Gross
profit as a percentage of net sales remained steady at 48 percent, for the
three-month period ended September 30, 2014 compared to 49 percent, for the
three-month period ended September 30, 2013.
Sales and Marketing
Sales
and marketing expense of $810,000 for the first quarter of fiscal year 2015
decreased by $1.0 million, or 56 percent, when compared to sales and marketing
expense of $1.8 million in the same period of fiscal 2014. The decrease in
sales and marketing expense for the three-months ended September 30, 2014 is
due to a $792,000 decrease in headcount related expenses due to decreased
commissions and decreased headcount, as well as a $154,000 decrease in travel
expenses as a result of the restructuring plans implemented in January and
April of 2014. In addition, advertising and promotion expense decreased by
$150,000 in the current year period. These decreases were partially offset by
modest increases of an aggregate of approximately $108,000 in other areas such
as consulting, physician expenses and the allowance for doubtful accounts
reserve.
General and
Administrative
General
and administrative expense decreased $197,000, or 29 percent, to $488,000 for
the three-month period ended September 30, 2014 compared to $685,000 for the
three-month period ended September 30, 2013. The decrease in general and
administrative expense is a result of decreased spending in all general and
administrative areas in an effort to manage expenses. In particular, wages and
benefits decreased $87,000 due to lower headcount, and legal and accounting
fees decreased by approximately $68,000.
Research and
Development
Research
and development expense, which includes expenditures for product development, regulatory
compliance and clinical studies, decreased $87,000 or 21 percent to $334,000
for the three-month period ended September 30, 2014 from $421,000 for the
three-month period ended September 30, 2013. The decrease in research and
development expense is a result of a $122,000 decrease in wages and benefits
due to lower headcount in the current year, partially offset by a $38,000
increase in consulting expenses.
Change in Value of
Acquisition Consideration
There
was no change in the value of acquisition consideration for the three-month
period ended September 30, 2014 compared to $9,000 for the three-month period
ended September 30, 2013. For the three-month period ended September 30, 2013,
the change in the value of acquisition consideration represents the reduction
in fair value of contingent consideration of $9,000 as a result of a reduction
in the projected royalty payments in excess of contractual minimums in earlier
years.
Medical Device Tax
The
medical device tax expense represents the excise tax imposed beginning January
1, 2013 on all U.S. medical device sales as part of the Federal health care
reform legislation. The medical device excise tax expense of $48,000 for the
three-month period ended September 30, 2014, decreased by $13,000 or 21
percent, when compared to medical device excise tax expense of $61,000 for the
three-months ended September 30, 2013. The decrease in the medical device tax
expense is a result of the decrease in sales.
Amortization of
Identifiable Intangible Assets
Amortization
expense represents the amortization of identifiable intangible assets acquired
as part of the Prostiva acquisition. Amortization expense was $23,000 for both
the three-month periods ended September 30, 2014 and 2013, respectively.
Net Interest Expense
Interest
expense is a result of non-cash interest accretion on the deferred acquisition
payments for the Prostiva business as well as the interest expense accrued on
the Note entered into with Medtronic on June 28, 2013. Interest expense
increased to $188,000 from $161,000 for the three-months ended September 30,
2014 and 2013, respectively. The increase in interest expense is due to lower
accretion expense in the prior year period due to the true up of the contractual
deferred acquisition liability.
Provision for Income
Taxes
We
recognized income tax expense of $5,000 for the three-months ended September
30, 2014, compared to income tax expense of $12,000 for the three-month period
ended September 30, 2013. The tax expense in the three-months ended September
30, 2014 consists of $5,000 for state taxes. The tax expense in the three-month
period ended September 30, 2013 relates to $7,000 for the deferred tax
liability resulting from the amortization for tax purposes of the goodwill
acquired in the Prostiva acquisition, as well as $5,000 for the provision for
state taxes. We fully impaired our goodwill balance as of April 30, 2014, and
therefore wrote-off the balance of the related deferred tax liability.
15
The
Company utilizes the asset and liability method of accounting for income taxes.
The Company recognizes deferred tax liabilities or assets for the expected
future tax consequences of temporary differences between the book and tax basis
of assets and liabilities. We have recorded and continue to carry a full
valuation allowance against our gross deferred tax assets that will not reverse
against deferred tax liabilities. We will continue to assess the assumptions
used to determine the amount of our valuation allowance and may adjust the
valuation allowance in future periods based on changes in assumptions of
estimated future income and other factors.
LIQUIDITY AND CAPITAL RESOURCES
We
have financed our operations since inception through sales of equity securities
and, to a lesser extent, sales of our Cooled ThermoTherapy products and,
beginning September 6, 2011, sales of the Prostiva RF Therapy System product.
As of September 30, 2014, we had cash of $545,000 compared to cash of $718,000
as of June 30, 2014.
During
the first quarter of fiscal 2012, the Company entered into a license agreement
with Medtronic for the Prostiva RF Therapy System. The Company paid Medtronic
$500,000 on September 6, 2011 for half of the $1.0 million initial license fee,
with the remaining $500,000 payable on September 6, 2012. On June 28, 2013, we
entered into a Restructuring Agreement with Medtronic related to the $7.5
million we then owed to Medtronic under the transaction documents. As part of
this agreement, we paid Medtronic $2.0 million in satisfaction of royalties
earned for the 12 months ended September 6, 2012, the second half of the
initial licensing fee, the license maintenance fee for the 12 month period
ended September 6, 2012, outstanding transition services fees, and Prostiva
inventory included as part of the acquisition and purchased subsequent to the
acquisition. In addition, we entered into a promissory note (the Note) with
Medtronic for $5.3 million for the remaining amounts owed on Prostiva inventory
acquired as part of the acquisition and purchased subsequent to the
acquisition. Interest on the Note accrues at a rate of 6 percent, compounded
annually, and is payable in five equal installments of principal, plus accrued
interest, on March 31st of each year beginning on March 31, 2015.
The $206,000 difference between the $7.5 million in obligations owed to
Medtronic and the $2.0 million paid and the $5.3 million Note was recorded as a
gain on debt extinguishment in fiscal year 2013. The Company does not have
adequate cash to repay the full outstanding principal amount of $5.3 million on
the Note. Any event of default under the Note may result in a loss of control
of our business or bankruptcy.
Under
the license agreement, royalty payments for Prostiva products are paid one year
in arrears based on the contract year. The royalty payment due during the
second quarter of fiscal year 2014 of $650,000 has not been paid as of
September 30, 2014. An additional $650,000 royalty payment was due on October
6, 2014, which is in the second quarter of fiscal year 2015. The Company does
not have adequate cash at September 30, 2014 to pay the full amount of the
royalty payments. Neither of these royalty payments have been paid as of the date
of the filing of this Quarterly Report on Form 10-Q. Both royalty payments
totaling $1.3 million are included in the short-term deferred acquisition
payment liability as of September 30, 2014. In addition, we have not paid, as
of September 30, 2014 or as of the date of filing this Quarterly Report on Form
10-Q, the annual $65,000 licensing maintenance fee due on September 6, 2013 and
September 6, 2014. The total license maintenance fee of $130,000 is included in
other accrued expenses as of September 30, 2014. The non-payment of either the
royalty or license maintenance fee does not entitle Medtronic to terminate the
license agreement unless Medtronic provides written notice and an opportunity
to cure the default. In the event of a material breach of the licensing
agreement or other transaction documents, and Medtronic provides written notice
to the Company and the Company fails to cure the breach, Medtronic may
terminate the license agreement. If the license agreement is terminated, the
Companys rights to sell the Prostiva product would be terminated.
The
Company is considering all available alternatives with respect to the business
as well as amounts owed to Medtronic to improve its cash and liquidity
position. In addition, the Company is attempting to generate revenues both from
sales of our Cooled ThermoTherapy and Prostiva products, negotiate payment
terms with our vendors, and manage our expenses in order to improve cash flow
from our business. The Company implemented restructuring plans in January 2014
and again in April 2014 to reduce our cash utilization. The targeted annual
savings from these restructurings total over $4.0 million, compared with the
first half of fiscal year 2014. As a result of these restructurings, the
Company expects to begin to generate positive cash flow from operations in
fiscal year 2015. The Company may also seek to improve its liquidity position
by raising capital through additional indebtedness or an offering of its equity
securities or both. However, it may be difficult to raise additional capital
through a debt offering due to the debt outstanding with Medtronic and its
position as a secured lender.
As
of September 30, 2014, the Companys cash may not be sufficient to sustain
day-to-day operations for the next 12 months. If the Company is unable to
generate sufficient liquidity to meet its needs and in a timely manner, the
Company may be required to further reduce expenses and curtail capital
expenditures, sell assets, or suspend or discontinue operations.
There
can be no assurance that the Company will be able to cure any potential event
of default of the Note or cure any breach of any agreement with Medtronic,
maintain compliance with its agreements with Medtronic, raise additional
capital, or improve its operating or financial performance.
16
The
September 30, 2014 financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classifications of liabilities that may result should
the Company be unable to continue as a going concern.
During the three-months ended September 30, 2014, we used $170,000 of cash for
operating activities. The net loss of $437,000 included non-cash charges of
$134,000 from depreciation and amortization expense, $15,000 from stock-based
compensation expense and $137,000 of accreted interest expense. Changes in
operating items resulted in the utilization of $34,000 of operating cash flow
for the period as a result of higher prepaid and other assets of $221,000 and
higher accounts receivable of $39,000. These changes were partially offset by
lower inventories of $90,000 and higher interest payable of $84,000.
The
increase in prepaids and other assets is the result of annual insurance
premiums which are paid at the beginning of the fiscal year and amortized over
the annual period. The increase in accounts receivable is a result of the
timing of sales as well as a slight increase in our days sales outstanding. The
decrease in inventories is due to lower volumes of Prostiva hand piece
inventory as of September 30, 2014 due to the timing of shipments from our
third-party supplier, and the increase in interest payable represents the 6
percent interest accrued on the Note agreement entered into with Medtronic in
June, 2013.
During
the three-months ended September 30, 2014, we used $3,000 for investing
activities related to the purchase of property and equipment and investments in
intellectual property.
During
the three-months ended September 30, 2014, we did not generate any cash from
financing activities.
We
plan to continue offering customers a variety of programs for both evaluation
and longer-term use of our Cooled ThermoTherapy system control units and
Prostiva RF Therapy System generators and scopes in addition to purchase
options. We also will continue to provide physicians and patients with
efficient access to our Cooled ThermoTherapy system control units and Prostiva
RF Therapy System generators and scopes on a pre-scheduled basis through our
mobile service. As of September 30, 2014, our property and equipment, net,
included approximately $267,000 of control units, generators and scopes used in
evaluation or longer-term use programs and units used in our Company-owned
mobile service.
Off Balance Sheet Arrangements
We
do not have any off balance sheet arrangements.
Recently Issued Accounting Standards
Information
regarding recently issued accounting pronouncements is included in Note 13 to
the condensed financial statements in this Quarterly Report on Form 10-Q.
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ITEM 3.
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QUALITATIVE AND QUANTITATIVE
DISCLOSURE ABOUT MARKET RISK
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Our
financial instruments include cash and as a result we do not have a material market risk exposure.
Our
policy is not to enter into derivative financial instruments. We do not have
any significant foreign currency exposure since we do not generally transact
business in foreign currencies. Therefore, we do not have significant overall
currency exposure. In addition, we do not enter into any futures or forward
commodity contracts since we do not have significant market risk exposure with
respect to commodity prices.
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ITEM 4.
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CONTROLS AND PROCEDURES
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(a) Evaluation of Disclosure Controls and
Procedures
The
Companys Chief Executive Officer and Interim Chief Financial Officer, Gregory
J. Fluet, has evaluated the Companys disclosure controls and procedures, as
defined in the Exchange Act Rule 13a-15(e), as of the end of the period covered
by this report. Based upon this review, he has concluded that these controls
and procedures are effective.
17
(b) Changes in Internal Control Over
Financial Reporting
There
have been no changes in internal control over financial reporting that occurred
during the fiscal period covered by this report that have materially affected,
or are reasonably likely to materially affect, the Companys internal control
over financial reporting.
PART II
- OTHER INFORMATION
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ITEM 1.
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LEGAL PROCEEDINGS
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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 our
financial position, liquidity or results of operations.
The
most significant risk factors applicable to the Company are described in Part
I, Item 1A Risk Factors of our Annual
Report on Form 10-K for the year ended June 30, 2014, and our subsequent
filings with the Securities and Exchange Commission.
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ITEM 2.
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UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
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Not
applicable.
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ITEM 3.
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DEFAULTS UPON SENIOR SECURITIES
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Not
applicable.
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ITEM 4.
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MINE SAFETY DISCLOSURES
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Not
applicable.
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ITEM 5.
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OTHER INFORMATION
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None
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ITEM 6.
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EXHIBITS
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Exhibit 31.1
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Certification
of Chief Executive Officer Pursuant to Section 13a-14(a) and 15d-14(a) of the
Exchange Act.
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Exhibit 31.2
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Certification
of Interim Chief Financial Officer Pursuant to Section 13a-14(a) and
15d-14(a) of the Exchange Act.
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Exhibit 32
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Certification
pursuant to 18 U.S.C. §1350.
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18
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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Urologix,
Inc.
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(Registrant)
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/s/ Gregory
J. Fluet
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Gregory J.
Fluet
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Chief
Executive Officer and Interim Chief Financial Officer
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(Principal
Executive Officer and Principal Financial and Accounting Officer)
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Date:
November 13, 2014
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19
Exhibit 31.1
CERTIFICATIONS
I, Gregory J. Fluet, certify
that:
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1.
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I have reviewed this Form
10-Q of Urologix, Inc.
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2.
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Based on my knowledge,
this report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
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3.
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Based on my knowledge, the
financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
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4.
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The registrants other
certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
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(a)
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Designed such disclosure
controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period
in which this report is being prepared;
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(b)
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Designed such internal
control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
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(c)
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Evaluated the
effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and,
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(d)
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Disclosed in this report
any change in the registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and,
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5.
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The registrants other
certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors (or
persons performing the equivalent functions):
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(a)
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All significant
deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report
financial information; and
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(b)
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Any fraud, whether or not
material, that involves management or other employees who have a significant
role in the registrants internal control over financial reporting.
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Date: November 13, 2014
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/s/ Gregory J. Fluet
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Gregory J. Fluet
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Chief Executive Officer
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20
Exhibit 31.2
CERTIFICATIONS
I, Gregory J. Fluet, certify
that:
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1.
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I have reviewed this Form
10-Q of Urologix, Inc.
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2.
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Based on my knowledge,
this report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
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3.
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Based on my knowledge, the
financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
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4.
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The registrants other
certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
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(a)
|
Designed such disclosure
controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period
in which this report is being prepared;
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(b)
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Designed such internal
control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
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(c)
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Evaluated the
effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and,
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(d)
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Disclosed in this report
any change in the registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and,
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5.
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The registrants other
certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors (or
persons performing the equivalent functions):
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(a)
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All significant
deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report
financial information; and
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(b)
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Any fraud, whether or not
material, that involves management or other employees who have a significant
role in the registrants internal control over financial reporting.
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Date: November 13, 2014
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/s/ Gregory J. Fluet
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Gregory J. Fluet,
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Interim Chief Financial
Officer
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21
Exhibit 32
CERTIFICATION
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The undersigned certify
pursuant to 18 U.S.C. § 1350, that:
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(1)
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The accompanying quarterly
report on Form 10-Q for the period ended September 30, 2014 fully complies
with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
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(2)
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The information contained
in the accompanying Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
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Date: November 13, 2014
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/s/ Gregory J. Fluet
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Gregory J. Fluet
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Chief Executive Officer
and Interim Chief Financial Officer
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22
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