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Urologix, Inc. (NASDAQ:ULGX)

Q4 2014 Results Earnings Conference Call

August 19, 2014 5:00 PM ET

Executives

Greg Fluet - Chief Executive Officer

Becky Weber - Controller and Director, Finance

Analysts

Operator

Good day, ladies and gentlemen. And welcome to the Urologix Inc. Fiscal Year 2014 Fourth Quarter and Full Year Conference Call. My name is Emanuel, 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 forward-looking statements due to risks and uncertainties. A detailed discussion of risks and uncertainties maybe found in Urologix’s recent annual report on Form 10-K for the year end 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 the course of this call.

At this time, I will turn the call over to Greg Fluet, Chief Executive Officer. Please proceed, sir.

Greg Fluet

Thank you, Emanuel. And welcome everyone to Urologix's fiscal year 2014 and fourth quarter earnings call. With me is Becky Weber, the company's Controller and Director of Finance.

Today we'll begin with a brief update on the announced transition in the executive team, review our fourth quarter operating performance, including the early results from the transformational restructuring completed in early April of this year, discuss our fiscal year 2015 goals and highlight key initiatives. I'll then review the financial results.

Lastly, I will review the market opportunity for our in-office BPH technologies. Summarize our initiatives to leverage our new operational infrastructure and the cost-effectiveness activities we are pursuing. Then we will open up the call for questions.

As announced in the press release, Brian Smrdel, our CFO has decided to pursue another opportunity in the private sector. He made this decision for personal reasons including spending more time with his family. I want to take a moment to thank Brian for his years of working at Urologix and his help in laying the groundwork in the last few months for a more sustainable operational structure.

We are actively working to identifying the right person to step into the CFO role at Urologix, but until that role is filled, I will serve in the role of Interim CFO. However, I want to acknowledge I’ll have the benefit of a strong finance team led by the Controller and Director of Finance, Becky Weber.

Becky has held leadership roles in our finance team for nine years and her bandwidth and experience provide the support necessary to make this successful transition during this interim period.

Turning to our fourth quarter performance, fourth quarter revenue was $3.3 million, a decline of 2% from the third quarter of this fiscal year. The sequential decline in revenue was due to lower unit sales of disposables. However, we expected some disruptions from the April restructuring of our team and the fourth quarter revenue met our sales target.

Importantly, we reduced our cash utilization in the quarter significantly to $98,000. This was achieved through the combination of the financial benefit from the restructuring combined with its minimal impact to our topline revenue.

Regarding our restructuring, in the second half of fiscal year 2014, we made a decision to evolve our entire organization and change our sale deployment model. In this new model we are leveraging a smaller traditional sales representative team by deploying additional insight sales representatives in our Urologix Mobile Services team.

Our excellent sales leadership team has matched the skill set of this new structure with our urology customers to ensure their patients have the access to our technologies they deserve and our customer’s needs are met.

We deployed this new structure in April and we are pleased with the results in the fourth quarter, and saw solid productivity across the team, including from our new insight sales personnel.

Our new structure lays the groundwork for us to achieve the first of two major goals in fiscal year 2015, generate positive cash flow from operations for the full year. The first quarter is one that typically is more cash intensive with annual insurance payments and other annual expenses, but beyond this quarter, we believe we are well-positioned to achieve this overall goal with the team in place.

The second major goal for us in fiscal year 2015 is to build upon the base of evidence, supporting our technologies cost-effectiveness and begin to leverage that value proposition. We have in placed collaborative research efforts to model the cost-effectiveness of our in-office technologies.

In the fourth quarter, we were pleased to see the presentation of early results from this cost-effectiveness work at the 2014 Annual Meeting in Orlando presented by Dr. Jim Ulchaker of the Cleveland Clinic.

The data was supportive of the relative value proposition our High Energy Cooled ThermoTherapy provides due to the combination of its effectiveness, durability and safety with low procedure costs.

In addition, we are piloting an initiative to show that illuminating this cost-effectiveness with the right targets can help support adoption of our therapies. The early initiatives are targeting provider groups with large market presence whose healthcare models value good outcomes and low costs. The groundwork we do in this area in fiscal year 2015 we believe will position us well for the changes developing in the healthcare system.

While pleased with the quarterly activity, we will take some time to show meaningful results, but we believe it is strategically important to prove this value proposition as we prepare for our future beyond fiscal year 2015, given the shifts in our healthcare system.

Many payers including Medicare are beginning to move towards programs designed to reward use of treatments and technologies that offer quality outcomes and lower the cost of care. We believe our technologies are well-positioned to help our urologist customers to meet these objectives in this new healthcare environment.

We will discuss the financial details in a moment, but for now let me say that we are all very pleased with the results in the fourth quarter since the restructuring, we may see some continued modest topline impact into the first quarter of fiscal year 2015 as we continue the process of adapting the new coverage model combined with the fact that the first quarter historically is a slower quarter for us over the summer months.

What is most encouraging is our employees are focused and engaged, and we believe that over the longer-term these efforts will enable us to generate positive sustainable cash flow from operations.

At Urologix, we are focused on key initiatives to design -- design to stabilize our business in fiscal year 2015 and I’m providing further evidence of the importance of our safe durable and cost effective in-office BPH technologies to this evolving healthcare system. To accomplish these objectives, we’re focused on three main building blocks.

First, we will continue to support our current customers through our dedicated and exceptional field sale team, mobile applications specialists and inside sales team. Our efforts with customers remain on demonstrating best-in-class training, support and patient education tools to help our customers teach their patients about how our technologies fit into their BPH treatment options.

Second, we’ll continue to work with leading institutions and neurologists to build on the base of evidence that demonstrates the cost effectiveness of our technologies. In this work, we’re focusing on how the combination of low procedure costs combined with a strong safety effectiveness and durability, create value for the healthcare system relative to other BPH treatment options, including chronic medical therapy.

Lastly, we believe this evidence fits with the direction that healthcare system is heading and we're piloting the ability to work with our urologist customers to influence decision-makers in the cost-conscious quality focused provider networks and hospital systems. We believe it is vitally important to arm these groups with the right information. So they are able to understand both the quality and the cost effectiveness of our technologies compared to alternative treatment options.

Our technologies should fit well in the healthcare system that’s looking to help reduce costs while generating good clinical outcomes. These positive initiatives reinforce the potential value we see for our business. Successful execution on these initiatives while continuing to execute on our proven patient education program is key to improving our operational results going forward.

And now I’ll provide more details on our financial performance. Fourth quarter fiscal year 2014 revenue totaled $3.3 million, down 2% sequentially from the third quarter of fiscal year 2014 and down 21% compared to the fourth quarter of fiscal year 2013. The sequential decrease in revenue was driven primarily by reduced sales of Cooled ThermoTherapy products partially offset by a slight increase in Prostiva products.

The year-over-year decline in revenue was driven by a decline in sales of CTT and Prostiva products compared to the prior year. As of June 30, 2014, the company's cash balance was $718,000 compared to $816,000 as of March 31, 2014, reflecting cash utilization of $98,000 in the fourth quarter. The cash utilization in the quarter includes the impact of approximately $80,000 in cash payments related to the restructuring that occurred in April 2014.

In the fourth quarter of fiscal year 2013, the company spent $2.8 million, which included a $2 million payment to Medtronic as part of a debt restructuring agreement to pay off obligations deferred from earlier in that fiscal year. Net of the debt restructuring payment, the cash balance is decreased $844,000 in the prior year's fourth quarter period.

The company's cash needs will be determined by a number of items including operating performance and the timing of annual royalty payments for Prostiva due and unpaid as of June 30, 2014. Royalty payments and other fees due Medtronic total $715,000 and are included in short-term liabilities as of June 30, 2014.

Regarding the amounts due and unpaid to Medtronic, we share with Medtronic a sincere commitment to patients and urologists. We recognize Medtronic’s continuing rights on the agreement and are working with Medtronic in our efforts to restructure the business both directly and through Medtronic's engagement as an observer on our Board of Directors.

On a full-year basis, the company's cash balance decreased $1.6 million in fiscal year 2014 compared to cash utilization of $3.7 million in the prior fiscal year 2013, after adjusting for the benefit of the cash proceeds from the financings of $3.8 million and the receipt of $321,000 in the demutualization of an insurer. Including the financing proceeds and gain from demutualization to an insurer, the company's cash balance increased $391,000 in fiscal year 2013.

Gross profit for the fourth quarter of fiscal year 2014 was $1.6 million or 48% of revenue compared to $1.9 million or 45.5% of revenue in the fourth quarter of fiscal year 2013. The increase in gross margin rate is due to the fourth quarter prior year cost of goods including an impairment charge of $274,000 related to reevaluation of intangible assets acquired with the Prostiva product line. Excluding this impairment charge, gross margins would have decreased by approximately 4 percentage points driven primarily by product sales mix, lower production volumes and lower margins, associated with our mobile service offering.

The company performed our annual goodwill impairment test as of April 30, 2014, which included as part of the testing, fair valuing all of our assets and liabilities, including those obtained as part of the Prostiva acquisition. It was determined that the fair value of the company could no longer support the carrying value of the goodwill acquired in that acquisition. As a result, we recorded a $3 million non-cash goodwill impairment charge in our statement of operations.

The total operating expense was $5 million for the fourth quarter of fiscal year 2014, which includes the impairment of goodwill resulting from the Prostiva acquisition of $3 million. Excluding the goodwill impairment charge, fourth quarter fiscal 2014 operating expenses were $2 million compared to operating expenses of $3.1 million in the fourth quarter of the prior fiscal year.

The fourth quarter operating expenses for fiscal year 2014 benefited from the restructuring of the company announced on April 11th. For the fourth quarter of fiscal year 2014, Urologix reported a net loss of $3.5 million or $0.17 per diluted share compared to a net loss of $1.2 million or $0.06 per diluted share in the fourth quarter of fiscal year 2013.

For the fiscal year 2014 period ended June 30, 2014, revenues totaled $14.2 million, down 14.2% compared to revenues of $16.6 million in fiscal year 2013. The year-over-year decline in revenue was driven by similar declines in sales of Cooled ThermoTherapy products and Prostiva RF therapy products.

Gross profit for fiscal year 2014 was $6.1 million or 42.8% of sales. Gross profit in the fiscal year was negatively affected by $739,000 non-cash charge associated with the write down of Prostiva capital equipment inventory in the third quarter of fiscal year 2014. The write down was triggered by the low volume of sales of the capital equipment and does not affect the marketability of the product in our inventory.

Total operating expense in fiscal year 2014 was $13 million. Excluding the $3 million goodwill impairment charge, operating expenses were $10 million in fiscal year 2014 compared to operating expenses of $12.1 million in fiscal year 2013.

The company reported net loss of $7.6 million, or $0.36 per diluted share for fiscal year 2014 compared to a net loss of $4.3 million or $0.21 per diluted share in the prior fiscal year period. Aside from the impact of the goodwill impairment, operating expenses in the fourth quarter were positively impacted by the restructuring.

As we stated in the last quarter earnings report, the total annualized expense reduction from the changes implemented with the restructuring of the company is over $4 million on annualized basis or approximately $1 million per quarter. In the fourth quarter, we captured a significant amount of that benefit though the restructuring was not in effect for the full quarter.

The reduction in our cash utilization to $98,000 in the fourth quarter shows the [yearly] [ph] benefit of these savings, combined with the production of $3.3 million of revenue generated in the quarter. While encouraged by these early results, we’re not providing fiscal year 2015 guidance at this time until we have more experience with the new organizational structure and results.

Before we open the call for your questions, I would like to remind investors some of the aspects of our business that we believe provide a strong foundation for shareholder value. Both Cooled ThermoTherapy and Prostiva RF therapy are proprietary technologies that have numerous peer-reviewed publications and long-term clinical data.

We’re now expanding on that data to show how cost effective both of these technologies are. There is well-established reimbursement for the two technologies among Medicare and private payers. There is a large unmet patient need that we're targeting that is a significant market opportunity and we have a strong team focused on executing and delivering results.

As a brief reminder, we are confident there is a significant number of 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.

This is a significant patient population and we offer safe, durable and effective solution for the treatment of BPH. But the healthcare system is evolving and for many patients, out-of-pocket cost for healthcare in general are increasing with higher deductibles and more cost sharing.

Our urology customers as are many specialty physicians are consolidating into larger urology groups or being purchased by large hospital systems or provider groups. And the payers are more and more focused on cost effectiveness, identifying optimized care pathway for patients.

Healthcare delivery is changing but we believe that our products provide a comparatively cost effective option for the patients and the healthcare system and they fit in this new model. To get there, we have to evolve as well.

In fiscal year 2014, we made major changes in our business to enable us to address this BPH market. First, we restructured the business and deployed a new sales model designed to support our customers in more operationally efficient manner with appropriate sales resources matched with our customers needs. The goal is to generate positive cash flow from operations.

Second, we work to help develop new clinical evidence and our cost-effectiveness and are preparing for the future by piloting a new initiative to help engage strategically important provider groups in a process to help optimize BPH patient care by including the use of our cost-effective in office technologies.

These new initiatives combined with our ongoing market development activities focused on patient education are all designed to help enable urologists to provide more BPH patients access to our two technologies. We believe that with our technology offerings, market opportunity and the team, we have the potential to generate strategic value over the long-term.

We think the male population currently being treated is just the tip of the iceberg of the patient population that would be interested and benefit from good outcomes if they knew of our treatment options. 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.

We believe that the BPH treatment market is a significant longer 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'll open the call up to your questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Greg Fluet

On behalf of the Board of Directors, senior leadership and all Urologix employees, I thank our loyal shareholders for your continued interest in Urologix. We look forward to updating you on our progress on our first quarter fiscal year 2015 conference call and hope that you’ll be able to attend our Annual Shareholder Meeting in November. Thank you and good afternoon.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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