Greg Fluet - CEO
Brian Smrdel - CFO
Urologix, Inc. (ULGX) F4Q 2013 Earnings Call August 20, 2013 5:00 PM ET
Good day, ladies and gentlemen. And welcome to the Urologix Incorporated Fiscal Year 2013 and Fourth Quarter Conference Call. My name is Crystal, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. As a reminder, this conference is being recorded for replay purposes.
Certain information discussed during this conference call, including answers to your questions, may contain forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those stated or implied in any forward-looking statements due to risks and uncertainties. A detailed discussion of risks and uncertainties may be found in Urologix’s recent Annual Report on Form 10-K for the year ended June 30, 2012, and other documents filed with the Securities and Exchange Commission. Urologix disclaims any obligation to update any forward-looking statement made during the course of this call.
In addition the company's management believes that non-GAAP gross margin for the fourth quarter provides meaningful supplemental information and is helpful in assessing the company's historical and future business performance. A table reconciling the GAAP gross margin to the non-GAAP gross margin for the fourth quarter and fiscal year 2013 is included in the gross earnings release which is posted on the Company's website at www.urologix.com under Investors.
At this time, I will turn the call over to Mr. Greg Fluet, Chief Executive Officer. Please proceed, sir.
Thank you Crystal and welcome everyone to Urologix's fiscal year 2013 and fourth quarter earnings call. With me is Brian Smrdel, the Company’s Chief Financial Officer. Today we’ll begin with a brief update on recent events, review our fourth quarter operating performance, highlight key initiatives, and provide guidance. Brian will then review the financial results. Lastly, I will discuss our plans to grow the market for our in-office BPH technologies to leverage our operational infrastructure and to identify new opportunities for growth. Then we will open up the call for questions.
First regarding recent events; on June 28th we completed a restructuring agreement which settled the $7.5 million in outstanding liabilities due to Medtronic related to the Prostiva license agreement. This restructuring which included $2 million cash payment in the quarter to Medtronic has allowed us to convert approximately $5.3 million of additional expense that would have been due under the original terms into long term debt, with no payment due on this amount until March 2015.
This restructuring provides new certainty in our payment obligations and enables us to better plan and to deploy our current resources towards achieving our Company objectives. Turning to our fourth quarter performance; fourth quarter revenue was 4.2 million up 2.5% sequentially; full year revenue of $16.6 million was in line with our forecast coming in at the midpoint of our guidance range. We're pleased to see the sequential improvement in our performance from the third quarter but continued to focus on our goal of demonstrating year-over-year growth in the business.
In addition we did meet our goal for total patient education seminars at the end of fiscal year 2013; we have now penetrated over 20% of our customer base with participation in these educational events. We achieved our fourth quarter results in what we're still observing to be a challenging environment broadly for medical procedures.
We continue to see industry reports of a reduced volume of patient visits to primary care physicians and specialist physicians in this calendar year. Some of this overall decline is being attributed to patients having more exposure to the cost of healthcare with high deductible plan becoming more prevalent. In the elderly population, there is financial exposure to the burden of their Medicare co-pays and deductibles particularly for those who can’t afford supplemental coverage.
To be successful in growing our business, we must continually work to demonstrate the value of our technologies to all major constituents in healthcare system patients, urologists, and payers. Fundamentally, our strategy is built on raising the awareness of the large unmet needs of BPH patients which our technologies can help address. We do this through education of patients regarding their options and in this process also educate urologists about how our technologies can help their patients and are good for their practice.
Our patient education seminars show there is a large unmet patient need that our in-office technologies can address. The seminar experience has also helped to illuminate this need for urologist customers hosting the seminars, many of whom are surprised at the turnout for the events. Educating more urologists on this unmet need is a secondary benefit of the patients’ seminars and helps demonstrate our value to the urologist.
We have a well proven tactic that supports our overall strategy with our patient education seminars and while our team did meet our seminar goal for fiscal year 2013 of achieving 20% total penetration of our account base, participating in the think outside the pillbox campaign, we still have the significant achievement to grow our overall business, that is why in fiscal year '13 we have launched in addition to seminars new programs designed to leverage what we have learned from seminars and accelerate the exposure of patients and urologists to our in-office therapies and the value they provide.
The two main ways we are doing this is first, through an increased presence on the web to enable patients to have the facts to make informed decisions in partnership with their urologists about their BPH treatment options, this includes improvements in our website, a new presence on social networking sites, a Urologix YouTube channel, a landing site with patient information at www.bph.com, and targeted events to drive patients to these resources such as the recent program on the balancing act on the lifetime channel.
Second, we have completed a handful of peer-to-peer events in the last fiscal year where we’re helping educate urologists about our technologies. We have begun to leverage the knowledge of urologists who understand the clinical value of our technologies to help educate their peers, other urologists, about the world’s safe cost effective durable Urologix’s product in their practice. The results of these efforts are still early but there is encouraging evidence that we can have a positive effect from these programs.
To execute these tactics, we have a direct sales force and marketing team focused on sales plan execution and deploying these tools in their territories while providing world-class training, service, and support for all of our physician customers and their office staff. Continuing execution of our seminars and building on this impact with our peer-to-peer events will better position the Company to drive growth by further developing the market for our in-office technologies that address a large unmet patient need.
As we mentioned in the press release, we continue to have confidence in our team and our plan. I would like to share a positive update that demonstrates how we look for early signs of success with our sales plan execution before I turn the call over to Brian to discuss our financial performance. As we discussed on last quarter’s call, we performed an analysis to identify areas of the country where our business is growing year-over-year. Last quarter, we are able to compare two quarters of revenue results on apples to apples basis with the prior fiscal years Q2 and Q3 results.
This was the first time we’re able to do this comparison for both product lines CTT and Prostiva since the acquisition of the Prostiva license which occurred in the first quarter of fiscal year '12. Now, at the end of Q4, we have updated that analysis comparing the last three quarters of fiscal year 2013 to the prior fiscal years Q2 to Q4 results. We continue to have approximately one-third of our territories in U.S. where we achieved revenue growth through execution of our sales plan. This segment of our business continues to set the bar for performance expectations and we have used this information to set clear goals for all in the sale team in fiscal year 2014 to generate growth.
Many of the territories not in the areas generating growth are newly staffed by sales reps that join over the course of fiscal year 2013. It takes time for new sale reps to build their clinical knowledge, establish relationships and trust with their customers and understand their distribution channels in their territory. We are seeing improving results from our reps that we have hired in fiscal year '13 that have hit the six to nine months mark in their tenure.
As the sale reps begin to hit the one year mark in fiscal year 2014, we expect their contribution will begin to positively impact our overall performance. While we think there are very powerful positives within the organization translating that work to top line results is critical to our future success, our team's completely focused on demonstrating the year-over-year growth and as our target first quarter of this fiscal year as well as our goal for the full fiscal year; however, we’re planning to turn this business to grow in a time of continued pressure on patient visits broadly and a government that is yet to address significant challenges to Medicare.
Given this environment, we are providing guidance for fiscal year 2014 with a range of $15 million to $17 million.
And now I’ll turn the call over to Brian Smrdel our CFO who will provide more details on our financial performance.
Thank you, Greg. Fourth quarter fiscal year 2013 revenue totaled $4.2 million, up 2.5% sequentially from the third quarter of fiscal year 2013 and down 7% compared to the fourth quarter of fiscal year 2012. The sequential increase in revenue was driven by low single digit growth in sales for both product lines Cooled ThermoTherapy and Prostiva RF therapy. The year-over-year decline in revenue was driven by 3.2% decline in sales of Cooled ThermoTherapy and a 13.2% decline in sales of Prostiva compared to the prior year.
The financials for the fourth quarter were affected by two significant events. The first one I will describe is a non-cash impact driven by the impairment testing of our long lived assets, the second is the restructuring of the liabilities related to Prostiva which removed significant uncertainty from our balance sheet.
In the fourth quarter of fiscal year 2013, the de-listing of our common stock from the NASDAQ Exchange was considered a triggering event requiring the impairment testing of the carrying value of goodwill and long lived assets on our balance sheet. Therefore, we tested these assets including intangible assets acquired as part of the Prostiva transaction to determine if an impairment existed. As a result of the testing, the company recorded a total impairment charge of $434,000 in the fourth quarter related to the Prostiva intangible assets. Of this total impairment charge, $274,000 was allocated to develop technology and patents and was reported in cost of goods sold, while the remaining $160,000 related to trademarks and customer list is broken out separately in the operating expense section of the income statement.
Second, as Greg mentioned, we restructured our current outstanding liabilities to Medtronic in the fourth quarter on June 28, paying $2 million in cash and issuing a long term note for $5.3 million. This restructuring settled our current payment obligations related to Prostiva product as well as other fees owed such as royalties in the second half of the initial licensing fee that were reported on the balance sheet. In total, we reduced short term deferred acquisition cost by $2.4 million and accounts payable by $5.1 million for these obligations. The $206,000 difference between the value of the consideration paid including the long term debt compared to the liabilities removed was recorded as a gain on the extinguishment of debt. As a result of the change, the future royalty stream due to Medtronic from the restructuring agreement approximately $160,000 of accreted interest expense previously reported in general and administrative cost was re-class the interest expense line.
Gross profit for the fourth quarter of fiscal year 2013 was $1.9 million or 45.5% of revenue compared to $2.3 million or 50.6% of revenue in the fourth quarter of fiscal year 2012. The fourth quarter of fiscal year 2013 was impacted by the aforementioned $274,000 impairment charge. Excluding this charge, fourth quarter gross margin for fiscal year 2013 on a non-GAAP basis was 52.1%, an improvement of 1.5 percentage points over last year. The improvement in gross margin excluding the impairment charge was driven primarily by a reduction in manufacturing cost and mobile expenses.
Total operating expense was $3.2 million for the fourth quarter of fiscal year 2013, down 5.3% year-over-year. The fourth quarter of fiscal year 2013 operating expense included the impairment charge of $160,000 related to trademarks and customer list acquired as part of the Prostiva transaction. Excluding this impairment charge and the gain on the change in value of acquisition consideration in both the current quarter and the fourth quarter of fiscal year 2012, operating expense declined 12.2% compared to the prior year. The decrease in total operating expense excluding the impairment charge and gains on acquisition consideration was driven by a decline of $399,000 in general and administrative expense primarily as a result of the restructuring of Medtronic liabilities in the period which moved accreted interest expense from general and administrative to the interest expense line. The Company also reported a reduction in sales and marketing and research and development expense totaling $96,000.
For the fourth quarter of fiscal year 2013, Urologix reported a net loss of $1.2 million or $0.06 per diluted share compared to a net loss of $1.2 million or $0.08 per diluted share in the fourth quarter of fiscal year 2012. The net loss in the fourth quarter of fiscal year 2013 compared to the prior year was impacted on a pretax basis by the total impairment charge of $434,000 on intangible assets, the $206,000 gain on debt extinguishment and $65,000 paid for the medical device tax.
For the fiscal year 2013 period ended June 30, 2013, revenues totaled $16.6 million, down 2.6% compared to revenues of $17 million in fiscal year 2012. The year-over-year decline in revenue was driven by a mid-single digit decline in sales of Cooled ThermoTherapy products and a mid-single digit increase in sales of Prostiva RF therapy products. Prostiva growth benefited from the inclusion of a full year sales in fiscal year 2013 compared to approximately 10 months of sales contribution following the company’s license acquisition in fiscal year 2012.
Gross profit for fiscal year 2013 was $8.2 million or 49.3% of sales. Excluding the impairment charge of $274,000 that impacted cost of goods sold in the fourth quarter of fiscal year 2013. Gross margin on a non-GAAP basis was 51%. Total operating expense of $12.1 million for fiscal year 2013 declined 3.4% year over year compared to $12.5 million in fiscal year 2012. Excluding the changes in the value of the acquisition consideration for both periods and as well as onetime items for the gain on demutualization and impairment charges in fiscal year 2013, total operating expenses were flat year over year.
The Company reported a net loss of $4.3 million or $0.21 per diluted share for fiscal year 2013 compared to a net loss of $4.7 million or $0.32 per diluted share in the prior fiscal year period.
As of June 30th, 2013, the Company's cash balance was $2.3 million compared to $5.1 million as of March 31st, 2013. This amount includes the impact from the $2 million payment to Medtronic paid upon signing of the restructuring agreement. Outside of the restructuring payment, the cash balance is decreased to $807,000 compared to March 31st, 2013. Part of the $807,000 in cash utilization was attributed to an extra payroll period which occurred in the fourth quarter and then will appear again in the second quarter of this fiscal year.
The Company has not drawn upon an existing $2 million line of credit currently in place with Silicon Valley Bank. On a full year basis, the company’s cash balance increased $391,000 compared to June 30th, 2012. The change in the cash balance over the fiscal year was impacted by the following items. First, an increase of $3.8 million from a common stock offering that closed on July 5th, 2012 with the second closing on August 7th, 2012; second, a decrease due to the cash payment of $2 million paid as a part of the Prostiva restructuring that was offset by the deferral of $2 million of payments due earlier in the year as part of the license agreement as well as for deferred inventory payments; and third, the receipt of $321,000 in January 2013 from the demutualization of an insurer. Net of these items, the company utilized $3.7 million in cash during fiscal year 2013.
I will now turn the call back to Greg.
Thank you, Brian. Before we open the call for your questions, I would like to provide some commentary on our view of our current market opportunity and our ability to generate incremental value from leveraging our sales and marketing infrastructure. First, I want to reiterate our confidence that we’re targeting the right market segment of BPH to achieve growth, those patients that do not want to be on chronic BPH medication and are looking for more effective non-surgical alternative. There are over 4 million men in the U.S. on chronic drug therapy trying to alleviate their symptoms with medication and more than that number in watchful waiting category.
In addition, this aging population of men is growing due to the current demographics. BPH medication has high non-compliance rates driven by the combination of the mixed clinical effectiveness, the troubling side effect profile and noticeable costs, facts continually reiterated by the published clinical data.
In addition, the growing reliance on drug management has burdened the healthcare system with more and more men having their BPH treated as a chronic disease. Many of the costs associated with drug management of BPH build over the time with their daily use and may be harder to track compared to procedure cost which is largely driven by singular event. A great example of how cost of BPH care can extend beyond the treatment costs alone is an article recently published online from the journal of urology, it explores the trends and emergency room cost associated with BPH care from 2006 to 2009 a period of time characterized by rapid rises in BPH drug utilization.
Emergency Department cost for treating BPH it needs three years increased by more than 40% or over $130 million in the United States. While not showing causation, this study is insightful and intriguing work based on real world data. It builds on earlier work that begins to point towards the potential risks of long term drug care for BPH but more needs to be done to analyze what is the optimal care for BPH patients and what are true costs of all treatment options. We believe that our office-based products provide a comparatively cost effective option for patients and for the healthcare system.
Our strategy to improve patient awareness hangs on education and the results of our seminar tactic has demonstrated that the unmet patient need for an option between drugs and surgery that our technologies addresses is real. We think this population attending our seminars is just the tip of the iceberg of the patient population that would be interested if they knew of our treatment options.
Growing the patient awareness of our technologies is still just one step; we have to continue to execute our mission of excellent product quality, customer service and clinical education to ensure continued adoption through the patient and customer satisfaction following the educational programs. As we mentioned last quarter, we had hosted peer-to-peer urology workshops in our booth at the at the American Urological Association meeting in San Diego this year which was a positive experience for us and we continue to see good results from these leads we identified at the events.
We have proved in a significant segment of our business that we can execute our plan and achieve growth. We have a well-trained and customer focused mobile service and an experienced and disciplined medical device sales leadership team that is committed to helping the talented individuals in our field meet their personal and professional goals. They are focused on our plan to grow our current business. We believe that successful execution of our strategy will result in improved performance and that the BPH treatment market remains a compelling long-term growth opportunity for the Company. However, we also believe that we have the opportunity to leverage this organization to sell other products that fit our urology office call point. Without distracting us from our organic growth plans we have begun the process to seek potential partners that have products that would fit into our distribution channel.
In summary, we have the levers to drive improved results in the future. We have updated our fiscal year 2014 performance targets to achieve our plan. Specifically these are improved patient awareness through execution of our patient education seminars, increased sales force productivity in fiscal year 2014 as we grow the tenure and experience of the sales organization through leadership and training, built upon our earlier experience with peer-to-peer urology events and demonstrate positive impact from those activities, and lastly, identify additional products to distribute through our differentiated distribution channel that includes both mobile technicians and sales reps.
In closing, we’re intensely focused on leveraging our leading market share position, expanded sales organization, and innovative market development and business development programs to drive top-line growth. We appreciate the time and continued interest in our Company and with that I’ll open up the call to your questions.
(Operator Instructions) There are no questions, sir.
Great, thank you, Crystal. On behalf of the Board of Directors, senior leadership and all Urologix employees, I thank our loyal shareholders for your continued interest in Urologix and we look forward to updating you on our progress on our first quarter conference call. Thank you and good afternoon.
Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!