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Executives

Stryker Warren – CEO

Brian Smrdel – CFO

Greg Fluet – EVP & COO

Analysts

Ernest Andberg – Feltl and Company

Urologix, Inc. (OTCQB:ULGX) F4Q2010 Earnings Call Transcript August 24, 2010 5:00 PM ET

Operator

Good day, ladies and gentlemen. Welcome to the Urologix Incorporated Fiscal Year 2010 and Fourth Quarter Conference Call. My name is Keith, and I will be your coordinator for today. At this time, all participants and in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. As a reminder, this conference is being recorded for replay purposes.

Statements made at this presentation may contain forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in any forward-looking statements due to risks and uncertainties. A detailed discussion of risks and uncertainties maybe found in Urologix's recent Annual Report on Form 10-K for the year ended June 30th, 2009, and other documents filed with the Securities and Exchange Commission.

At this time, I will turn the call over to Mr. Stryker Warren, Jr., Chief Executive Officer. Please proceed, sir.

Stryker Warren

Good afternoon. This is Stryker Warren. As Chief Executive Officer of Urologix, I welcome you to this earnings call. Joining me are Brian Smrdel, Urologix's Chief Financial Officer; and Greg Fluet, Urologix's Executive Vice President and Chief Operating Officer.

Before I share my perspective on the fourth quarter and full year of fiscal 2010, I will ask Brian to review the financial results.

Brian Smrdel

Thank you, Stryker. Revenue for the fourth quarter was $3.3 million or 9% less than the $3.6 million reported in the third quarter of this fiscal year and 5% less than the $3.4 million reported in the same period of fiscal 2009. The decrease in revenue compared to the 2010 third quarter and the prior-year fourth quarter is a result of a temporary backorder for our Prostaprobe product utilized by our third-party mobiles and physician uncertainty surrounding Medicare reimbursement due to the disruption of Medicare payments in portions of April and June of 2010.

To further break down the sources of Urologix's revenue on a sequential basis, revenue from catheter sales to direct accounts contributed 39% percent of overall revenue in the fourth quarter of fiscal 2010 compared to 36% percent in the previous quarter. Urologix mobile service treatment revenue contributed 49% of overall revenue and third-party mobile operations contributed 10% of overall revenue in the fourth quarter of fiscal 2010 compared to 46% and 15%, respectively, for the third quarter of this year.

The net loss for the fiscal 2010 fourth quarter was $622,000 or $0.04 per diluted share. This represents a 4% increase in net loss compared to the $597,000 loss or $0.04 per diluted share in the third quarter of this fiscal year, but a 29% reduction compared to the net loss of $875,000 or $0.06 per diluted share in the fourth quarter of fiscal 2009.

Cash and cash equivalents were $5.7 million at June 30th of 2010 compared to $5.8 million at March 31st of 2010 and $7 million at June 30th of 2009. Cash utilization decreased $185,000 from the prior quarter and $541,000 from the fourth quarter of fiscal 2009, as we continue to focus on expense and working capital management.

Our day sales outstanding at the end of the fourth quarter was 38 days, an improvement compared to the 46 days at the end of the third quarter of fiscal 2010 and 39 days at June 30th of 2009.

As mentioned in today's press release, based on our fiscal year 2011 planning process, management believes that the $5.7 million cash balance at June 30th of 2010 will be sufficient to fund our working capital needs beyond fiscal year 2011. This evaluation includes the expected increase in cash utilization in the first quarter of fiscal 2011 associated with annual expenses that occur in the first quarter of each fiscal year, including annual insurance premiums, independent auditor fees, and payment of other accruals associated with the end of our prior fiscal year.

Gross profit for the fourth quarter of fiscal 2010 was $1.8 million or 54% of revenue, a 1 percentage point decrease when compared to the prior quarter. However, gross profit as a percentage of revenue increased by 2 percentage points when compared to the prior-year fourth quarter. The 1 percentage point decrease in gross margin compared to the prior quarter of this fiscal year is a result of higher manufacturing expense per unit due to lower production volumes. The increase in the gross profit rate over the same period for fiscal 2009 is due to a reduction in unabsorbed manufacturing expense as a result of increased unit production.

Reported fourth quarter operating expense totaled $2.5 million, a decrease of $123,000 or 5% when compared to the $2.6 million reported in the third quarter of fiscal 2010 and a decrease of $268,000 or 10% when compared to the $2.7 million reported in the fourth quarter of fiscal 2009.

The decrease in operating expense when compared to the third quarter is a result of a $174,000 decrease in general and administrative expense, partially offset by a $52,000 increase in research and development expense as the company increased its investment in product and clinical research efforts. The decrease in operating expense when compared to the fourth quarter of the prior fiscal year is primarily the result of a reduction of $246,000 in sales and marketing expense.

For the year ended June 30th, 2010, revenue was $14.8 million, up $2 million or 15.3% when compared to the $12.8 million reported in fiscal 2009. The net loss for fiscal 2010 was $2.2 million or $0.15 per diluted share. This compares to a net loss of $4.4 million or $0.31 per diluted share for fiscal year 2009, a reduction of 50% in a net loss.

I will now turn the call back to Stryker.

Stryker Warren

Thank you, Brian. As I have previously observed when discussing quarterly results and comparisons, while the quarter does not a year make, this one has both confirmed strength and presented demonstrable challenges accentuated from the third fiscal quarter to the fourth with respect to the continuation of reimbursement uncertainty for all Medicare providers.

The evident strengths in the fourth quarter and full year include operational efficiencies, the quality of our product, and the recognition of the clinical distinction of Urologix's high energy, Cooled ThermoTherapy or CTT from lower-energy competitors. The operational strengths are evident. In the fiscal year 2010, gross margin rate improvement in excess of 5 percentage points from the prior year, exhibiting our continued focus on operational efficiencies, particularly in manufacturing.

The company's management also made efficient use of resources in decreasing operating expense by 4.2%. As a result, the company ended the 2010 fiscal year with a cash balance of $5.7 million.

There were two distinct factors that affected our revenue performance in the fourth quarter. One, which I have already mentioned, was the uncertainty caused by a lack of Congressional action to fix Medicare physician fee schedule rates. This reimbursement issue has been resolved through November 30th of 2010, in fact, with a 2.2% increase in reimbursement. The second was the short-term interruption on our supply of Prostaprobes. The shortfall in Prostaprobe supply experienced in the fourth quarter has been resolved.

We have heard multiple reports from the field where confusion around the potential for global Medicare cuts, driven by the sustainable growth rate formula caused temporary disruptions in physician practice patterns among some of our customers, as they feared reimbursement cuts on a retrospective basis subsequent to treating patients.

The most dramatic was the third temporary fix or delay of the 21% decrease, attributable to the sustainable growth rate formula. This fix lasted from signing into law in April until June 2nd, 2010. The ultimate fix to last through November 30th came three weeks later after temporary halting payments to providers for most of that three-week time frame. By then, we heard from a number of customers they were delaying microwave treatments or taking the patient to the hospital for a TURP, whether it would be little or no risk to the urologist professional fee, and where it was incumbent upon the hospital to collect from the patient.

Since the enactment of the fix to Medicare reimbursement at the end of June, we now have clarity through November 30th on this issue, but we remain active in our reimbursement strategy going forward to attempt to minimize any future disruption. The significance of these two factors masked some of the underlying successes in the fourth fiscal quarter of 2010 as we continue to refine targeted sales and marketing efforts. These were focused on positioning Cooled ThermoTherapy as an earlier treatment option in the continuum of the BPH disease progression.

The company has continued to promote the CTC Advance catheter family which was designed to optimize patient comfort without compromising durability, promote and enhance treatment algorithm, and promote the advantages of Cooled ThermoTherapy versus medical therapy.

For the fiscal year ended June 30, 2010, we reported revenues of $14.8 million, a 15.3% increase year-over-year compared with fiscal 2009. The growth is attributable to the benefit from the temporary absence of a competitive product in the marketplace, and sales and marketing efforts initiated over the past two years.

The competitive product withdrawal provided us an opportunity on which we capitalized. The majority of the converted accounts have continued to choose Urologix's Cooled ThermoTherapy. However, they were similarly affected by the external impacts associated with the economic environment and reimbursement uncertainty during the second half of our fiscal year.

Our targeted marketing efforts are intended to raise the awareness of Cooled ThermoTherapy as a treatment option early in the BPH patient management protocol, as the BPH patient population prescribed medication is large and it is growing.

Of note, a provocative and very well-attended presentation at the AUA's Annual Meeting in San Francisco reported data from a large patient registry of men on BPH medication, showing that 48% of these men did not recognize meaningful improvement, yet 84% of these men continued to take their prescriptions. Many men are recognizing the side effect profiles of these drugs are not minimal, the costs are not nominal, and the efficacy is certainly not assured. Men on BPH medication are often particularly unhappy of experiencing the sexual side effects associated with the 5-alpha reductase inhibitors and alpha-blockers or any other of an array of troublesome side effects.

As I have shared in the past, drugs are not a panacea nor devoid of drawbacks. The primary objective of our sales and marketing efforts is to dramatize the apparent shortcomings of medical therapy for an ever-growing population of patients. We are, however, realistic that we live in a society where many wish that drugs were the answer. We intend to illustrate that rather than the solution as many are led to believe, drugs are in fact part of the problem.

We also continue to identify the clear difference provided by Urologix when compared to low-energy devices that offer no durability. Moreover, urologists' choices are reflective of this difference, a conclusion supported by our analysis of calendar year 2008 and 2009 procedure data.

From this data, it is clear that low energy microwave competitors have lost market share, while Urologix has grown. We remind the urologists and the patient results matter, that simple. And we continue to draw attention when we discuss our five-year durability data presented at the 2009 AUA Annual Meeting, as well as our prior peer-reviewed publications, presenting four and five-year results, which substantiate efficacy and durability.

With microwave therapy historically niched between medical therapy and surgery, we intend to continue to take market share from other minimally invasive BPH options, while positioning high energy, Cooled ThermoTherapy as an earlier solution in the treatment paradigm. Our theme at the AUA's Annual Meeting in 2010 was a drug-free zone, emphasizing CTT as an efficacious first-line definitive therapy when discussing treatment options with BPH patients.

The consultative sale remains our focus with comparative effectiveness against low-energy microwave and medical therapy, our principal initiatives. On the business side, the sales efforts continue to be complemented by aggressive and thoughtful expense management with our focus on using our resources to responsibly invest in and grow the business. We have been diligent in managing all aspects of the business that are under our control and I think our expense and cash management reflect this conscientious attitude.

Across the organization, we are recognizing the continuous improvement in our clinical training capabilities, our improved operational and mobile services efficiencies, the market's resonance with our differentiable clinical data, the market's enthusiasm for CTC Advance catheter, and our customizable therapy to ensure patient tolerability. The early successes of our marketing programs to reach BPH patients on drugs, and our demonstration that high-energy microwave therapy is the gold standard for office-based BPH therapies.

Senior leadership is neither pleased nor satisfied with the financial results, despite the continued progress as we have attempted to build upon the previous three quarters. We recognize we must demonstrate market penetration against medical therapy, and we intend to do so, and we are encouraged by the urologists' responsiveness to the "CTT versus drug" focus.

In the meantime, while the market remains challenging in these uncertain economic times for the urologists, Urologix is optimistic, confident, and diligent. Incumbent upon us is to demonstrate we can accelerate the market share gains, while continuing to encourage urologists to embrace CTT as the definitive first-line therapy early in the BPH treatment paradigm.

As I have stated in past, Urologix is good technology and good people. Moreover, quality, reliability, and trust remain the currency upon which we trade and we are thoughtfully, but aggressive working to continually demonstrate this commitment to our customers. I believe the strength and quality of our leadership, our product benefits academically grounded in the five-year durability data, our operational excellence, and our intense clinical focus will allow us to establish and maintain strong relationships with urologists. That is our political capital, an asset we guard carefully.

There has been not been any change in our focus I shared one year ago; our highest priority was the patient outcome, followed by our next highest priority, achieving positive cash flow. We continue to strive toward these objectives.

In closing, I remind all of us what we as a company have reminded the urology market of, and that is Urologix is the reliable choice; reliable product, reliable people, and reliable outcomes.

With respect to the people, I reiterate my enthusiasm for the recent additions to our Board of Directors, Chris Barys and Pat Spangler, both introducing significant medical device expertise; as well as the addition to the Urologix's leadership team of Brian Smrdel as Chief Financial Officer and Ralph Cardinal as Vice President, Research and Development. Ralph represents our renewed commitment and new leadership in R&D to continue to advance the state-of-the-art for high energy, Cooled ThermoTherapy.

Along with reliability, two other terms of equal importance to all of us involved with Urologix. Those are quality and trust. Amidst reimbursement controversy, competition, and significant advertising budgets for pharmaceuticals, we should continue to pursue a differentiable clinical posture, while at the same time marshaling resources. "CTT versus drugs" remains our principal focus and it is our fervent belief this sector is our clinical calling, as we attempt to address the unmet needs of the BPH patient dissatisfied with medical therapy.

Concluding Brian's and my comments, we will now do our best to answer any questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question is from the line of Ernest Andberg with Feltl and Company. Please proceed.

Ernest Andberg – Feltl and Company

Hello, Stryker.

Stryker Warren

Hi, Ernie.

Ernest Andberg – Feltl and Company

You made some comments about your view of the data that you have picked up market share against the low-power microwave competitors over the last couple of years. Can you give us some insight as to what you think has happened there, and additionally, what's going on in the overall market for BPH treatments at this point in time?

Stryker Warren

Ernie, we have taken advantage of publicly available information, looking at procedure rates, particularly from CMS 2008, 2009, looking at the trends of our competitors who are not broken out by individual company.

Ernest Andberg – Feltl and Company

Correct.

Stryker Warren

But we know what our procedure volumes have been. Looking both at those statistics, as well as our more current numbers, it seems quite apparent to us that while others have lost market share during the same period, we have grown. And certainly the discussions I have had in the market would lead one to believe that there is a growing recognition that the retreatment rates with low energy versus high energy are quite dramatic.

So from the standpoint of efficacy and durability, I would like to think that the data that we presented at the 2009 Annual Meeting of the AUA, which is a centerpiece of our marketing and sales efforts, is really resonating. We have also, as you know, made a big push against drugs and on a preliminary basis are very, very gratified by the responses we are getting in terms of the marketing efforts and the ability to draw our patients on drugs, as well as what urologists are telling us.

Across the BPH more – market more broadly, there continue to be technologies either in trials or that have come on to the market that we are seeing, but there is nothing, Ernie, that I have seen that would lead one to believe that there has been any dramatic shift that's underway that we should be concerned about. We are very, very gratified to feel that we are the recipient of being able to differentiate ourselves on the basis of clinicals.

Ernest Andberg – Feltl and Company

A little further down this line. Would you say that you think that your pickup in market share versus a loss of the primary competitors, overall do you think that the microwave segment has grown or stayed about the same, Stryker, over the last two years? Best guess?

Stryker Warren

Ernie, let me ask Greg Fluet who has done a considerable amount of analysis, both as it relates to microwave and to your question about the broader BPH market, to address that question.

Ernest Andberg – Feltl and Company

Thank you.

Greg Fluet

Hi, Ernie. How are you?

Ernest Andberg – Feltl and Company

Good.

Greg Fluet

So the 2008 Medicare data show that almost all BPH procedure rates have declined somewhat. And there has only been some preliminary data in 2009 that has come out on actual procedure rates, microwave being one of them. The rest of the procedure rates have not all come out for TURP and PVP.

And so I think given the trend in 2008 and with the economic environment, there is probably the expectation that there will be some decline across the board. That is what had occurred from 2007 to 2008. So kind of on an overall market of procedures with BPH, there has been some decrease in Medicare procedure rates, but we don't know what the Medicare Advantage rates have been or private pay.

Ernest Andberg – Feltl and Company

Okay. That's fair enough. That gives me a feel for what overall you think is going out there – on out there, Greg.

Stryker, this is maybe going to sound like a little bit of a bitch, but you have known since the end of June that you had a supply problem in the ProstaLund side, and docs were affected in terms of using your systems for doing procedures by the Medicare reimbursement issues. So you are one of the first ones who I have run across actually who saw a noticeable decrease in procedures. Might it have been worthwhile to tell us publicly that you were affected and how much do you estimate the quarter was affected by the supply disruption and the decrease in procedures?

Stryker Warren

A couple of things, Ernie. First of all, it's Prostaprobe, not ProstaLund.

Ernest Andberg – Feltl and Company

Thank you. You are right. You are absolutely right. I apologize.

Stryker Warren

No, no – no need to. From our vantage point, one of the attempts we made was that for those people that have been buying Prostaprobes from third-party mobiles, you know they were in an end-of-life build, and it has been our intent to transition those customers from Prostaprobe to CTC Advance, and that process has in fact begun. And what we were attempting to do was to ensure that we took advantage of this opportunity to try to actually accelerate that process. So while the Prostaprobe purchases did affect us in the fourth quarter, I did not feel it necessary to report anything publicly on that.

Ernest Andberg – Feltl and Company

Was it material in the SEC sense, 5% of revenue or anything like that?

Brian Smrdel

Well, Ernie, there are two third-party mobile customers that still use a Prostaprobe. And basically – we had a backorder associated with a – purchase order we weren't able to fill; that was approximately $100,000 in revenue.

Ernest Andberg – Feltl and Company

Thank you very much. That answers the question. That gives me a feel for it.

Okay. Stryker, you have added two new Board members. Will Moore, who had been BlueLine Partners originally, was on your Board, but I haven't seen any filings from BlueLine that say they have reduced their position. Can you comment on that at all?

Stryker Warren

Ernie, I can't. I certainly haven’t seen anything from BlueLine, and Will, while originally involved with BlueLine when he joined the Board and certainly well familiar to them, and they of Will, to the best to my knowledge had no active role in BlueLine at the time –

Ernest Andberg – Feltl and Company

I agree. That was why I was asking a question. Basically, from your perspective, BlueLine chose not to stay on the Board?

Stryker Warren

I can't answer that, because I quite frankly have enormous respect and am gratified by BlueLine's position in the company. But I saw Will quite frankly as an independent Director, and he, in terms of his representation, I think behaved that way and again, to the best of my knowledge was not involved, and certainly no one from BlueLine has approached me since Will's departure.

Ernest Andberg – Feltl and Company

Fair enough. That – that's a fair answer to the question, Stryker.

Stryker Warren

And Ernie, I should say, because of the way this has come up, I do feel a responsibility to simply say to you and to anybody else interested and some of the large investors, I was very appreciative of Will Moore's involvement in the company and I was disappointed to see him leave the Board.

Ernest Andberg – Feltl and Company

Fair enough. Thank you. In part of the comments, you cautioned that there would be some cash flow effects from increases in expenses this quarter. Last year, it looked like expenses were maybe a couple of hundred thousand dollars higher sequentially from the fourth quarter to the first quarter. Is that the kind of impact you are talking about from an audit and insurance kind of expenses?

Brian Smrdel

Ernie, this is Brian. I mean, last year, we – our cash utilization was about $1 million in the first quarter of 2010. Now, I certainly can't –

Ernest Andberg – Feltl and Company

Cash utilization?

Brian Smrdel

Yes, cash utilization, I apologize, was in the first quarter of 2010. I certainly can't say whether we will be at that level or not, but yes, in first quarter, we – as I mentioned, we have the annual insurance premium renewal, we have the audit – of course, all the audit fees from the year-end audit come into play then also. And also, other accruals that were made at year-end are paid out at that point in time.

Ernest Andberg – Feltl and Company

And there is a difference between accruals and cash flow?

Brian Smrdel

Correct.

Ernest Andberg – Feltl and Company

Clearly. Okay, fair enough. I think that – I think that does it for me. I have – thank you very much for your time.

Stryker Warren

Thank you, Ernie.

Brian Smrdel

Thank you, Ernie.

Operator

There are no other questions at this time. (Operator Instructions). Gentlemen, it looks like that was all your questions for the day.

Stryker Warren

On behalf of the Board of Directors, senior leadership, and Urologix's employees, as the CEO of the company, I thank our loyal shareholders for your continued interest in Urologix. And it is our intent daily to create shareholder value.

With that, I wish you good health and good day.

Operator

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

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