| Item 1. | 4 | |||
| Item 1A. |
11 | |||
| Item 1B. |
18 | |||
| Item 2. |
18 | |||
| Item 3. |
18 | |||
| Item 4. |
18 | |||
| PART II | ||||
| Item 5. |
19 | |||
| Item 6. |
20 | |||
| Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
23 | ||
| Item 7A. |
32 | |||
| Item 8. |
33 | |||
| Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
53 | ||
| Item 9A. |
53 | |||
| Item 9B. |
53 | |||
| PART III | ||||
| Item 10. |
54 | |||
| Item 11. |
54 | |||
| Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
54 | ||
| Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
54 | ||
| Item 14. |
54 | |||
| PART IV | ||||
| Item 15. |
55 | |||
| SIGNATURES | 57 | |||
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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 in the future. We wish to 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 “Risks 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 management’s opinions only as of the date of this Annual Report on Form 10-K, and we undertake no obligation to update any such forward-looking statements.
Overview
Urologix develops, manufactures, and markets non-surgical, catheter-based therapies that use a proprietary cooled microwave technology for the treatment of benign prostatic hyperplasia (BPH), a disease that affects more than 23 million men worldwide. We market our control units under the Targis® and CoolWave® names and our procedure kits under the recently approved CTC Advance™, CTC™, Targis and Prostaprobe™ names. All systems utilize the Company’s Cooled ThermoTherapy™ technology, a targeted microwave energy combined with a unique cooling mechanism that protects healthy tissue and enhances patient comfort while providing safe, effective, lasting relief from the symptoms of BPH. Cooled ThermoTherapy can be performed without general anesthesia or intravenous sedation and can be performed in a physician’s office or an outpatient clinic. We believe that Cooled ThermoTherapy provides an efficacious, safe and cost-effective solution for BPH with results clinically superior to medication and without the complications and side effects inherent in surgical procedures.
We maintain a website at www.urologix.com. Our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our periodic reports on Form 8-K (and any amendments to these reports) are available free of charge on our website as soon as reasonably practical after we file these reports with the SEC. To obtain copies of these reports, please go to www.urologix.com.
Benign Prostatic Hyperplasia
BPH is a non-cancerous disease in which the prostate grows and constricts the urethra causing adverse changes in urinary voiding patterns. 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. 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 upon other portions of the prostate gland and the urethra, thereby restricting the normal passage of urine. BPH patients typically suffer from a variety of troubling symptoms that can have a significant impact on their quality of life. Symptoms of BPH include frequent urination during the day and night, urgency and painful urination. A delay in treatment can have serious consequences, including complete obstruction (acute retention of urine), urinary tract infections, loss of bladder function, sexual dysfunction and, in extreme cases, kidney failure.
BPH generally affects men after the age of 50. Medical experts suggest that nearly every man will be affected by this condition at some time in his life. The BPH market is large and can be expected to continue to grow due to the general aging of the world’s population as well as increasing life expectancies.
Due in part to the side effects and complications associated with traditional BPH therapies, many patients diagnosed with BPH are regularly monitored by their physicians but elect not to receive active intervention. This course of inaction is known as “watchful waiting.” If symptoms persist or worsen, drug therapy or surgical
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intervention has historically been recommended. Drug therapy is usually the first line of treatment. It is estimated that more than 20% of patients who initially pursue drug therapy discontinue treatment within 12 months for various reasons including cost, ineffectiveness, side effects and the burdens of compliance. Patients may also try multiple drugs or combinations of drugs to improve effectiveness. This leads to a more costly treatment and often more side effects. Traditionally, the most common 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 urethra and improving urinary flow. While TURP results in a dramatic improvement in urine flow and reduction in symptoms, the procedure can require a lengthy recovery time and is reported to have a high rate of side effects and complications. Because the TURP procedure requires a highly skilled surgeon with extensive training, the incidence of complications is affected by the experience of the surgeon performing the TURP.
Cooled ThermoTherapy
Our Targis, Prostatron, and CoolWave systems utilize Cooled ThermoTherapy, a catheter-based treatment for BPH that is clinically superior to medication and less invasive than surgery. We strive to have Cooled ThermoTherapy be the treatment of choice for patients who have tried drugs unsuccessfully and wish to avoid surgery. Today, some patients choose Cooled ThermoTherapy before trying medications.
Cooled ThermoTherapy utilizes a proprietary microwave technology, delivered through a flexible catheter that targets energy into the enlarged area of the prostate to a temperature sufficient to cause cell death, while simultaneously cooling and protecting the healthy, pain-sensitive urethral tissue. During a Cooled ThermoTherapy procedure, a catheter is inserted into the urethra, and a thermosensing unit is placed into the 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 during the months following treatment.
Cooled ThermoTherapy provides significant advantages over other BPH therapies, producing lasting results that are clinically superior to drug therapy while avoiding the complications associated with surgery. Because Cooled ThermoTherapy does not require punctures or incisions and protects the urethra during treatment, it can be performed in the physician’s office or other outpatient environments without the need for general anesthesia or intravenous sedation and it results in fewer complications.
Clinical Studies
Clinical trials of the Cooled ThermoTherapy procedure have been performed to obtain data to support potential new indications and marketing claims, to obtain long-term durability data, and to gather data for Medicare and other reimbursement approvals in various markets. We continue to monitor multi-center, multi-year studies to evaluate the long-term durability of Cooled ThermoTherapy procedures. In our published results from multi-center clinical trials, conducted both in the United States and internationally, the majority of Cooled ThermoTherapy patients for whom follow-up data is available shows significant long-term relief from the symptoms of BPH, without significant post-procedure complications. This was recently confirmed by the presentation of interim five year data on Cooled ThermoTherapy; results showed that the efficacy of our CTC microwave catheter is durable for five years and the freedom from additional, minimally invasive or surgical procedures is 90 percent.
Sales and Marketing
Our goal is to grow Cooled ThermoTherapy as a standard of care for the treatment of BPH. Our business strategy to achieve this goal is (i) to educate both patients and physicians on the benefits of Cooled
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Thermotherapy compared to other treatment options, (ii) to increase the use of Cooled ThermoTherapy by physicians who already have access to a Cooled ThermoTherapy system, (iii) to increase the number of physicians who provide Cooled ThermoTherapy to their patients, and (iv) to provide more physicians with access to Cooled ThermoTherapy through the expansion of our Cooled ThermoTherapy mobile service in the United States.
United States
We have a sales and marketing team consisting of sales and marketing management, clinical, and direct and independent sales representatives, all of whom are dedicated to marketing our Cooled ThermoTherapy products and our Cooled ThermoTherapy mobile service. Our direct sales force and marketing efforts are targeted at urologists who treat BPH patients in their office. Our Cooled ThermoTherapy mobile service employees transport the Cooled ThermoTherapy system control unit, along with the single-use treatment catheters and all necessary supplies, to physician offices and hospitals on a scheduled basis, making the treatment available to physicians and patients on an efficient and economical basis. As of June 30, 2008, our mobile assets included 16 vans which service 13 mobile routes in select geographies across the United States. In addition to our direct sales force and Cooled ThermoTherapy mobile service employees, we continue to utilize independent third-party mobile service providers to provide hospitals and urology clinics with access to our Cooled ThermoTherapy treatment. As of June 30, 2008, we employed a total of 34 individuals in our sales and marketing department and our Cooled ThermoTherapy mobile service and six independent sales representative groups, some of which have multiple representatives working on behalf of Urologix. The expenses for our Cooled ThermoTherapy mobile service are included in cost of goods sold.
We offer our Cooled ThermoTherapy systems to our customers on a direct purchase, or on an evaluation or longer-term use basis. Pricing for single-use treatment catheters and our Cooled ThermoTherapy mobile service varies based upon treatment volume.
International
Although our international sales efforts have historically been modest, we believe that there is a potential market for Cooled ThermoTherapy outside of the United States. While we will continue to utilize local distributors experienced in selling products to hospitals and urologists to assist us in maximizing these opportunities, our principal focus is on the U.S. market opportunity. The inherent challenge outside the United States is that third party reimbursement of our Cooled ThermoTherapy procedure is less prevalent and our revenue in international markets will largely be dependent upon private payors.
Manufacturing
We manufacture the Targis control unit, CoolWave control unit, and single-use treatment catheters for use with our Targis and CoolWave control units at our suburban Minneapolis facility. We outsource the remaining manufacturing.
Our supply agreement with Accellent Endoscopy for the production of the Prostatron disposable treatment catheter was terminated as of April 2007. Prior to this termination, we signed an agreement with The MedTech Group, Inc. to become a qualified supplier of our Prostatron Cooled ThermoTherapy single-use treatment catheter products. During the fourth quarter of fiscal 2007, in connection with our strategy to develop a next generation catheter, we implemented an end-of-life plan for our Prostatron product line. As a result, we negotiated an end-of-life build with the MedTech Group to support our Prostatron customers until we can transition them to another of our products.
We assemble Targis and CoolWave control units and procedure kits using materials and components supplied by various subcontractors and suppliers, as well as components we fabricate. Several of the components
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are currently available to us through a single vendor. We attempt to develop alternative sources for critical components. Where alternative sourcing is not possible, we attempt to 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 as we increase our manufacturing level, could have a material adverse effect on our business, financial condition and 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.
The FDA periodically inspects our facility, documentation and quality systems and to date 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 maintained CE mark certification, which allows us to affix the CE Mark to our Targis and Prostatron system components and market them in the European Union. In addition, the Targis and Prostatron systems have been approved for marketing by the Japanese Ministry of Health and Welfare. As of June 30, 2008, we employed 31 individuals in our manufacturing department.
Research and Development
We intend to build upon our scientific and clinical knowledge and relationships to develop innovative future generations of BPH and other urology products. Our research and development efforts and goals are currently focused on improving the function and features of our Cooled ThermoTherapy systems, improving the treatable population and clinical response to Cooled ThermoTherapy treatment and reducing the manufacturing cost of our products.
During the fiscal years ended June 30, 2008, 2007, and 2006, we spent $2.8 million, $3.0 million, and $3.0 million, respectively, on our research and development efforts. As of June 30, 2008, we employed 14 individuals in our research and development department.
Reimbursement
We believe that third-party reimbursement is essential to the continued adoption of Cooled ThermoTherapy, and that clinical efficacy, overall cost-effectiveness and physician advocacy will be keys to maintaining such reimbursement. We estimate that 60% to 80% of patients who receive Cooled ThermoTherapy treatment in the United States will be eligible for Medicare coverage. The remaining patients will either be covered by private insurers, including traditional indemnity health insurers and managed care organizations, or they will be private-paying patients. As a result, Medicare reimbursement is particularly critical for widespread market adoption of Cooled ThermoTherapy in the United States.
The level of Medicare reimbursement for Cooled ThermoTherapy is dependent on the site of service. Beginning on August 1, 2000, the Centers for Medicare and Medicaid Services (CMS) replaced the reasonable cost basis of reimbursement for outpatient hospital-based procedures, including Cooled ThermoTherapy, with a new fixed rate or prospective payment system. Under this method of reimbursement, a hospital receives a fixed reimbursement for each Cooled ThermoTherapy treatment performed in its facility, approximately $550 in
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calendar year 2008, although the rate varies depending on a wage index and other factors for each hospital. The urologist performing the Cooled ThermoTherapy treatment receives reimbursement of approximately $500 per procedure. The relatively low facility reimbursement relative to the cost of the procedure limits the number of Cooled ThermoTherapy treatments done in a hospital.
In January 2001, CMS began to reimburse for Cooled ThermoTherapy treatments performed in the urologist’s office. The reimbursement rate (inclusive of the physician’s fee) in calendar year 2008 for Cooled ThermoTherapy procedures performed in the urologist’s office is $3,118 compared to $3,562 in calendar 2007, which is subject to geographic adjustment.
In July 2003, CMS added the CPT Code covering Cooled ThermoTherapy to the ASC list of Medicare approved procedures providing a reimbursement rate for ambulatory surgical centers (ASC). As a result, procedures performed in an ASC were reimbursed under a two-part system similar to hospitals: the ASC received a fixed fee of approximately $1,300, the highest amount allowable under this system, while the urologist performing the procedure was reimbursed the same amount as if the treatment occurred in a hospital, approximately $500. Effective July 2005, the CPT code covering Cooled ThermoTherapy was deleted from the ASC list of Medicare approved procedures. As a result, effective with that change, urologists who performed Cooled ThermoTherapy procedures in an ASC were reimbursed at the office-based reimbursement rates, approximately $3,500 in calendar year 2007, subject to geographic adjustment. However, as of January 2008, the CPT Code covering Cooled ThermoTherapy was once again added to the ASC list of Medicare approved procedures. Effective with this latest change, urologists who perform Cooled ThermoTherapy procedures in an ASC are reimbursed under the two-part system in which the ASC receives a fixed fee of $1,872 for calendar year 2008, while the urologist performing the treatment is reimbursed $547 for calendar year 2008. As a result of the decrease in reimbursement rates for an ASC, we expect the number of Cooled ThermoTherapy treatments performed in an ASC to be minimal.
For calendar 2009, CMS is proposing additional reductions in the physician fee schedule covering Cooled ThermoTherapy for treatments performed in a physician’s office. The exact amount of the reduction has not yet been determined however, initial estimates were in the range of a 13 percent decrease. We are actively participating in the comment process related to the proposed reductions, have an active reimbursement strategy, and have retained consultative experts to assist us with dealing with the proposed reimbursement rate reductions.
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 in various geographies from private insurance companies and HMOs throughout the United States. We intend to continue our efforts to gain coverage and reimbursement across the United States. There can be no assurance that we will receive favorable coverage or reimbursement determinations for Cooled ThermoTherapy from these payers or that amounts reimbursed to physicians for performing Cooled ThermoTherapy procedures will be sufficient to encourage physicians to use Cooled ThermoTherapy.
Internationally, reimbursement approvals for the Cooled ThermoTherapy procedure are awarded on an individual-country basis.
Patents and Proprietary Rights
We currently own 46 U.S. and 14 international patents. We also have four patent applications pending in the United States and in a number of non-U.S. jurisdictions, and we intend to file additional patent applications in the future.
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
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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, there can be no assurance that our competitors, many of which have substantial resources and have made substantial investments in competing technologies, will not seek to apply for and obtain patents that will prevent, limit or interfere with our ability to manufacture or market Cooled ThermoTherapy in the United States or in international markets. Further, there can be no assurance that our Cooled ThermoTherapy system does not infringe upon the patent rights or other intellectual property rights of other companies, that we will not be required to seek licenses from other companies or that other companies will not pursue claims of infringement against us.
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 standard industry 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. There can be no assurance that proprietary information or non-compete agreements with employees, consultants and others will not be breached, that we will have adequate remedies for any such breach, or that third parties will not otherwise gain access to our technology.
Competition
Competition in the market for the treatment of BPH comes from invasive surgical therapies, such as TURP and side-firing lasers (GreenLight Laser PVP (American Medical Systems/ Laserscope), Lumenis, RevoLix, and Biolitec), drug therapy and other minimally invasive, office-based treatments. There are six 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), Proscar (Merck & Co., Inc.) and Avodart (GlaxoSmithKline). Drug therapy is currently the first-line therapy prescribed by most physicians in the United States for BPH. The drug companies have significant resources to educate physicians and patients through direct sales and direct to consumer marketing. We must also focus on educating physicians and their patients to the benefits of our Cooled ThermoTherapy in a focused and efficient manner with less resources.
Competition in the market for minimally invasive office-based treatments for BPH is significant. Competitive devices include low energy microwave combined with balloon dilatation (Boston Scientific); non-cooled, low energy microwave (American Medical Systems); radio frequency (Medtronic); high energy microwave with limited cooling (Prostalund); and hot water therapy (ACMI). Additional competitors may enter the market. We believe Cooled ThermoTherapy offers a durable solution as shown in peer reviewed clinical trials and interim five year data as presented at the May 2008 American Urological Association (AUA) conference, and the largest treatable patient population over other office-based BPH therapies. Because Cooled ThermoTherapy does not require punctures or incisions, it can be performed in the physician’s office or other outpatient environments without the need for general anesthesia or intravenous sedation. Further, by combining microwave energy with cooling, we can drive more energy deep into the prostate, creating lasting results while preventing damage to the urethra, enhancing patient comfort and reducing complications.
Government Regulation
Governmental 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 manufacture, distribution and sale of medical devices. Foreign sales of medical devices are subject to foreign governmental regulation and restrictions that vary from country to country.
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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 (performance standards) or Class III (pre-market approval or 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 clearance for sale in the United States as a class III medical device. We have obtained CE Mark certification for distribution in Europe and product registration for distribution in Canada, India and Japan.
The FDA’s regulations require agency approval of a PMA supplement for a class III medical device 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, and delays in receipt of, or failure to receive such approvals, or the loss of the approval of the PMA for either of our Cooled ThermoTherapy systems 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 testing 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.
Health Care Regulatory Issues
The health care industry is highly regulated, and there can be no assurance that the regulatory environment in which we operate will not change significantly in the future. In general, regulation of health care related companies is increasing. We anticipate that Congress and state legislatures will continue to review and assess alternative health care delivery and payment systems. We cannot predict what impact the adoption of any federal or state health care reform measures may have on our business.
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 operations or profitability.
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Product Liability and Insurance
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 market, we are from time to time involved in lawsuits, claims and proceedings alleging product liability and related claims such as negligence. If 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. 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, 2008, we employed 86 individuals on a full-time basis. We also had several part-time employees, consultants and independent third-party sales representatives. None of our employees are covered under a collective bargaining agreement. We consider our relationship with our employees to be good.
Seasonality
We believe that holidays, major medical conventions and vacations taken by physicians, patients and patient families have a seasonal impact on our sales. We continue to monitor and assess the impact seasonality may have on demand for our products.
Backlog
As of June 30, 2008, we did not maintain any backlog of product orders. Our policy is to stock enough inventory to be able to ship most orders within a few days of receipt or as requested by our customers. Therefore, we rely on orders placed during a given period for sales during that period. Backlog information as of the end of a particular period is not necessarily indicative of future levels of our revenue.
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.
We are faced with intense competition and rapid technological and industry change.
The medical device industry is 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. We face intense competition from other device manufacturers and surgical manufacturers, as well as from pharmaceutical companies. Nearly all of our competitors are significantly larger than we are and have greater
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financial, technical, research, marketing, sales, distribution and other resources than we do. We believe that price competition will continue among products developed in our markets. Our competitors may develop or market technologies and products, including drug-based treatments that are more effective or commercially attractive than any 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 significant negative effect on our business, financial condition and results of operations. Even if we are able to compete successfully, we may not be able to do so in a profitable manner.
Our products, including our Cooled ThermoTherapy mobile service and our recently approved CTC Advance catheter may not achieve market acceptance, which could limit our future revenue.
Physicians will not recommend Cooled ThermoTherapy procedures unless they conclude, based on clinical data and other factors, that it is an effective alternative to other methods of enlarged prostate treatment, including more established methods. Patient acceptance of the procedure will depend in part upon physician recommendations and on other factors, including the degree of invasiveness and the rate and severity of complications associated with the Cooled ThermoTherapy procedure compared with other therapies. Patient acceptance of the Cooled ThermoTherapy procedure also will depend upon the ability of physicians to educate these patients on their treatment choices. Health care payer acceptance of our procedure will require, among other things, evidence of the cost effectiveness of Cooled ThermoTherapy compared to other BPH therapies. Although we believe Cooled ThermoTherapy offers physicians and patients advantages over competitive therapies for BPH, the success of our product also will depend upon the extent to which physicians and patients perceive our procedure as having these advantages and the extent to which these advantages are relevant to their treatment decision. Our marketing strategy must overcome the difficulties inherent in the introduction of new technology to the medical community. If our Cooled ThermoTherapy procedure is not widely accepted by physicians, patients or payers, or is accepted more slowly than expected, our business will be harmed. Further, we operate our own Cooled ThermoTherapy mobile service. If our mobile service is not accepted by physicians, patients, or payers, or is accepted more slowly than expected, our business will be harmed.
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 physicians, generally rely on third-party payers. Third-party reimbursement is dependent upon decisions by the CMS, contract Medicare carriers, individual managed care organizations, private insurers, foreign governmental health programs and other payers of health care cost. Failure to receive or maintain favorable coding, coverage and reimbursement determinations for Cooled ThermoTherapy by these organizations could discourage physicians 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 Medicare and Medicaid systems, and on the cost of medical products and services. Additionally, third-party payers are increasingly challenging the prices charged for medical products and services. Also, the trend toward managed health care in the United States and the concurrent growth of organizations such as HMO’s that could control or significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may also result in lower prices for, or rejection of, our products. 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 ability to operate profitably. For calendar 2009, CMS is proposing additional reductions in the physician fee schedule covering
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Cooled ThermoTherapy for treatments performed in a physician’s office, and we are expecting additional proposed reductions for calendar 2010. We are actively participating in the comment process related to the proposed reductions, have an active reimbursement strategy, and have retained consultative experts to assist us with dealing with the proposed reimbursement rate reductions.
We depend upon our Cooled ThermoTherapy products for all of our revenues.
All of our revenues are derived from sales of our Cooled ThermoTherapy system control units and single-use treatment catheters and treatments delivered through our Cooled ThermoTherapy mobile service. As a result, our success is solely dependent upon the success of our Cooled ThermoTherapy products. To date, our Cooled ThermoTherapy systems have not achieved widespread market adoption. If we are unable to widely commercialize the use of these systems successfully through our marketing initiatives, including our company-owned Cooled ThermoTherapy mobile service, our business, financial condition and results of operations will be materially and adversely affected. Further, higher than expected manufacturing, marketing and distribution costs, lower than expected reimbursement levels, lower than expected usage by physicians, and/or other competitive forces may require us to alter our pricing or marketing structure in a manner that could have a material adverse effect on us.
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.
Before any new products we may offer may be 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.
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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.
We have a history of unprofitability.
We incurred a net loss of $14.9 million (which includes a net of tax charge of $8.6 million related to a $10.2 million impairment to write-off our goodwill, and the benefit of the reversal of the related deferred tax liability of $1.6 million) for the year ended June 30, 2008. Including the losses described above, since our inception, we have incurred losses of approximately $99.7 million. Although we were profitable in fiscal years 2006, 2005 and 2004, if physicians do not continue to purchase and use our Cooled ThermoTherapy systems to treat patients with BPH, we may not be able to once again achieve profitability. Because we expect to continue to incur additional expenses relating to sales and marketing activities and research and development activities, we will need to increase the revenues we receive from sales of our products in order to operate in a profitable manner. We cannot assure you that we will be able to increase our revenues, once again attain profitable operations, or successfully implement our business plan or future business opportunities.
We have limited experience manufacturing some of our products and are dependent upon a limited number of third-party suppliers to manufacture our products.
We manufacture the Targis system control unit, the CoolWave control unit, and single-use treatment catheters for use with our Targis and 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. Because we lack extensive manufacturing experience, we may encounter difficulties in maintaining production efficiencies, quality control and assurance, component supply and qualified personnel. We cannot assure you 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 Targis and CoolWave system control units and procedure kits, we outsource the remaining manufacturing for our products. We assemble Targis and 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. Our reliance on outside suppliers for our components involves risks including limited control over the price and uncertainty regarding timely delivery and quality of parts. Our supply agreement with Accellent Endoscopy for the production of the Prostatprobe disposable treatment catheter was terminated as of April 2007. Prior to this termination, we signed an agreement with The MedTech Group, Inc. to become a qualified supplier of our Cooled ThermoTherapy single-use treatment catheter products. During the fourth quarter of fiscal 2007, in connection with our strategy to develop a next generation catheter, we implemented an end-of-life plan for our Prostatron product line. As a result, we negotiated an end-of-life build with the MedTech Group so we can continue to support our Prostatron customers until we can transition them to another of our products.
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
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additional costs and may delay the production of our products. Further, 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 may need to obtain FDA approval of a PMA supplement to reflect changes in product manufacturing and the FDA may require additional testing of any component from new suppliers prior to our use of these components. Further, if FDA approval of a PMA supplement is required, any delays in delivery of our product to customers would be extended and our costs associated with the change in product manufacturing would increase.
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 market, 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.
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.
We cannot assure you that others may not 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 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
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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 or manufacture. A government-mandated or voluntary recall by us could occur as a result of component failures, manufacturing 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 Stryker Warren, Jr., our Chief Executive Officer and Greg Fluet, our Chief Operating Officer. We have employment agreements with Mr. Warren and Mr. Fluet that provide that either party may terminate Mr. Warren’s or Mr. Fluet’s employment at any time with or without cause. If there is a change in control and we terminate Mr. Warren’s or Mr. Fluet’s employment without cause, however, we would be required to make specified payments to them as described in their employment agreement. We do not have key person life insurance on Mr. Warren or Mr. Fluet.
Our future success also depends on our continuing ability to attract, retain and motivate highly qualified managerial, technical and sales personnel. During the past year we experienced turnover in our sales force. Our inability to retain or attract qualified personnel could have a significant negative effect and thereby materially harm our business and financial condition.
We may not have additional financing available to us.
We used approximately $1.0 million of net cash from operating activities in the year ended June 30, 2008 and ended that period with approximately $11.0 million of cash and cash equivalents. We believe our $11.0 million in cash and cash equivalents, together with the funds generated from product sales, will be sufficient to fund our working capital and capital resource needs for the next 12 months. Our business plan and financing needs are subject to change depending on, among other things, success of our efforts to continue to effectively manage expenses, market conditions, business opportunities and cash flow from operations, if any. We may require additional financing to continue our business, the receipt of which cannot be assured. Such additional financing could be sought from a number of sources, including possible sales of equity or debt securities or loans from banks or other financial institutions. We may not be able to obtain additional financing from any source on reasonable terms, if at all. Any future capital that is available may be raised on terms that are dilutive to our shareholders.
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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 single-use treatment catheters, |
| • | the impact to the marketplace of competitive products and pricing, |
| • | the timing of expenditures related to sales and marketing, and research and development, |
| • | product availability, and |
| • | changes in 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 emerging 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 us or 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 next generation catheter, |
| • | 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. |
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.
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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 of our common stock and the liquidity of our common stock. These sales also might make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that we would deem appropriate.
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, 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 certain of 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
We lease approximately 26,000 square feet of office, manufacturing and warehouse space in a suburb of Minneapolis, Minnesota, pursuant to a lease that expires in March 2011. 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.
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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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 is traded on the Nasdaq Global Market System of the NASDAQ Stock Market LLC under the symbol “ULGX.” The following table sets forth quarterly high and low last-sale prices of our common stock for the past two years.
| Quarter | ||||||||||||||
| Fiscal Year |
First | Second | Third | Fourth | ||||||||||
| 2008 |
High | $ | 2.95 | $ | 1.86 | $ | 1.28 | $ | 1.88 | |||||
| Low | 1.82 | 1.11 | 0.78 | 0.86 | ||||||||||
| 2007 |
High | $ | 3.53 | $ | 2.81 | $ | 3.66 | $ | 3.02 | |||||
| Low | 2.75 | 2.28 | 2.52 | 2.14 | ||||||||||
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, 2008:
| Plan Category |
Number of securities to be issued upon exercise of outstanding options, warrants |