Urologix Inc. (OTCPK:ULGX) F2Q 2014 Results Earnings Call February 4, 2014 5:00 PM ET
Greg Fluet - Chief Executive Officer
Brian Smrdel - Chief Financial Officer
Good day, ladies and gentlemen. And welcome to the Urologix Incorporated Fiscal Year 2014 Second Quarter Conference Call. My name is Cilia, and I’ll be your coordinator for today. At this time, all participants are in 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 are found in Urologix’s recent annual report on Form 10-K for the year ended June 30, 2013, and other documents filed with the Securities and Exchange Commission. Urologix disclaims any obligation to update any forward-looking statements made during this conference call.
At this time, I will turn the call over to Greg Fluet, Chief Executive Officer. Please proceed, sir.
Thank you, Cilia. And welcome everyone to Urologix's fiscal year 2014 second quarter earnings call. With me is Brian Smrdel, the company’s Chief Financial Officer. Today, we’ll begin with a brief update on our second quarter operating performance, provide an update on the market dynamics, discuss the recently announced reorganization and highlight key market development initiatives. Brian will then review the financial results. Lastly, I will review the market opportunity for our in-office BPH technologies and highlight our initiatives to leverage our new operational infrastructure. Then we will open up the call for questions.
Turning to our second quarter performance, Q2 revenue was $3.8 million, relatively stabilize with the prior quarter and down 12.6% from the second quarter of the prior year. These results did not meet our expectation as we experienced lower order volume as typical for the end of the calendar year. Despite the topline performance, we managed our spending carefully which helped to preserve our cash position at quarter end.
Further, we announced the completion of a strategic restructuring on January 8th design to refocus the allocation of resources and improve overall profitability. I will discuss each of these in further detail in a few moments.
As we discussed in recent quarters, while our patient population continues to grow with the increasing aging of the population, the overall healthcare provider landscape including urology is changing rapidly. Urology groups continued to merge and hospitals continued to acquire practices in a meaningful way.
There is not a singular answer for how these changes are affecting our customers. Some customers are benefiting from the consolidation in the market and others are not. But what it is doing is forcing us to change how we think about the most effective way to provide sales service and support to our customers. These market factors in conjunction with our operating results and current resources were significant factors in our decision to design and implement the new organizational structure.
So let me provide some more background and detail on our new structure. Over the last few years, we have built a multi-tiered Urologix sales team of Regional Sales Directors, Territory Sales Representatives, Mobile Application Specialists and Inside Sales Support. Each layer has different resources and skills, which are important assets for the company of our customers.
The new deployment model is designed to match these assets with the individual needs of our customers. This new model should allow us to work smarter, use our time more efficiently and to deploy our sales and marketing tools in an enhanced manner, squarely focused on where we think we will get the best return on investment.
This, quarter, we launched the new structure and we are intently focused on effective execution and change management, both within the team and with our customers. We expect there may be a short-term learning curve with new responsibilities for the team. But longer term, we think it will position us for more profitable sales model. What this means in terms of sales coverage and expense reduction? I will cover the high-level, but we will not go into much detail given the competitive nature of the BPH marketplace.
Our Executive Vice President of Sales and Marketing, Lisa Ackermann is doing an excellent job of leading the field sales organization through this transformation. Before this restructuring, we had 37 field sales personnel, consisting of the previously mentioned Regional Sales Directors, Territory Sales Representatives and Mobile Application Specialists.
After the restructuring, there will be 30 individuals in the field sale team plus one individual that’s always dedicated to inside sales. Urologix field sale team will continue to have direct responsibility for managing the customers that accounted for 90% of our U.S. regional revenue in the last year. But we are still supporting the remainder of our U.S. customers through the inside sales positions and through our customer service team.
Importantly, many of our customers will see no significant change in their existing sales coverage, and our team has responded very well to the new sales deployment structure when we rolled it out at the beginning of January. In addition, there have been some changes in the operations group based in Minnesota as well. All combined, the restructuring reduced our headcount by approximately 10% across the company and should result in over $1.5 million in reduced expenses on an annual basis, largely associated with sales costs.
Importantly, we expect to realize nearly fully benefits of this expense saving in our fiscal third quarter. We're continuing to focus our resources on key initiatives designed to expand the patient, physician and payer awareness of unique benefits of our in-office technologies in order to expand our market. For patient awareness, the primary tool continues to be the patient education seminars. They are validated but there is a large unmet patient need for in-office technologies.
These same seminars also help expand Urologix’s awareness of the unmet patient need when they see a room for their BPH patients that want to learn more about our technology as a treatment option.
Second, we’ve continued to build upon our professional education efforts with both, our presence at the recent AUA regional meetings and with tools to help physicians educate their fellow physicians on how they optimally utilize our technologies. There is a great example of this occurring in the second quarter with three different posters covering Cooled ThermoTherapy or Prostiva that urologists individually presented at AUA regional meetings.
Lastly, we have invested more of our research efforts on healthcare economics. Our clinical outcomes are well documented through numerous peer reviewed publications. However, we can do more on the payer community with the right information so they are able to understand the cost effectiveness of our technologies compared to alternative treatment options.
Our clinically proven durable and safe in-office BPH technologies provide patient care that should meet the intended goals of new ACO or Bundle Payments models, low procedure costs, good clinical outcomes, low risk of complications and low retreatment rates.
Our technology should benefit in the healthcare system looking to help reduce costs while generating good clinical outcomes. We expect in fiscal year 2014, we’ll have more data to help expand upon the previously presented work on cost effectiveness. These positive initiatives reinforce the potential value we see for our business. Expanding on these efforts to improve our operational results is critical to our future success.
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. Second quarter fiscal year 2014 revenue totaled $3.8 million, up 0.7% sequentially which is relatively flat with the first quarter of fiscal year 2014 and down 12.6% compared with the second quarter of fiscal year 2013.
Revenue decline compared to the second quarter of fiscal year 2013 was due to a similar decrease in sales for both product lines. Gross profit for the second quarter of fiscal year 2014 was $1.8 million or 47.2% revenue compared to $2.2 million or 51.4% of revenue in the second quarter of fiscal year 2013.
Gross margin also declined sequentially compared to 49.3% in the first quarter of fiscal year 2014. The change in gross margin compared to the prior year and the first quarter of fiscal year 2014 was primarily due to lower production volumes to reduce inventory levels in the second quarter of fiscal year 2014 as well as higher costs related to Prostiva product line. The lower production volumes resulted in increased fixed manufacturing costs on a per unit basis.
Total operating expense was $2.7 million for the second quarter of fiscal year 2014 representing a decline of 12.3% compared to the prior year period and a decline of 11.1% sequentially.
Operating expense in the second quarter of fiscal year 2014 included $59,000 related to the medical device excise tax which did not occur in the prior year. Additionally, total operating expense in the second quarter of fiscal year 2014 included a non-cash gain on the change in value of acquisition consideration of $84,000 compared to $215,000 in the prior year.
Excluding the impact from these items, operating expense declined 17.2% compared to the prior year. This 17.2% decline in total operating expense was driven primarily by lower spending of $326,000 in sales and marketing as well as $150,000 in research and development. On a sequential basis,expenses declined primarily due to lower costs in sales and marketing and the decrease in legal and audit fees as year end audit fees were reported in the first quarter of fiscal year 2014.
For the second quarter of fiscal year 2014, Urologix reported a net loss of $1.1 million or $0.05 per diluted share, compared to a net loss of $970,000 or $0.05 per share in the second quarter of fiscal year 2013. As of December 31, 2013, the company's cash balance is $1.3 million compared to $1.6 million as of September 30, 2013.
Cash utilization in the quarter was $284,000. Our cash utilization benefited from increased collections at the end of the calendar year and reduced operating expenses. The company's cash needs will be determined by number of items including operating performance, accessibility to our line of credit, and the timing of annual royalty payments due and unpaid in the second quarter of fiscal year totaling $650,000, which are included in short-term deferred acquisition payments on the balance sheet.
Finally, today, we announced an extension to our line of credit with Silicon Valley Bank through June 30, 2014, the details of which are available in a separate press release issued this afternoon. The line of credit with SVB allows us to borrow up to the lesser of $2 million or the defined borrowing base consisting of 80% of eligible accounts receivable.
I will now turn the call back to Greg.
Thank you, Brian. Before we open the call for your questions, I would like to remind investors that some of the aspects of our business that we believe provide a strong foundation for shareholder value, both Cooled ThermoTherapy and Prostiva, our proprietary technologies at numerous peer-reviewed publications with long-term clinical data. There is well-established reimbursement to the two technologies among Medicare and private payers. There is a large unmet patient need that we're targeting as a significant market opportunity and we have a strong team focused on executing and delivering results.
Specifically on the market, we're confident in the growth potential of focusing on those patients that do not want to be on chronic BPH medication and are looking for a more effective non-surgical alternative. There are over 4 million men in the U.S. on chronic drug therapy for BPH, trying to alleviate their symptoms with medication and more than that number that are in the watchful waiting category.
This is a significant patient population for our leading technologies to address. We offer safe, durable and effective solution for the treatment of BPH, and we believe that our products provide a comparatively cost effective option for patients and the healthcare system. To help enable BPH patients to gain access to the care that our urologist customers can provide, we're continuing to focus our resources on patient education, peer-to-peer professional education and new cost effectiveness research.
We believe that with our technology offerings and market opportunity, we have the potential to generate significant strategic value over the long-term. We think the population attending our seminars is just the tip of the iceberg with respect to the patient population that would be interested if they knew of our treatment options. Beyond expanding patient awareness, we have to continue to execute our mission of excellent product quality, customer service and clinical education to ensure continued adoption among our urologist customers.
In addition to our strategic efforts to grow our current business, we also believe that we have the opportunity to leverage this organization to sell other products that fit our urology office call point. We believe that the BPH treatment market remains a compelling long-term growth opportunity for the company, and that the successful execution of our strategy will result in improved financial and operating performance going forward.
We appreciate the time and continued interest in our company. And with that, I will open the call up to your questions.
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 third quarter conference call. Thank you and good afternoon.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.
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