose Haresco, III, PhD – JMP Securities

What about the clinical support team that go and help train officers to find their – find for patient, how relaxed back we need to be.

Robert Kill

Right now its we are kind of in the pilot stages for that so my initial hiring will be five and we want to make sure that the model works and that we are seeing the value that we think we will, we are confident and then we will responsibly add to that team as the business tactics.

Jose Haresco, III, PhD – JMP Securities

Okay thank you. Turning to now thoughts for a second could you remind us exactly what was there before this expanded number of indications, which I see as a positive, what was it before and am I miss interpreting this in thinking that for lack of better phrase moves Urgent PC up to treatment algorithm? In other word you know do I have to still be refractory to two or three guards

Robert Kill

So Jose, its still third line treatment, its after drugs the diagnosis, code I don’t know, Drain you know specifics on that we can get to you off, I'm sorry I don’t know the specific of playing new to CEO role on that one. And the expansion though is from 12 months to two years we obviously released a study last quarter showing efficacy over 36 months. I mean that’s a positive. So this is a move in the right direction with Novartis who covers were 11 million Medicare lives.

Jose Haresco, III, PhD – JMP Securities

And how many of the other – I know you certainly already have two years coverage, how many of the other ones you have courage and should we expect – is that a prior for you guys to keep on expanding that number of covered lives that have two years coverage or more?

Darin Hammers

Yeah the answer is yes. So when I say we have good reimbursement that’s getting better, it’s getting better because of announcements like Novitas and we are very focused on that. I don’t know off-hand how many are less than two years right now, there’s a few. But our focus is we want to gain Medicare coverage universally. So there is one contractor that we don’t – and we are working on that I mean we still focus on gaining private pair coverage too. So the reimbursement story is one that’s very important to us.

Jose Haresco, III, PhD – JMP Securities

Okay. That’s great thank you very much.

Operator

And your next question will come from line of Mr. David Musket from ProMed. Please go ahead.

David Musket – ProMed

Hi guys a couple of fill ins. So any change on the ASPs in the last quarter?

Robert Kill

They were not.

David Musket – ProMed

And how are you – I think you said you are seeing increased utilization, how are you, by what metrics are you making that statement?

Robert Kill

Yes one of the things that we look at is just the average utilization number of lead sets used per account. And I trust that on a quarterly basis and it’s a metric that we used to try to growth existing businesses within a particular account. So that getting to specifics what the numbers are. That’s trending positive and has for the last two quarters.

David Musket – ProMed

Yeah, we’re still way below where we were just a couple of quarter ago. But it is trending positive again. That’s great.

Robert Kill

That’s right.

David Musket – ProMed

And what do you think causing the pickup right now. Have you changed the incentives, but you’re offering your sales forces or the way you’re promoting the product. What do you think is responsible for the churn?

Robert Kill

Well, we did change compensation at the beginning of this year. So it’s more growth oriented and I think that’s had a positive effect. I think we’ve provided the team with some additional tools that they haven’t had in the past that what we develop from a play book with the database that we looked that our existing customers. We’ve improved the education for the new hires. So I think it’s a lot of little things David. And quite frankly just helping our team understand where they need to spend their time and they’re executing at a high level.

David Musket – ProMed

I appreciate that. And I’m sure a lot of this is hard to put your finger on it. Some quarters ago, before you had all these improved programs in place we had a much higher overall utilization of lead sets so its just a matter now of trying to figure how do we loose those and how do we – you know the folks that were – the physicians that were using this sort of higher level two quarters ago, do we have a better sense of why they fell off and how we’re going to get them back?

Robert Kill

Yeah, that’s one of the things that we look at obviously, so attrition has been something that that we’ve look at closely since I’ve been here. There is a lot of reasons why customers moved away, I think reimbursement has been a piece of it and that’s getting better. But we just had a couple of quarters where we lost our way a little bit and we’re getting it back and we hope to get back to those levels pretty quickly.

David Musket – ProMed

So as you think is mostly related to reimbursement to shifts?

Robert Kill

I think that plays a part of it and then I think a big part of it is how we sold it into some of these accounts initially and how they were implemented to make sure that the business stuck. And so there you saw these high orders at the beginning and then if there is not a reorder associated with it, it scales up your utilization number.

David Musket – ProMed

You would hope that if the physicians were getting reliable results, if they would work through those percentages?

Robert Kill

You would hope.

David Musket – ProMed

All right, but we’ll keeping watch on it, thanks.

Robert Kill

All right, thanks, David.

Operator

(Operator Instructions) And your next question comes from the line of Mr. Joe First from First Associates. Please go ahead.

Joe First – First Associates

Good afternoon, gentlemen. You mentioned that there are about $700,000 of non-recurring expenses in that quarter, well most of them in the general administrative or some of them in the selling and marketing expenses?

Robert Kill

No, the expenses that I referenced were associated with the internal review we did.

Joe First – First Associates

Right, and so they’re under…

Robert Kill

Units.

Joe First – First Associates

SG&A, okay. And then I noticed that your selling expenses are up around $700,000 is that because of duplicate payments to salesmen who are leaving and salesmen that were new and so on?

Robert Kill

No, not at all, I mean they’re still not in the sales team and when there is bodies and seats versus empty spaces that adds up and…

Joe First – First Associates

All right.

Robert Kill

You had travel expenses and lot of that associated with it. So I have full confidence sales team drives that…

Joe First – First Associates

Okay. How about one-time expenses for the outgoing President and legal fees and some of these always transaction lawsuit?

Robert Kill

Yeah, there will be some so primarily in Q2. I think we’ve put in the queue that they were somewhere in the range of 400K to 500K.

Joe First – First Associates

Got you, okay. Thank you, keep up the good work. You’re going to make a lot of improvements I’m sure.

Robert Kill

Thank you.

Operator

And your next question will come from the line of Charles Haff from Craig-Hallum. Please go ahead.

Charles Haff – Craig-Hallum Capital Group

Hi. Thanks for taking my follow-up question. Darin, I was wondering on the physician office the ICD-9 searches that you guys were got kind of working on a couple of quarters ago. It seems like the past, it was still little too early to see if that program was going to bare fruit, but I wondered if, now with the few more months under your belt if you could give us an update on how those files searches for the ICD-9 codes are going.

Darin Hammers

Sure. Charles it is really hard to quantify that uptake from the ICD-9 cert because the patients don’t come in and say there – that’s a result of a mailer, but we have tracked the accounts that we’ve done searches in; we’re seeing an uptick in utilization, so we do believe that the searches are affective. There are tool. It’ not a strategy, but we’ve seen positive results from where the account that we have done the searches in.

Charles Haff – Craig-Hallum Capital Group

Okay thanks.

Darin Hammers

You bet.

Operator

There are no further questions on this time, and I’ll now turn the call back over to management.

Dough Sherk

Well thank you Angel and thanks everyone for participating today. We really appreciate your interest and look forward to updating you on our progress for our second quarter of fiscal 2014, in the October timeframe. Thanks very much.

Operator

Ladies and Gentlemen, this concludes our conference call for today. Thank you for participating. Please disconnect your lines.

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