Acquisition Of Prostiva Radio Frequency Therapy

6 Months Ended

Dec. 31, 2012

Acquisition Of Prostiva Radio Frequency Therapy [Abstract]

Acquisition Of Prostiva Radio Frequency Therapy

4.Acquisition of Prostiva Radio Frequency Therapy

On September 6, 2011, the Company entered into agreements with Medtronic, Inc. relating to the Prostiva® Radio Frequency (RF) Therapy System, a minimally invasive medical product for the treatment of benign prostatic hyperplasia (BPH). As a result of those agreements, the Company obtained an exclusive, worldwide license to the Prostiva technology for a ten year term, with an option to purchase the technology anytime during the ten year term for a maximum purchase price of $10 million. The maximum purchase price is reduced dollar-for-dollar by the license fee and royalties paid during the term of the agreement.

The above transaction was accounted for as a business combination. Under the terms of the agreements the Company will be responsible for the manufacturing, sourcing, operations, compliance, quality, regulatory and other matters of the Prostiva RF Therapy System. The Company entered into this transaction to increase its revenue, addressable patient population, customer base and sales force. As a result of this transaction, Urologix became a market leader for providing in-office treatment solutions for symptomatic or obstructive BPH with over 60 percent market share.

The Company hired independent valuation specialists to assist management with its determination of the fair value of the consideration to be paid as well as the fair value of the assets acquired in the acquisition of the Prostiva RF Thereapy System. Management is responsible for the estimates and valuations. The work performed by the independent valuation specialists has been considered in management’s estimates of fair value reflected below.

The Company estimated that the fair value of the consideration to be paid to acquire the Prostiva business at approximately $7.0 million.  Included in the total consideration is the licensing fee of $1 million, of which $500,000 was paid on September 6, 2011, deferred payments for acquired inventory, and royalties on Prostiva products sold, subject to minimum and maximum amounts.

Approximately $6.5 million of the $7.0 million purchase price is unpaid as of December 31, 2012. The consideration is categorized as contingent or non-contingent. The non-contingent consideration consists of the $500,000 paid at the date of acquisition, as well as future cash payments for the second $500,000 payment of the initial licensing fee, consigned inventory and minimum royalty payments with an acquisition date fair value of $3.8 million. The estimated royalty payments between the minimum and maximum amounts are contingent consideration and were measured at fair value at the acquisition date by applying an appropriate discount rate that reflects the risk factors associated with the payment streams. The acquisition date fair value of the contingent consideration was $2.7 million. The contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved with the changes in fair value that do not relate to the initial recognition of the liability as of the acquisition date, recognized in earnings.  For the six-month period ended December 31, 2012, we have recognized a gain of $791,000 from changes in the fair value of the contingent consideration, which was partially offset by an increase of $422,000 in the non-contingent consideration due to an increase in the projected time to reach the cumulative $10 million of royalty and license fees. 

The Company assumed no liabilities in the acquisition. The fair values of the assets acquired by major class in the acquisition were as follows (in thousands):

Manufacturing Equipment	$	128
Finished Goods Inventory		1,484
Identifiable Intangible Assets:
Patents and Technology		1,529
Customer List		531
Trademarks		325
Goodwill		3,036
Total assets acquired	$	7,033

The goodwill of $3.0 million represents the value of the functional business already in place at the time of acquisition and the expected higher future revenue stream from the combined product lines as a result of expected synergies from the combined businesses.  For tax purposes the goodwill value at acquisition was $1.7 million.  For tax purposes the payments related to the acquisition of Prostiva RF Therapy System patent rights are treated as payment in respect of a license agreement and are therefore tax deductible in the year of acquisition.  The inventory and manufacturing equipment acquired is treated for tax purposes as an asset purchase and will be depreciated.  The goodwill and other intangible assets are recorded for tax as an acquisition and are amortized and deductible over 15 years for tax purposes.

The patents and technology intangible assets consist of patents and technology, many of which are used in the Prostiva RF Therapy System. Trademarks consist of the use of the Prostiva name in the BPH marketplace.

Total cumulative transaction expenses were $391,000 primarily related to legal and accounting fees.  Of the $391,000 of transaction expenses $103,000 were incurred in fiscal year 2011, and $288,000 were incurred in fiscal year 2012 and included in general and administrative expenses in those periods.

In addition to the above transaction payments, the Company is required to pay an annual licensing maintenance fee of $65,000 to Medtronic, as well as a monthly $30,000 transition services fee that began in October 2011 for transition services provided by Medtronic until the earlier of the end of the initial term of the Transition Agreement or the last of certain United States or European Union regulatory transfers. As these fees are for services being provided by Medtronic on a go-forward basis, they are not included in total consideration for the acquisition of the Prostiva RF Therapy System and will be expensed in the period incurred and reported as part of research and development expenses.

The revenue and operating expenses related to the Prostiva business have been included in the Company’s results of operations since September 6, 2011, the date of acquisition. The acquired Prostiva business was not operated as a separate subsidiary, division or entity by Medtronic, Inc. As a result, the Company is unable to accurately determine earnings/(losses) for the Prostiva business on a stand-alone basis prior to the date of acquisition. Prostiva revenue included in reported Urologix revenue for the three and six-month period ended December 31, 2012 and 2011 totaled approximately $1.5 million and $1.6 million, respectively, and $2.9 million and $2.1 million, respectively.

As previously mentioned, as the Prostiva business was not operated as a separate subsidiary, division or entity, Medtronic did not maintain separate financial statements for the Prostiva business. As a result, the following unaudited pro-forma financial information represents revenue and only direct expenses for the Prostiva business prior to the September 6, 2011 acquisition date. The pro-forma financial information below shows the revenue and net loss as if the acquisition of Prostiva had occurred on July 1^st, the start of our fiscal year, and the Cooled ThermoTherapy and Prostiva businesses were combined for the three and six-months ended December 31, 2011 (in thousands except per share amounts).

		Three months ended		Six months ended
		December 31,		December 31,
	2011		2011
Pro forma net revenue	$	4,653	$	9,051
Pro forma net loss	$	(1,254)	$	(2,445)
Pro forma net loss per share (basic)	$	(0.09)	$	(0.17)
Pro forma net loss per share (diluted)	$	(0.09)	$	(0.17)

The pro forma financial information above excludes the non-recurring acquisition related expenses of $356,000 in the prior year period. However, the pro forma financial information does include the amortization and depreciation expense from acquired Prostiva assets, the implied interest expense on deferred acquisition payments, and the expense related to the increase in the fair value of acquired Prostiva inventories as if they had occurred as of July 1st of the first period presented. The pro forma financial information is not indicative of the results that would have actually been realized if the acquisitions had occurred as of the beginning of fiscal year 2012 or of results that may be realized in the future.