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Executives

Stryker Warren, Jr. – Chief Executive Officer

Brian Smrdel – Chief Financial Officer

Greg Fluet – Executive Vice President and COO

Analysts

Urologix, Inc. (OTCQB:ULGX) F2Q2012 Earnings Call January 24, 2012 5:00 PM ET

Operator

Good day, ladies and gentlemen. And welcome to the Urologix Incorporated Fiscal Year 2012 Second Quarter Conference Call. My name is Ann, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. As a reminder, this conference is being recorded for replay purposes.

Certain information discussed during this conference call, including answers to your questions, may contain forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those stated or implied in 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 30, 2011 and other documents filed with the Securities and Exchange Commission. Urologix disclaims any obligation to update any forward-looking statements made during the course of this call.

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

Stryker Warren Jr.

Thank you, Ann, and good afternoon to all those joining us today to discuss the company's results for the second quarter of fiscal year 2012. With me are Brian Smrdel, the company's Chief Financial Officer; and Greg Fluet, the company’s Executive Vice President and Chief Operating Officer.

Today's call we’ll begin with a brief summary of the highlights from our first full quarter as the new Urologix. Brian will then review the financial results for the second fiscal quarter in detail. Finally, I will share an update on the progress we are making on our growth strategy that I shared with you last quarter and review our near-term priorities before opening up the call for questions.

The second quarter this fiscal year was encouraging on multiple levels. None more so than our ability to execute on our strategic growth objectives, integrate our Prostiva RF therapy business and drive improvements in utilization amidst a difficult economic environment which continues to pressure elective procedures.

We believe our strong second quarter performance represents a glimpse into the potential power of the new Urologix story. The combination of the Prostiva RF therapy system with our Cooled ThermoTherapy technology has made Urologix the clear leader for the in-office treatment of BPH with an expanded population of men whom we can effectively treat.

We have two complimentary in-office technologies which combined have more than 50% market share. Both products have demonstrated durable clinical effectiveness for the treatment of BPH and we have a focus sales growth strategy to drive financial and operating performance fueled by market development initiatives and patient education programs.

Urologix’s products serve the BPH treatment market, a segment of Urology marketplace with very favorable growth characteristics. The addressable patient population is both large and growing comprised of aging men with symptoms of bother caused by a progressive condition which left untreated can cause serious health issues.

Urologist, the company’s target customers and their patients are questioning the merits of chronic medication for BPH in light of the marginal benefit and building evidence of the risk associated with long-term drug management. The company is demonstrating that when patients are made aware of Urologix’s in-office treatment options many are seeking to avoid drugs in favor of a more definitive therapy.

In addition, and as I will discuss later, the competitive landscape in the in-office treatment space is changing with the pending withdrawal of one the low energy microwave treatments for the market which presents an opportunity to further consolidate our position as the leader in the in-office treatment of BPH.

Simply stated, we see opportunities for growth. Our technologies are safe, effective and durable, they treat a large and growing patient population, and we are targeting a group of physicians who are increasingly aware of the need for a change in the treatment paradigm. Each of this will benefit our company’s future growth.

I will now turn the call over to Brian to review the second quarter’s financial results. Brian?

Brian Smrdel

Thank you, Stryker. Our revenue for the second quarter of fiscal 2012 was $4.7 million, up 40% year-over-year and up 48%, sequentially. Revenue growth on a year-over-year basis was driven by the contribution of Prostiva RF therapy product revenue for a full fiscal quarter, following the acquisition of the exclusive license of that product line on September 6, 2011.

Sequential was driven by an 11% sequential increase in our CTT product, as well as the additional benefit of the inclusion of a full quarter of the Prostiva product line. We are particularly encouraged by the CTT business, which experienced sequential growth for the first time in four quarters.

Gross profit for the second quarter of fiscal 2012 was $2.3 million or 49% of revenue, compared to $1.4 million or 45% of revenue in the prior quarter and $1.8 million or 56% of revenue last year.

Gross margin for the second quarter of 2012 was lower than the prior year quarter due to the 45% gross margin reported for the Prostiva product line, which included $86,000 of non-cash charges or 2% of total company revenue, primarily for the amortization of intangible assets.

In addition, there was a negative impact from the product line mix in the base business, as well as an impact from slightly lower production volumes.

Operating expense totaled $3.2 million, up 24% year-over-year and up 16%, sequentially. The $620,000 increase year-over-year was primarily driven by the additional expense from our expanded sales force following the Prostiva acquisition.

Second quarter operating expense also included $157,000 of non-recurring general and administrative costs expenses related both to this Prostiva transaction and our recent financing agreement with Silicon Valley Bank.

The net loss for the second quarter was $1.1 million or $0.08 per diluted share, compared to a net loss of $712,000 or $0.05 per diluted share last year. The net loss compared to the prior year was affected by a total of $456,000 or $0.03 per share of one-time non-cash charges related to the acquisition of the Prostiva business.

Turning to the balance sheet. Cash and cash equivalents were $1.6 million at December 31, 2011, compared to $1.6 million at September 30, 2011 and $3.1 million at the end of our prior fiscal year at June 30, 2011.

The cash performance is a result in part of beneficial terms on Prostiva product inventory and the timing of royalty payments. Payments for approximately $1.3 million of Prostiva product purchased during the second quarter of fiscal year 2012 were deferred as a result of 270 day payment terms negotiated as part of the license agreement.

For the terms of the license agreement, payment to Medtronic for the final $500,000 tranche of the license fee and the first year royalties will become due following the September 6th anniversary date of the agreement.

Finally, to further improve our liquidity position on January 12, 2012 we announced the closing of an agreement for $2 million credit facility with Silicon Valley Bank the banking division of SVB financial group.

I will now turn the call back to Stryker.

Stryker Warren Jr.

Thank you, Brian. I will share an update on the progress that we’ve made on the integration of the Prostiva product line, as well as a multi-year growth strategy we detailed for you last quarter. Since the transaction closed in mid-September we’ve been focused on the integration of Prostiva into Urologix.

I’m pleased to report that we made significant progress in the quarter and are on track with our integration plans, specifically we have fully integrated the Prostiva sales reps who joined with our existing CTT sales force, so that we are now truly one team.

We have completed cross-training of all the sales reps on both products. We have completed our product positioning and marketing integration, and we initiated agreements with distributors in key markets for Prostiva in Europe.

Beyond the successful integration of Prostiva, our primary focus is to leverage our leading market share position, our expanded sales organization and our innovative market development in patient education programs to drive topline growth. Our early results have been promising and we are confident that our continued focus on executive will drive the year-over-year revenue growth that our current guidance assumes.

Turning now to each of the key drivers of this revenue growth. First, the BPH treatment market landscape is changing, an estimated 4 million men in the U.S. are in some form chronic drug therapy for symptoms related to BPH. This large patient population is not new but they are growing dissatisfaction with results provided by chronic medical therapy certainly is new and it will drive growth opportunities for Urologix.

Supporting these changing dynamics in our target patient population, the urologist community appears to be increasingly concern with the lack of long-term efficacy and potential risk associated with drug therapy.

Clinical research published over the last 12 months has prompted many urologists to question the risk reward relationship profile of drug therapy. As evidence continues to mount against drug therapy as a long-term solution, Urologix’s in-office non-surgical procedures are well-positioned to capitalize on changes in the treatment paradigm.

Physicians like the clinical efficacy of our products, the reimbursement is established and fair, and the return per unit of physician time is compelling. The message is spreading. Drug therapy is not the answer, drugs treat the symptoms and not the problem. Conversely, our procedures are a proven long-term in-office solution to treat BPH.

Finally, turning to the competitive market dynamics for in-office therapies, it was recently announced that Prolieve, a low energy microwave treatment for BPH marketed by Boston Scientific will be exiting the market over the next six months.

The in-office treatment market has historically been crowded with each competitor often bring conflicting marketing messages to the physicians. We are optimistic that are significant and growing market share combined with fewer competitive options contributes to a growing tailwind.

This market dynamic will allow us to more effectively educate both patients and physicians on the proven long-term clinical benefits of our market leading in-office technologies and increase their access to our Cooled ThermoTherapy and Prostiva product lines.

We have all the pieces in place to drive growth in our business. The new Urologix has the most complete solution set for the in-office non-surgical treatment of BPH, experienced sales leadership guiding the execution of the company’s strategic growth plan, a larger fully integrated sales force post the Prostiva transaction and a reorganized territory plan to foster better customer service in the field.

In the second quarter, our sales force was integrated, deployed in their unique territories and cross-trained on both products. We have analyzed our combined account base and segmented our accounts to ensure that our sales force is appropriately focused on those accounts CTT or Prostiva, where we have the best ability to grow our business.

With the opportunity presented by the strategic decision of our competitor, we have the opportunity to take additional market share, which we plant to accomplish. However, this will not alter our strategy to grow procedure volume in our existing account base. Our primary tool in driving near-term procedure volume growth is our patient education and market development programs. These programs appear to be gaining traction in raising awareness amongst urologist and patients.

For the growing population of men to satisfy with drug we are educating them with a message of the existence of safe, effective and durable in-office non-surgical alternative to drug therapy. Our Think Outside the Pillbox seminars have been well-attended and resulted in strong pull-through to procedures in urology practices of different size and diverse geographies across the country. For urologist this significant patient interest in in-office procedures and clear dissatisfaction with current drug regimens has their attention.

Importantly, these market development efforts are working. Well, admittedly it is early, we have seen year-over-year increases in practice revenue of 20 plus percent in the quarter following a seminar and we have a large customer base we can target for this programs. We are also seeing compelling ROIs from our investments in market development in patient education so far and we plan to continue investing in these efforts going forward.

In closing, the second quarter performance was solid and we are encouraged by the early traction we are seeing in our market development initiatives. The new Urologix organization is position to take advantage of the changing dynamics in the BPH treatment market.

We are achieving our plan for the integration of the Prostiva RF therapy business, the sales and marketing organization is fully integrated and we are focus on our multiple internal initiatives aimed at driving topline growth. I’m more enthusiastic then ever about the opportunity in front of us and we look forward to updating you on our continued progress next quarter. We appreciate the time and continued interest in our company.

With that, I’ll open up the call to your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we have no questions at this time. So that -- then concludes today’s question-and-answer session. I would now like to turn the call back to Mr. Stryker Warren for closing remarks.

Stryker Warren Jr.

Ann, thank you. On behalf of the Board of Director, senior leadership and all Urologix’s employees, I thank our loyal shareholders for your continued interest in Urologix and we look forward to updating on our progress on our third quarter conference call, until then good day and good health.

Operator

Ladies and gentlemen, this concludes our conference for today. And we thank you for your participation. You may now disconnect. Have a good day.

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