UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2011

or

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transaction period from ____________ to _______________

Commission File Number 0-28414

UROLOGIX, INC.

(Exact name of registrant as specified in its charter)

14405 21st Avenue North, Minneapolis, MN 55447

(Address of principal executive offices)

Registrant’s telephone number, including area code: (763) 475-1400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted an posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.   See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐  No ☒

As of May 1, 2011, the Company had outstanding 14,580,648 shares of common stock, $.01 par value.

PART I – FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

Urologix, Inc.

Condensed Balance Sheets

(In thousands, except per share data)

(*) The Balance Sheet at June 30, 2010 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The accompanying notes to financial statements are an integral part of these statements.

Urologix, Inc.

Condensed Statements of Operations

(In thousands, except per share data)

(Unaudited)

The accompanying notes to financial statements are an integral part of these statements.

Urologix, Inc.

Condensed Statements of Cash Flows

(Unaudited, in thousands)

The accompanying notes to financial statements are an integral part of these statements.

Urologix, Inc.

Notes to Condensed Financial Statements

March 31, 2011

(Unaudited)

1.         Basis of Presentation

The accompanying unaudited condensed financial statements of Urologix, Inc. (the “Company,” “Urologix,” “we”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X.  The balance sheet as of March 31, 2011 and the statements of operations and cash flows for the three and nine-month periods ended March 31, 2011 and 2010 are unaudited but include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position at such date, and the operating results and cash flows for those periods.  Certain information normally included in financial statements and related footnotes prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.  The accompanying financial statements should be read in conjunction with the financial statements and notes included in the Urologix Annual Report on Form 10-K for the year ended June 30, 2010.

Results for any interim period shown in this report are not necessarily indicative of results to be expected for any other interim period or for the entire year. 

2.         Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates and assumptions are based on management’s best estimates and judgments. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors that management believes to be reasonable under the circumstances, including the current economic environment. The Company adjusts such estimates and assumptions when facts and circumstances dictate. These include, among others, the continued difficult economic conditions, tight credit markets, Medicare reimbursement rate uncertainty, and a decline in consumer spending and confidence, all of which have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual amounts could differ significantly from those estimated at the time the financial statements are prepared. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

3.         Stock-Based Compensation

The Company has an equity compensation plan, the 1991 Stock Option Plan (the “1991 Plan”), that provides for the granting of incentive stock options to employees and nonqualified stock options and restricted stock to employees, directors and consultants. As of March 31, 2011, we had reserved 4,450,910 shares of common stock under the 1991 Plan, and 616,854 shares were available for future grants. Options expire 10 years from the date of grant and typically vest 25 percent after the first year of service with the remaining vesting 1/36th each month thereafter.  Under the current terms of the 1991 Plan, persons serving as non-employee directors at the date of the annual shareholder meeting receive an option grant to purchase 10,000 shares of common stock at a price equal to fair market value on the date of grant. Generally, such options are immediately exercisable on the date of grant, and expire 10 years from the date of grant, subject to earlier termination one year after the person ceases to be a director of the Company.

Urologix, Inc.

Notes to Condensed Financial Statements

December 31, 2010

(Unaudited)

Options were granted to a non-employee consultant to purchase a total of 20,000 shares in both the first quarter of fiscal years 2011 and 2010. These options are non-qualified options which expire 10 years from the grant date and become fully vested over 24 months from the date of grant provided the consultant is still providing services to the Company.  As these options were granted to a non-employee consultant, the final value of these options will be determined at their vesting dates, rather than the date of grant, using the Black-Scholes option pricing model and marked to market at each reporting date until they become fully vested.  The Company uses the fair value recognition provisions of the revised authoritative guidance for equity-based compensation and applies the modified prospective method in determining stock option expense. Our results of operations reflect compensation expense for new stock options granted and vested under the 1991 Plan and the unvested portion of previous stock option grants and restricted stock which vest during the year. 

Amounts recognized in the financial statements for the three and nine-month periods ended March 31, 2011 and 2010 related to stock-based compensation were as follows (in thousands):

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. We use historical data to estimate expected volatility, the period of time that option grants are expected to be outstanding, as well as employee termination behavior. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The following assumptions were used to estimate the fair value of options granted during the nine-month periods ended March 31, 2011 and 2010 using the Black-Scholes option-pricing model:

Urologix, Inc.

Notes to Condensed Financial Statements

March 31, 2011

(Unaudited)

A summary of our option activity for the nine-month period ended March 31, 2011 is as follows:

The aggregate intrinsic value in the table above is based on our closing stock price of $0.63 and $1.07 on March 31, 2011 and June 30, 2010, respectively, which would have been received by the optionees had all in-the-money options been exercised on that date. 

On August 19, 2010, our Compensation Committee recommended, and the Board of Directors approved, an award of restricted stock to each non-employee director serving as a member of the Company’s Board of Directors immediately following the 2010 Annual Meeting of Shareholders held on November 9, 2010 with the number of shares of restricted stock equal to $12,500 divided by the closing price of our common stock on the date of the Annual Meeting, rounded up to the next whole share. A total of 60,976 shares of restricted stock were granted under the 1991 Plan to our non-employee directors on the date of the Annual Meeting or 15,244 shares of restricted stock to each of our four non-employee directors.  The restrictions on the restricted stock lapse on the first business day immediately prior to the date of our 2011 Annual Meeting of Shareholders if the director is serving on the board as of such date. The restricted stock award is in addition to the stock option grant under the 1991 Plan.

A summary of restricted stock award activity for the nine-month period ended March 31, 2011 is as follows: 

As of March 31, 2011, total unrecognized compensation cost related to non-vested stock options and restricted stock awards granted under our plan was $384,000 and $63,000, respectively.  That cost is expected to be recognized over a weighted-average period of 2.3 years for non-vested stock options and 0.9 years for restricted stock awards. 

Urologix, Inc.

Notes to Condensed Financial Statements

March 31, 2011

(Unaudited)

4.         Basic and Diluted Loss Per Share

Basic loss per share is computed by dividing the net loss by the weighted average number of shares of common stock and participating securities outstanding during the periods presented.  Diluted loss per share is computed by dividing the net loss by the weighted average number of shares of common stock and participating securities outstanding plus all dilutive potential common shares that result from stock options.  The weighted average common shares outstanding for both basic and dilutive (in thousands), were 14,575 and 14,522, for the three-month periods ended March 31, 2011 and 2010, respectively, and 14,546 and 14,503, for the nine-month periods ended March 31, 2011 and 2010, respectively.

The dilutive effect of stock options excludes approximately 1.71 million and 1.74 million options for the three and nine-month periods ended March 31, 2011, respectively, and 1.0 million and 1.3 million options for the three and nine-month periods ended March 31, 2010, respectively, for which the exercise price was higher than the average market price.  In addition, 888 and 82,834 of potentially dilutive stock options where the exercise price was lower than the average market price were excluded from diluted weighted average common shares outstanding for the three-month periods ended March 31, 2011 and 2010, respectively, as they would be anti-dilutive due to our net loss for such periods.  For the nine-month periods ended March 31, 2011 and 2010, there were 1,538 and 8,815 potentially dilutive stock options, respectively, excluded from diluted weighted average common shares outstanding, as they would also be anti-dilutive due to our net loss for these nine-month periods.

5.         Inventories

Inventories are stated at the lower of cost or market on a first-in, first-out (FIFO) basis and consisted of (in thousands):

6.         Other Accrued Expenses

Other accrued expenses were comprised of the following as of (in thousands):

Urologix, Inc.

Notes to Condensed Financial Statements

March 31, 2011

(Unaudited)

7.         Income Taxes

We utilize the asset and liability method of accounting for income taxes.  We recognize 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 recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense.

As of June 30, 2010, the liability for gross unrecognized tax benefits was $15,000.  During the nine-month period ended March 31, 2011, there were no significant changes to the total gross unrecognized tax benefits.  It is expected that the amount of unrecognized tax benefits for positions which we have identified will not change significantly in the next twelve months.

We file income tax returns in the United States (U.S.) federal jurisdiction as well as various state jurisdictions. We are subject to U.S. federal income tax examinations by tax authorities for fiscal years after 1995. We may also be subject to state income tax examinations whose regulations vary by jurisdiction.

8.         Warranty

Some of our products are covered by warranties against defects in material and workmanship for periods of up to 24 months.  We record a liability for warranty claims at the time of sale.  The amount of the liability is based on the trend in the historical ratio of product failure rates, material usage and service delivery costs to sales, the historical length of time between the sale and resulting warranty claim, and other factors.

Warranty provisions and claims for the nine-month periods ended March 31, 2011 and 2010 were as follows (in thousands):

9.         Commitments and Contingencies

Legal Proceedings

We have been 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.  The ultimate liabilities, if any, cannot be determined at this time. However, 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.

10.      Recently Issued Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (FASB) issued new revenue guidance that requires an entity to apply the relative selling price allocation method in order to estimate a selling price for all units of accounting, including delivered items when vendor-specific objective evidence or acceptable third-party evidence does not exist, as well as new guidance addressing the accounting for revenue transactions involving software. The new guidance is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company adopted this new guidance effective July 1, 2010 on a prospective basis.  The adoption of this statement did not have any impact on our financial condition or results of operations.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains, in addition to historical information, forward-looking statements that are based on our current expectations, beliefs, intentions or future strategies. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements as a result of certain factors, including those set forth under Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2010, as well as in other filings we make with the Securities and Exchange Commission and include factors such as: we are faced with intense competition and rapid technological and industry change; third party reimbursement is critical to market acceptance of our products; we depend upon our Cooled ThermoTherapy products for all of our revenues; we have a history of unprofitability; we may not have additional financing available to us; government regulation has a significant impact on our business; we are dependent upon a limited number of third-party suppliers to manufacture our products; 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; we are dependent on adequate protection of our patent and proprietary rights; our products may be subject to product recalls even after receiving FDA clearance or approval, which would harm our reputation and our business; we are dependent on key personnel; fluctuations in our future operating results may negatively affect the market price of our common stock; our stock price may be volatile and a shareholder’s investment could decline in value; future sales of shares of our common stock may negatively affect our stock price; and 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. All forward-looking statements included herein are based on information available to us as of the date hereof, and we undertake no obligation to update any such forward-looking statements.

The following is a discussion and analysis of Urologix’ financial condition and results of operations as of and for the three and nine month periods ended March 31, 2011 and 2010.  This section should be read in conjunction with the condensed financial statements and related notes in Item 1 of this report and Urologix’ Annual Report on Form 10-K for the year ended June 30, 2010.

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 CoolWave® and Targis® names and our procedure kits, that consist of a disposable treatment catheter, Rectal Thermal Unit (RTU) balloon and coolant bag, under the CTC Advance®, Targis, and Prostaprobe™ names.  All systems utilize the Company’s Cooled ThermoTherapy™ (CTT) 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 by the thermal ablation of hyperplasic prostatic tissue. Cooled ThermoTherapy can be performed without general anesthesia or intravenous sedation and can be performed in a urologist’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.

Our goal is to establish Cooled ThermoTherapy as the first treatment choice for BPH patients who prefer not taking daily medication or who are dissatisfied with symptom improvement, cost or side effects from chronic BPH drugs.   Our business strategy to achieve this goal is to (i) educate both patients and urologists on the benefits of Cooled ThermoTherapy versus chronic maintenance medication through the Company’s “Think Outside the Pillbox!” campaign, (ii) increase the use of Cooled ThermoTherapy by urologists who already have access to a Cooled ThermoTherapy system, (iii) increase the number of urologists who provide Cooled ThermoTherapy to their patients, and (iv) provide more urologists with access to Cooled ThermoTherapy through the use of our own Cooled ThermoTherapy mobile service or third party mobile providers in the United States.

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.

Each calendar year the Medicare reimbursement rate for Cooled ThermoTherapy is determined by the Centers for Medicare and Medicaid Services (CMS). The Medicare reimbursement rate for physicians varies depending on the site of service, wage indexes and geographic location. The national average reimbursement rate is the fixed rate for the year without any geographic adjustments, but does vary based on site of service. Cooled ThermoTherapy can be performed in the urologist’s office, an ambulatory surgery center (ASC), or a hospital as an outpatient procedure.

The national average of Medicare reimbursement in the physician office setting for all transurethral microwave therapy procedures for calendar 2011 is $2,350 per procedure.  We continue to monitor all reimbursement developments closely and will continue to execute on our active reimbursement strategy.

Cooled ThermoTherapy procedures are reimbursed when performed in an ASC or a hospital outpatient setting, but these are a small portion of our business and the CMS changes to these rates will not have a material effect on our financial performance.

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 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, nor reimbursement determinations for Cooled ThermoTherapy from these payers or that amounts reimbursed to urologists for performing Cooled ThermoTherapy procedures will be sufficient to encourage urologists to use Urologix’ product and service offerings.

As a result of recently enacted federal health care reform legislation, substantial changes are anticipated in the United States health care system. Such legislation includes numerous provisions affecting the delivery of health care services, the financing of health care costs, reimbursement of health care providers and the legal obligations of health insurers, providers and employers. These provisions are currently slated to take effect at specified times over approximately the next decade. The federal health care reform legislation did not directly affect our fiscal year 2010 financial statements and we do not expect the legislation to affect our financial results for fiscal year 2011.

We will continue to invest in research and development and clinical trials to improve our products and our therapy. These investments are intended to broaden our product offering and expand the clinical evidence supporting our proprietary Cooled ThermoTherapy treatment for BPH.  We continue to highlight our five year durability data and the ability of urologists using our system to customize the treatment for patients.

Critical Accounting Policies:

A description of our critical accounting policies was provided in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended June 30, 2010.  At March 31, 2011, our critical accounting policies and estimates continue to include revenue recognition, allowance for doubtful accounts, inventories, valuation of long-lived assets, income taxes, and stock-based compensation. 

RESULTS OF OPERATIONS

Net Sales

Net sales for the three and nine-month periods ended March 31, 2011 were $3.0 million and $9.7 million, respectively, compared to $3.6 million and $11.5 million, respectively, during the same periods of the prior fiscal year.  The $612,000 or 17 percent decrease in net sales, and the $1.9 million, or 16 percent decrease in net sales, for the three and nine-month periods ended March 31, 2011, is primarily attributable to reduced order volume due to decreased utilization in our direct, mobile, and third-party mobile channels.

During the third quarter of fiscal 2011, revenue derived from the Urologix-owned Cooled ThermoTherapy mobile service constituted 47 percent of overall revenue in the current quarter compared to 46 percent of revenues in the third quarter of fiscal 2010.   Revenue derived from treatment catheter sales to direct accounts remained consistent at 36 percent of sales in the third quarter of fiscal 2011 and 2010.  In addition, third party mobile catheter revenue constituted 14 percent of overall revenue in the third quarter of fiscal 2011 compared with 15 percent in the third quarter of fiscal 2010. 

Cost of Goods Sold and Gross Profit

Cost of goods sold includes raw materials, labor, overhead, and royalties incurred in connection with the production of our Cooled ThermoTherapy system control units and single-use treatment catheters, amortization related to developed technologies, as well as costs associated with the delivery of our Cooled ThermoTherapy mobile service.  Cost of goods sold for the three-month period ended March 31, 2011 decreased $246,000, or 15 percent, to $1.4 million, from $1.6 million for the three-month period ended March 31, 2010.  For the nine-month period ended March 31, 2011, cost of goods sold decreased $700,000, or 14 percent, to $4.4 million, from $5.1 million during the prior year period.  The decrease in costs of goods sold for the three and nine-month periods ended March 31, 2011 is primarily a result of the lower sales mentioned above. 

Gross profit as a percentage of sales decreased to 54 percent and 55 percent for the three and nine-month periods ended March 31, 2011, from 55 percent and 56 percent, respectively, for the three and nine-month periods ended March 31, 2010.  The decrease in the gross margin rate is due primarily to the allocation of fixed manufacturing costs over a production volume adjusted for reduced sales.

Selling, General & Administrative

Selling, general and administrative expenses of $2.0 million for the third quarter of fiscal 2011 decreased $70,000, or 3 percent when compared to selling, general and administrative expenses of $2.1 million in the same period of fiscal 2010.   The decrease in selling, general and administrative expenses for the three-month period ended March 31, 2011 is primarily due to a $78,000 decrease in variable sales compensation expense as a result of lower revenue.    For the nine-month period ended March 31, 2011, selling, general and administrative expenses decreased $641,000, or 10 percent, to $6.0 million from $6.7 million reported for the same nine-month period of fiscal year 2010.  The decrease in expense is primarily the result of a decrease in variable sales compensation expense of $449,000 and a decrease in the bonus accrual of $180,000 due to the lower revenue.

Research and Development

Research and development expenses, which include expenditures for product development, regulatory compliance and clinical studies, increased to $553,000 and $1.7 million, respectively, for the three and nine-month periods ended March 31, 2011, from $461,000 and $1.3 million in the same respective periods of the prior fiscal year.  The increase in expense of $92,000, or 20 percent, and $334,000 or 25 percent, for the three and nine-month periods ended March 31, 2011, is due to increased headcount as we as continue to invest in research and development activities.  

Provision for Income Taxes

We recognized an income tax benefit of $3,000 and $6,000 for the three and nine-month periods ended March 31, 2011, respectively, compared to an income tax benefit of $1,000 and $13,000 for the comparable prior year fiscal periods.  The tax benefit in the three and nine-month periods ended March 31, 2011 and 2010 relates to estimates for research and development credits, partially offset by provisions for state taxes.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations since inception through sales of equity securities and sales of our Cooled ThermoTherapy system control units, single-use treatment catheters and mobile service offerings.  As of March 31, 2011, we had total cash and cash equivalents of $3.8 million compared to $5.7 million as of June 30, 2010.  Working capital decreased to $5.0 million at March 31, 2011 from $6.7 million at June 30, 2010.  This decrease in working capital is primarily due to the $1.9 million decrease in the cash balance offset by a $214,000 increase in accounts payable.

During the nine-month period ended March 31, 2011, we used $1.7 million of cash for operating activities.  The net loss of $2.4 million included non-cash charges of $443,000 from depreciation and amortization expense and $284,000 from stock-based compensation expense.  Movements in operating items had little effect on our operating cash flow for the period as a result of higher accounts payable of $214,000, lower prepaid and other assets of $153,000, and lower accounts receivable of $71,000.  This was partially offset by lower accrued expenses and deferred income balances of $221,000, and increased inventories of $212,000.   The increase in accounts payable is due to programs established to increase the time between purchase and payment, and the decrease in accounts receivable is due to lower sales volume.   The decrease in accrued expenses and deferred income is a result of a decrease in our payroll accrual due to timing and a decrease in the bonus accrual as a result of the payout of fiscal 2010 bonuses during the first quarter of fiscal 2011.  The increase in inventories is a result of an increase in finished goods inventory due to the decrease in sales. The increase in our year-over-year cash used in operations of $500,000 is primarily due to the decrease in sales, partially offset by our increase in accounts payable. 

During the nine-months ended March 31, 2011, we used $216,000 for investing activities primarily to purchase property and equipment related to a tenant improvement allowance as a result of signing a building lease extension.

During the nine-months ended March 31, 2011, we generated $4,000 of cash from financing activities from the exercise of stock options.

We plan to continue offering customers a variety of programs for both evaluation and longer-term use of our Cooled ThermoTherapy system control units in addition to purchase options.   We also will continue to provide physicians and patients with efficient access to our Cooled ThermoTherapy system control units on a pre-scheduled basis through our mobile service.  As of March 31, 2011, our property and equipment, net, included approximately $644,000 of control units used in evaluation or longer-term use programs and in our Company-owned mobile service. 

We believe our $3.8 million in cash and cash equivalents at March 31, 2011 will be sufficient to fund our working capital and capital resource needs beyond the next twelve months.  In addition, we believe the majority of our cash equivalents are secure as they are backed by United States Government Treasuries. 

Our business plan and financing needs are subject to change depending on, among other things, the success of our efforts to increase revenue and 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.

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 10 to the condensed financial statements in this Quarterly Report on Form 10-Q.

ITEM 3.   QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

Our financial instruments include cash equivalent instruments.  Increases and decreases in prevailing interest rates generally translate into decreases and increases, respectively, in the fair value of these instruments, as our investments are variable rate investments.  Also, fair values of interest rate sensitive instruments may be affected by the credit worthiness of the issuer, prepayment options, relative values of alternative instruments, the liquidity of the instrument and other general market conditions.

Market risk was estimated as the potential decrease in fair value resulting from a hypothetical 1% change in interest rates and was not materially different from the quarter-end carrying value.  Due to the nature of our cash equivalent instruments, we have concluded that 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.  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.

ITEM 4.    CONTROLS AND PROCEDURES

(a)  Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer, Stryker Warren, Jr., and Chief Financial Officer, Brian J. Smrdel,  have evaluated the Company’s “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, they have concluded that these controls and procedures are effective.

(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 Company’s internal control over financial reporting. 

PART II – OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

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. 

ITEM 1A. RISK FACTORS

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, 2010, as updated by our subsequent filings with the Securities and Exchange Commission.  There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.   [REMOVED AND RESERVED]

ITEM 5.   OTHER INFORMATION

We received a letter, dated February 16, 2011, from The Nasdaq Stock Market notifying us that our request had been granted for an additional 180 calendar day cure period, until August 15, 2011, to regain compliance with the $1.00 per share minimum bid price requirement for continued listing on The Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2).

The Nasdaq letter states that, pursuant to Listing Rule 5810(c)(3)(A), Urologix is eligible for this additional compliance period because it meets all other Nasdaq Capital Market initial listing criteria set forth in Listing Rule 5505.  Previously, on August 19, 2010, Urologix was notified by Nasdaq that it did not meet the minimum bid price requirement for continued listing and was provided until February 15, 2011 to achieve compliance.

The Company may achieve compliance during the additional 180-day period if the closing bid price of the company’s common stock is at least $1.00 per share for a minimum of 10 consecutive business days before August 15, 2011. This notification has no immediate effect on the Company’s listing on The Nasdaq Capital Market nor on the trading of the Company’s common stock.

ITEM 6.   EXHIBITS

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.