##### Table of Contents



UNITED
STATESSECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
  For the Quarterly Period Ended June 30, 2006
 Commission File No. 000-20989
 UROPLASTY, INC.
  Minnesota, U.S.A.
(State or other jurisdiction of
incorporation or organization)
    
    41-1719250
(I.R.S. Employer
Identification No.)
 5420 Feltl Road
Minnetonka, Minnesota, 55343
 (912) 426-6140
   þ o
  o þ
   o þ




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. CONTROLS AND PROCEDURESPART II. OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 6. EXHIBITSSIGNATURESCertification of CEO and CFO Pursuant to Section 302Certification of CEO and CFO Pursuant to Section 906    Table of Contents  
  
 
 ITEM 1. FINANCIAL STATEMENTS
   June 30, 2006
    
    
    March 31, 2006(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    1,394,306
    
    
    $
    1,563,433Short-term investments
    
    
    
    
    
    
    1,137,647Accounts receivable, net
    
    
    936,816
    
    
    
    716,587Income tax receivable
    
    
    170,290
    
    
    
    270,934Inventories
    
    
    731,663
    
    
    
    757,062Other
    
    
    415,107
    
    
    
    353,178Total current assets
    
    
    3,648,182
    
    
    
    4,798,841Property, plant, and equipment, net
    
    
    1,445,778
    
    
    
    1,079,438Intangible assets, net
    
    
    385,067
    
    
    
    411,604Deferred tax assets
    
    
    139,505
    
    
    
    111,361Total assets
    
    $
    5,618,532
    
    
    $
    6,401,244
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June 30, 2006
    
    
    March 31, 2006(unaudited)Liabilities and Shareholders EquityCurrent liabilities:Current maturities  long-term debt
    
    $
    43,998
    
    
    $
    41,658Current maturities  deferred rent
    
    
    35,000
    
    
    
    Notes payable
    
    
    185,426
    
    
    
    Accounts payable
    
    
    552,704
    
    
    
    506,793Accrued liabilities
    
    
    632,197
    
    
    
    917,981Warrant liability
    
    
    337,624
    
    
    
    665,356Total current liabilities
    
    
    1,786,949
    
    
    
    2,131,788Long-term debt  less current maturities
    
    
    400,101
    
    
    
    389,241Deferred rent  less current maturities
    
    
    239,433
    
    
    
    Accrued pension liability
    
    
    573,267
    
    
    
    473,165Total liabilities
    
    
    2,999,750
    
    
    
    2,994,194Shareholders equity:Common stock $.01 par value; 20,000,000
shares authorized, 6,965,206 and 6,937,786
shares issued and outstanding at June 30 and
March 31, 2006, respectively
    
    
    69,652
    
    
    
    69,378Additional paid-in capital
    
    
    15,199,298
    
    
    
    14,831,787Accumulated deficit
    
    
    (12,275,339
    )
    
    
    (11,034,100
    )Accumulated other comprehensive loss
    
    
    (374,829
    )
    
    
    (460,015
    )Total shareholders equity
    
    
    2,618,782
    
    
    
    3,407,050Total liabilities and shareholders equity
    
    $
    5,618,532
    
    
    $
    6,401,244
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Three Months EndedJune 30,2006
    
    
    2005Net sales
    
    $
    1,764,210
    
    
    $
    1,645,653Cost of goods sold
    
    
    555,516
    
    
    
    420,828Gross profit
    
    
    1,208,694
    
    
    
    1,224,825Operating expensesGeneral and administrative
    
    
    884,109
    
    
    
    690,564Research and development
    
    
    674,954
    
    
    
    630,598Selling and marketing
    
    
    1,232,587
    
    
    
    664,0332,791,650
    
    
    
    1,985,195Operating loss
    
    
    (1,582,956
    )
    
    
    (760,370
    )Other income (expense)Interest income
    
    
    19,507
    
    
    
    27,380Interest expense
    
    
    (5,982
    )
    
    
    (4,809
    )Warrant benefit (expense)
    
    
    327,732
    
    
    
    (686,295
    )Foreign currency exchange gain (loss)
    
    
    26,411
    
    
    
    (1,199
    )Other
    
    
    4,800
    
    
    
    372,468
    
    
    
    (664,923
    )Loss before income taxes
    
    
    (1,210,488
    )
    
    
    (1,425,293
    )Income tax expense
    
    
    30,751
    
    
    
    37,020Net loss$
    (1,241,239
    )
    
    $
    (1,462,313
    )Basic and diluted loss per common share
    
    $
    (0.18
    )
    
    $
    (0.23
    )Weighted average common shares
outstanding:Basic and diluted
    
    
    6,952,167
    
    
    
    6,351,245
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Additional
    
    
    
    
    
    
Accumulated
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    Other
Comprehensive
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    

Loss
    
    
    EquityBalance at March 31, 2006
    
    
    6,937,786
    
    
    $
    69,378
    
    
    $
    14,831,787
    
    
    $
    (11,034,100
    )
    
    
    $(460,015
    )
    
    $
    3,407,050Exercise of Stock Options
    
    
    9,666
    
    
    
    96
    
    
    
    12,702
    
    
    
    
    
    
    
    
    
    
    
    12,798Employee Retirement
Savings Plan
Contribution
    
    
    17,754
    
    
    
    178
    
    
    
    44,207
    
    
    
    
    
    
    
    
    
    
    
    44,385Share-Based Compensation
    
    
    
    
    
    
    
    
    
    
    310,602
    
    
    
    
    
    
    
    
    
    
    
    310,602Comprehensive Loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,241,239
    )
    
    
    Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96,589Additional pension
liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,403
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,156,053
    )Balance at June 30, 2006
    
    
    6,965,206
    
    
    $
    69,652
    
    
    $
    15,199,298
    
    
    $
    (12,275,339
    )
    
    
    ($  374,829
    )
    
    $
    2,618,782
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Three Months EndedJune 30,2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (1,241,239
    )
    
    $
    (1,462,313
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    78,295
    
    
    
    54,319Gain on disposal of assets
    
    
    (4,800
    )
    
    
    Warrant expense (benefit)
    
    
    (327,732
    )
    
    
    686,295Stock-based consulting expense
    
    
    11,007
    
    
    
    Stock-based compensation expense
    
    
    299,595
    
    
    
    Deferred income taxes
    
    
    (21,495
    )
    
    
    7,453Deferred rent
    
    
    (5,833
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (178,338
    )
    
    
    (37,436
    )Inventories
    
    
    76,937
    
    
    
    (222,364
    )Other current assets and income tax receivable
    
    
    59,400
    
    
    
    (92,228
    )Accounts payable
    
    
    35,354
    
    
    
    11,650Deferred rent
    
    
    274,433
    
    
    
    Accrued liabilities
    
    
    (207,912
    )
    
    
    165,265Accrued pension liability
    
    
    27,025
    
    
    
    19,613Net cash used in operating activities
    
    
    (1,125,303
    )
    
    
    (869,746
    )Cash flows from investing activities:Purchase of short-term investments
    
    
    
    
    
    
    (2,103,402
    )Proceeds from sale of short-term investments
    
    
    1,137,647
    
    
    
    87,359Payments for property, plant and equipment
    
    
    (371,825
    )
    
    
    (129,474
    )Proceeds from sale of property, plant and equipment
    
    
    4,800
    
    
    
    Payments for intangible assets
    
    
    
    
    
    
    (266,667
    )Net cash provided by (used in) investing activities
    
    
    770,622
    
    
    
    (2,412,184
    )Cash flows from financing activities:Proceeds from financing obligations
    
    
    210,999Repayment of long-term obligations
    
    
    (36,374
    )
    
    
    (10,819
    )Proceeds from issuance of common stock and warrants
    
    
    12,798
    
    
    
    6,824,069Net cash provided by financing activities
    
    
    187,423
    
    
    
    6,813,250Effect of exchange rates on cash and cash equivalents
    
    
    (1,869
    )
    
    
    (81,808
    )Net increase (decrease) in cash and cash equivalents
    
    
    (169,127
    )
    
    
    3,449,512Cash and cash equivalents at beginning of period
    
    
    1,563,433
    
    
    
    1,405,324Cash and cash equivalents at end of period
    
    $
    1,394,306
    
    
    $
    4,854,836Supplemental disclosure of cash flow information:Cash paid during the period for interest
    
    $
    7,081
    
    
    $
    5,056Cash paid during the period for income taxes
    
    
    23,121
    
    
    
    15,281Supplemental disclosure of non-cash financing and investing activities:Shares issued for 401(k) plan profit sharing contribution
    
    $
    44,408
    
    
    $
    Property, plant and equipment additions funded by lessor allowance and
classified as deferred rent
    
    
    280,000
    
    
    
    
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1. Basis of Presentation
    2. Nature of Business, Sales of Common Stock and Corporate Liquidity
 TM ®
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3. Short-term Investments
  4. Inventories
  June 30, 2006
    
    
    March 31, 2006Raw materials
    
    $
    345,110
    
    
    $
    379,685Work-in-process
    
    
    67,950
    
    
    
    26,183Finished goods
    
    
    418,408
    
    
    
    453,633Reserve
    
    
    (99,805
    )
    
    
    (102,439
    )$
    731,663
    
    
    $
    757,062
 5. Intangible Assets
  June 30, 2006GrossEstimated
    
    
    Carrying
    
    
    AccumulatedLives (Years)
    
    
    Amount
    
    
    Amortization
    
    
    Net valueLicensed technology
    
    
    5
    
    
    $
    501,290
    
    
    $
    136,028
    
    
    $
    365,262Patents and inventions
    
    
    6
    
    
    
    237,900
    
    
    
    218,095
    
    
    
    19,805Totals
    
    
    
    
    
    $
    739,190
    
    
    $
    354,123
    
    
    $
    385,067
 March 31, 2006Licensed technology
    
    
    5
    
    
    $
    501,290
    
    
    $
    111,183
    
    
    $
    390,107Patents and inventions
    
    
    6
    
    
    
    237,900
    
    
    
    216,403
    
    
    
    21,497Totals
    
    
    
    
    
    $
    739,190
    
    
    $
    327,586
    
    
    $
    411,604
  Remainder of fiscal 2007
    
    $
    77,0002008
    
    
    100,8002009
    
    
    100,7002010
    
    
    98,4002011
    
    
    8,200$
    385,100
 6. Comprehensive Loss
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Three Months EndedJune 30,2006
    
    
    2005Net loss
    
    $
    (1,241,239
    )
    
    $
    (1,462,313
    )Items of other comprehensive income (loss):Translation adjustment
    
    
    96,589
    
    
    
    (208,159
    )Additional pension liability
    
    
    (11,403
    )
    
    
    4,409Comprehensive loss
    
    $
    (1,156,053
    )
    
    $
    (1,666,063
    )
 7. Options and Warrants
  Number of
    
    
    Range of ExerciseOptions/Warrants
    
    
    PricesFor the three months ended:June 30, 2006
    
    
    4,038,460
    
    
    $0.90 to $10.50June 30, 2005
    
    
    3,706,338
    
    
    $0.90 to $10.50
 8. Shareholders Equity
 Warrants
    9. Share-based Compensation
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Proforma UnderAs Reported
    
    
    APB 25Loss before taxes
    
    $
    (1,210,488
    )
    
    $
    (1,210,488
    )Add back compensation expense
    
    
    
    
    
    
    310,602Adjusted loss before taxes
    
    
    (1,210,488
    )
    
    
    (899,886
    )Income tax expense
    
    
    30,751
    
    
    
    30,751Net loss
    
    $
    (1,241,239
    )
    
    $
    (930,637
    )Net loss per common share  basic and
diluted
    
    $
    (0.18
    )
    
    $
    (0.13
    )
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Three Months EndedJune 30,2006
    
    
    2005Net loss  As reported
    
    $
    (1,241,239
    )
    
    $
    (1,426,313
    )Deduct: Total stock-based employee
compensation expense determined under fair
value-based method
    
    
    
    
    
    
    (433,431
    )Net loss  Pro forma
    
    $
    (1,241,239
    )
    
    $
    (1,895,744
    )Net loss per common share  As reported:Basic and diluted
    
    $
    (0.18
    )
    
    $
    (0.23
    )Net loss per common share  Pro forma:Basic and diluted
    
    $
    (0.18
    )
    
    $
    (0.30
    )
  Expected life in years
    
    
    8.97Risk-free interest rate
    
    
    5.06
    %Expected volatility
    
    
    100.26
    %Expected dividend yield
    
    
    0Weighted-average fair value
    
    
    2.177
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Weighted AvgWeighted Avg
    
    
    RemainingNumber of Shares
    
    
    Exercise Price
    
    
    Contract LifeOptions outstanding at beginning of
period
    
    
    1,888,327
    
    
    $
    3.80
    
    
    
    4.48Options granted
    
    
    358,000
    
    
    
    2.51
    
    
    
    8.86Options exercised
    
    
    (9,666
    )
    
    
    1.32
    
    
    
    Options surrendered
    
    
    (22,267
    )
    
    
    5.13
    
    
    
    Options outstanding at end of period
    
    
    2,214,394
    
    
    $
    3.59
    
    
    
    5.27Options exercisable at end of period
    
    
    1,820,310
    
    
    $
    3.86
    
    
    
    4.97
 10. Savings and Retirement Plans
    Three Months EndedJune 30,2006
    
    
    2005Gross service cost
    
    $
    50,542
    
    
    $
    44,861Interest cost
    
    
    30,413
    
    
    
    25,835Expected return on assets
    
    
    (17,444
    )
    
    
    (14,911
    )Amortization
    
    
    10,431
    
    
    
    7,267Net periodic retirement cost
    
    $
    73,942
    
    
    $
    63,052
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Three Months EndedJune 30,2006
    
    2005Discount rate
    
    
    4.25-5.50
    %
    
    
    4.50-5.25
    %Expected return on assets
    
    
    4.00-5.00
    %
    
    
    4.00-5.00
    %Expected rate of increase in future
compensation:General
    
    
    3
    %
    
    
    3
    %Individual
    
    
    0%-3
    %
    
    
    0%-3
    %
 11. Foreign Currency Translation
   12. Income Tax Expense
  13. Business Segment and Geographic Information
 ®
 ®
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AdjustmentsUnited
    
    The
    
    United
    
    andStates
    
    Netherlands
    
    Kingdom
    
    Eliminations
    
    ConsolidatedFiscal 2007Sales, three months
ended June 30, 2006
    
    $
    298,300
    
    
    $
    1,163,129
    
    
    $
    529,437
    
    
    $
    (226,656
    )
    
    $
    1,764,210Income tax expense,
three months ended
June 30, 2006
    
    
    
    
    
    
    30,751
    
    
    
    
    
    
    
    
    
    
    
    30,751Net income (loss),
three months ended
June 30, 2006
    
    
    (1,347,945
    )
    
    
    107,927
    
    
    
    (57,675
    )
    
    
    56,454
    
    
    
    (1,241,239
    )Long-lived assets
at June 30, 2006
    
    
    1,079,198
    
    
    
    747,365
    
    
    
    4,282
    
    
    
    
    
    
    
    1,830,845Fiscal 2006Sales, three months
ended June 30, 2005
    
    $
    140,821
    
    
    $
    1,337,601
    
    
    $
    457,770
    
    
    $
    (290,539
    )
    
    $
    1,645,653Income tax expense,
three months ended
June 30, 2005
    
    
    
    
    
    
    37,020
    
    
    
    
    
    
    
    
    
    
    
    37,020Net income (loss),
three months ended
June 30, 2005
    
    
    (1,656,475
    )
    
    
    (12,104
    )
    
    
    44,414
    
    
    
    161,852
    
    
    
    (1,462,313
    )Long-lived assets
at June 30, 2005
    
    
    619,125
    
    
    
    741,071
    
    
    
    7,398
    
    
    
    
    
    
    
    1,367,594
 14. Recently Issued Accounting Standards
  15. Subsequent Event
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS




Forward-looking Statements










Overview







    
    Pursue regulatory approval in the U.S. for our Macroplastique products.
    
    Expand our U.S. marketing and sales organization, using a combination of direct and independent reps;
    
    Conduct multi-center, prospective, post-market clinical trials for the Urgent PC;
    
    Expand distribution of our products outside of the U.S.; and
    
    Acquire or license complimentary products if appropriate opportunities arise.


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Critical Accounting Policies




Revenue Recognition


Accounts Receivable


Inventories


Foreign Currency Translation/Transactions


Impairment of Long-Lived Assets


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Share-Based Compensation. Share-Based Payment Accounting for Stock-Based Compensation
  Income Taxes.
   Results of Operations
 Three-month period ended June 30, 2006 compared to three-month period ended June 30, 2005
 
    Page 17




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 
    Liquidity and Capital Resources
 Cash Flows
  Page 18




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Sources of Liquidity.









Commitments and Contingencies.








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Payments Due by PeriodRemainder
    
    
    Fiscal
    
    
    Fiscal
    
    
    Fiscalof Fiscal
    
    
    2008 and
    
    
    2010 and
    
    
    2012 andTotal
    
    
    2007
    
    
    2009
    
    
    2011
    
    
    thereafterMinimum royalty payments
    
    $
    234,000
    
    
    $
    40,500
    
    
    $
    108,000
    
    
    $
    85,500
    
    
    $
    Minimum purchase agreement
    
    
    6,996,482
    
    
    
    721,696
    
    
    
    2,129,973
    
    
    
    4,144,813
    
    
    
    Notes payable
    
    
    756,607
    
    
    
    165,980
    
    
    
    193,478
    
    
    
    107,869
    
    
    
    289,280Operating lease commitments
    
    
    1,367,331
    
    
    
    242,763
    
    
    
    401,668
    
    
    
    285,773
    
    
    
    437,127Total contractual obligations
    
    $
    9,264,782
    
    
    $
    1,081,301
    
    
    $
    2,833,119
    
    
    $
    4,623,955
    
    
    $
    726,407
 
 ITEM 3. CONTROLS AND PROCEDURES.
  Internal Control Matters
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PART II. OTHER INFORMATION
   
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Abstentions andVotes For
    
    Votes Against
    
    Votes Withheld
    
    Broker Non-Votes3,133,014
    
    998,270
    
    
    
    2,185,763
 
 ITEM 6. EXHIBITS.
    Page 22




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SIGNATURES
  UROPLASTY, INC.by:
    
    /s/ DAVID B. KAYSENDate: August 14, 2006
    
    David B. KaysenPresident and Chief Executive OfficerDate: August 14, 2006
    
    by:
    
    /s/ MAHEDI A. JIWANIMahedi A. JiwaniChief Financial Officer
 Page 23