e10vqza
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(Amendment No. 1)
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(Mark One) |
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE TRANSITION PERIOD
FROM TO . |
COMMISSION FILE NUMBER: 001-15063
Endocare, Inc.
(Exact name of Registrant as Specified in Its Charter)
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DELAWARE
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33-0618093 |
(State of Incorporation) |
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(I.R.S. Employer I.D. No.) |
201 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA 92618
(Address of Principal Executive Office, Including Zip
Code)
(949) 450-5400
(Registrants Telephone Number, Including Area Code)
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. (1) Yes þ No o; (2) Yes þ No o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange
Act). Yes þ No o
The number of shares of the Registrants common stock, par
value $.001 per share, outstanding at July 20, 2005
was 30,059,977.
Endocare, Inc.
INDEX
2
EXPLANATORY NOTE
This amendment no. 1 on Form 10-Q/A amends our quarterly
report on Form 10-Q for the quarter ended June 30,
2005, which was originally filed with the SEC on August 9,
2005. The purpose of this amendment no. 1 is to revise the items
set forth below based on comments received from the SEC staff in
connection with the SEC staffs review of a registration
statement on Form S-2 that we originally filed on
April 5, 2005 and subsequently amended. Except as otherwise
expressly stated, this amendment no. 1 does not reflect any
events occurring after the filing of the original
Form 10-Q, nor does it modify or update in any way the
disclosures contained in the original Form 10-Q filing.
This amendment no. 1 continues to speak as of the date of the
original Form 10-Q filing, except that we have included as
exhibits updated certifications from our chief executive officer
and chief financial officer, as exhibits 31.1, 31.2, 32.1
and 32.2, respectively. This amendment no. 1 should be read
in conjunction with our filings made with the SEC subsequent to
the date of the original Form 10-Q filing, including any
amendments to those filings.
3
PART I FINANCIAL INFORMATION
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Item 1. |
Condensed Consolidated Financial Statements |
ENDOCARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended | |
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Six Months Ended | |
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June 30, | |
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June 30, | |
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2005 | |
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2004 | |
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2005 | |
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2004 | |
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(Restated) | |
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(Restated) | |
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(Unaudited) | |
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(In thousands, except per share data) | |
Total revenues
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$ |
9,078 |
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$ |
8,312 |
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$ |
18,205 |
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$ |
15,694 |
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Costs and expenses:
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Cost of revenues
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4,580 |
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4,313 |
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9,647 |
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8,547 |
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Research and development
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585 |
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452 |
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906 |
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988 |
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Selling and marketing
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4,167 |
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5,014 |
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8,195 |
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9,527 |
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General and administrative
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3,661 |
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4,075 |
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7,921 |
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10,742 |
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Impairment charge
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(583 |
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Total costs and expenses
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12,993 |
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13,854 |
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26,086 |
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29,804 |
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Loss from operations
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(3,915 |
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(5,542 |
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(7,881 |
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(14,110 |
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Interest income (expense), net
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(282 |
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77 |
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(822 |
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122 |
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Loss before minority interests
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(4,197 |
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(5,465 |
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(8,703 |
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(13,988 |
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Minority interests
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(155 |
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(255 |
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Net loss
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$ |
(4,197 |
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$ |
(5,620 |
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$ |
(8,703 |
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$ |
(14,243 |
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Net loss per share basic and diluted
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$ |
(0.14 |
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$ |
(0.23 |
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$ |
(0.30 |
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$ |
(0.59 |
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Weighted average shares of common stock outstanding
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30,044 |
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24,000 |
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28,969 |
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24,095 |
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
ENDOCARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30, | |
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December 31, | |
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2005 | |
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2004 | |
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(Unaudited) | |
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(Restated) | |
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(In thousands, except per | |
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share data) | |
ASSETS |
Current assets:
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Cash and cash equivalents
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$ |
12,720 |
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$ |
7,985 |
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Accounts receivable, net
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3,925 |
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3,904 |
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Inventories, net
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3,754 |
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3,175 |
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Prepaid expenses and other current assets
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1,379 |
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1,651 |
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Total current assets
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21,778 |
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16,715 |
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Property and equipment, net
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2,245 |
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3,139 |
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Goodwill
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4,552 |
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4,552 |
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Intangibles, net
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7,983 |
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8,560 |
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Investments and other assets
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1,039 |
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1,409 |
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Total assets
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$ |
37,597 |
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$ |
34,375 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
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Accounts payable
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$ |
2,628 |
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$ |
2,636 |
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Accrued compensation
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2,783 |
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3,708 |
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Other accrued liabilities
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7,620 |
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10,391 |
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Total current liabilities
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13,031 |
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16,735 |
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Common stock warrants
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6,785 |
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Total liabilities
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19,816 |
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16,735 |
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Minority interests
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214 |
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Stockholders equity:
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Preferred stock, $.001 par value; 1,000 shares
authorized; none issued and outstanding
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Common stock, $.001 par value; 50,000 shares
authorized; 30,060 and 24,342 issued and outstanding as of
June 30, 2005 and December 31, 2004, respectively
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30 |
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24 |
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Additional paid-in capital
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178,452 |
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169,400 |
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Accumulated deficit
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(160,701 |
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(151,998 |
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Total stockholders equity
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17,781 |
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17,426 |
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Total liabilities and stockholders equity
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$ |
37,597 |
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$ |
34,375 |
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The accompanying notes are an integral part of these condensed
consolidated balance sheets.
5
ENDOCARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Six Months Ended | |
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June 30, | |
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2005 | |
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2004 | |
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(Restated) | |
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(Unaudited) | |
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(In thousands) | |
Cash flows from operating activities:
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Net loss
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$ |
(8,703 |
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$ |
(14,243 |
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Adjustments to reconcile net loss to net cash used in operating
activities:
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Depreciation and amortization
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1,804 |
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1,971 |
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Loss on disposals of fixed assets
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12 |
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13 |
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Compensation expense related to issuance of options and warrants
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45 |
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14 |
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Costs related to assets held for sale
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(583 |
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Minority interests
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(214 |
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255 |
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Interest expense related to common stock warrants
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1,105 |
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Changes in operating assets and liabilities:
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Accounts receivable
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(21 |
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110 |
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Inventories
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(834 |
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(1,953 |
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Prepaid expenses and other current assets
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(234 |
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(1,208 |
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Accounts payable
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(8 |
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551 |
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Accrued compensation
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(925 |
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(484 |
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Other accrued liabilities
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(2,090 |
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630 |
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Net cash used in operating activities
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(10,646 |
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(14,344 |
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Cash flows from investing activities:
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Sales of property and equipment
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220 |
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Purchases of property and equipment
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(162 |
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(398 |
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Proceeds from divestitures
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850 |
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2,500 |
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Partnership distributions to minority interests
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(383 |
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Decrease in other assets
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270 |
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Net cash provided by investing activities
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688 |
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2,209 |
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Cash flows from financing activities:
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Stock options and warrants exercised
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108 |
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32 |
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Proceeds from sale of common stock and warrants, net of issuance
costs
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14,585 |
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Treasury stock received in settlement
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(504 |
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Net cash provided by (used in) financing activities
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14,693 |
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(472 |
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Net increase (decrease) in cash and cash equivalents
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4,735 |
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(12,607 |
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Cash and cash equivalents, beginning of period
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7,985 |
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23,977 |
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Cash and cash equivalents, end of period
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$ |
12,720 |
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$ |
11,370 |
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Non-cash activities:
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Transfer of inventory to property and equipment
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$ |
254 |
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$ |
236 |
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Retirement of treasury shares held
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2,596 |
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Deferred compensation on options forfeited
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94 |
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
ENDOCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular numbers in thousands, except per share data)
(Unaudited)
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1. |
Organization and Operations of the Company |
Endocare, Inc. (Endocare) is a medical device
company focused on developing, manufacturing and selling
cryoablation products with the potential to improve the
treatment of cancer and other tumors. In addition, we offer
vacuum therapy systems for non-pharmaceutical treatment of
erectile dysfunction. Endocare was formed in 1990 as a research
and development division of Medstone International, Inc.
(Medstone), a manufacturer of shockwave lithotripsy
equipment for the treatment of kidney stones. Following its
incorporation under the laws of the state of Delaware in 1994,
Endocare became an independent, publicly-owned corporation upon
Medstones distribution of Endocares stock to the
existing stockholders on January 1, 1996.
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2. |
Restatement of Unaudited Condensed Consolidated Financial
Statements as of and for the three and six months ended
June 30, 2005 |
In order to correct the financial statements so that they comply
with U.S. generally accepted accounting principles (in
particular, EITF 00-19, Accounting for Derivative Financial
Instruments Indexed To, and Potentially Settled In, a
Companys Own Stock), our Unaudited Condensed
Consolidated Statements of Operations, Unaudited Condensed
Consolidated Balance Sheet and Unaudited Condensed Consolidated
Statements of Cash Flows as of and for the three and six months
ended June 30, 2005 have been restated to reflect a
reclassification from equity to non-current liability of the
warrants that we issued in March 2005, and to reflect interest
expense to represent the change in the fair value of the
warrants during the respective periods, as described below in
Note 5. As a result of this correction, our net loss for
the three and six months ended June 30, 2005 increased from
$3.7 million to $4.2 million and from
$7.6 million to $8.7 million, respectively, and our
net loss per share increased from $0.12 to $0.14 and from $0.26
to $0.30, respectively.
Following the rules and regulations of the Securities and
Exchange Commission (the SEC) we have omitted
footnote disclosures in this report that would substantially
duplicate the disclosures contained in our annual audited
financial statements. The accompanying condensed consolidated
financial statements should be read together with the
consolidated financial statements and the notes thereto included
in our December 31, 2004 Annual Report on Form 10-K,
filed with the SEC on March 16, 2005.
The accompanying condensed consolidated financial statements
reflect all adjustments, consisting solely of normal recurring
accruals, needed to present fairly the financial results for
these interim periods. The condensed consolidated results of
operations presented for the interim periods are not necessarily
indicative of the results for a full year. All intercompany
transactions and accounts have been eliminated in consolidation.
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4. |
Changes to Plan of Sale Timm Medical |
In July 2004, we began actively marketing Timm Medical
Technologies, Inc. (Timm Medical), our wholly-owned subsidiary,
and our equity interests in the mobile prostate treatment
businesses (collectively the Disposal Group) to potential buyers
as part of an overall plan to raise additional capital. In
accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the assets and
liabilities of the Disposal Group were classified as assets held
for sale as of that date. In connection with the potential sale,
we reduced the carrying value of these assets and liabilities to
fair value less estimated cost to sell and suspended
depreciation of fixed assets and amortization of intangibles as
of July 31, 2004.
7
ENDOCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As a result, we recorded an impairment charge of
$15.8 million in the third quarter of 2004, of which
$5.9 million related to the write-down of goodwill and
developed technology at Timm Medical.
We completed the sale of the mobile treatment businesses in
December 2004. By the end of March 2005, we had not found a
suitable buyer for Timm Medical. With the successful completion
of a private placement of our common stock in March 2005 (see
Note 5) in which we raised $14.6 million in new
capital, we determined that we would no longer seek a buyer and
ceased all marketing efforts in April 2005. In accordance with
SFAS No. 144, we measured Timm Medicals assets
and liabilities individually at the (a) lower of its
carrying amount before they were classified as held for
sale, adjusted for any depreciation
(amortization) expense or impairment losses that would have
been recognized had the net asset group been continuously
classified as held and used or (b) fair value at
March 31, 2005. Based on this review, we recorded
$0.4 million in depreciation of fixed assets and
amortization of intangibles for the period from July 31,
2004 to March 31, 2005 (included in general and
administrative expenses). We also recorded income of
$0.6 million as a result of the elimination of the
estimated costs to sell, which were previously reported as a
component of the impairment charge. The condensed consolidated
balance sheet at December 31, 2004 has been reclassified to
reflect the Timm Medical assets and liabilities as held and used.
As of June 30, 2005, we retained three mobile treatment
businesses, all of which are inactive and are being dissolved.
These residual interests are not significant and are accounted
for on the equity method.
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5. |
Private Placement of Common Stock and Warrants |
On March 11, 2005, we completed a private placement of
5,635,378 shares of our common stock and detachable
warrants to purchase 3,944,748 common shares at an offering
price of $2.77 per share, for aggregate gross proceeds of
$15.6 million. Transaction costs were $1.0 million,
resulting in net proceeds of $14.6 million. 1,972,374 of
the warrants have an initial exercise price of $3.50
(Series A warrants) per share and 1,972,374 warrants have
an initial exercise price of $4.00 (Series B warrants) per
share. We believe that the proceeds of this offering will
provide us with the means to eventually improve our business to
a positive cash flow status.
The warrants initially are exercisable at any time during the
next five years for cash only. The warrants may be exercised on
a cashless exercise basis in limited circumstances after the
first anniversary of the closing date if there is not an
effective registration statement covering the resale of the
shares underlying the warrants. Each warrant is callable by
Endocare at a price of $0.01 per share underlying such
warrant if Endocares stock trades above certain dollar
thresholds ($6.50 for the Series A warrants and $7.50 for
Series B warrants) for 20 consecutive days commencing on
any date after the effectiveness of the registration statement,
provided that (a) we provide 30-day advanced written notice
(Notice Period), (b) we simultaneously call all warrants on
the same terms and (c) all common shares issuable are
registered. Holders may exercise their warrants during the
Notice Period and warrants which remain unexercised will be
redeemed at $0.01 per share.
Upon exercise, we will pay transaction fees equal to 6% of the
warrant proceeds under an existing capital advisory agreement.
Pursuant to the terms of the registration rights agreement, we
filed with the SEC a registration statement on Form S-2
under the Securities Act of 1933, as amended, on April 4,
2005 covering the resale of all of the common stock purchased
and the common stock underlying the issued warrants. Such
registration statement has not yet been declared effective.
The registration rights agreement further provides that if a
registration statement is not filed within 30 days of
closing or does not become effective within 90 days
thereafter, then in addition to any other rights the holders may
have, we will be required to pay each holder an amount in cash,
as liquidated
8
ENDOCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
damages, equal to 1% per month of the aggregate purchase
price paid by such holder. As of June 30, 2005 we have
incurred $109,000 of liquidated damages, which have been
included in general and administrative expenses.
In order to correct the financial statements so that they comply
with U.S. generally accepted accounting principles, we have
restated the Unaudited Condensed Consolidated Balance Sheet as
of June 30, 2005 to reclassify the warrants from
stockholders equity to non-current liabilities to reflect
the fact that the registration rights agreement into which we
entered in connection with our issuance of the warrants requires
us to pay liquidated damages, which in some cases could exceed a
reasonable discount for delivering unregistered shares and thus
would require the warrants to be classified as a liability until
the earlier of the date the warrants are exercised or expire.
The restatement reduced stockholders equity at
June 30, 2005 by $6.8 million and increased interest
expense and net loss for the three and six months ended
June 30, 2005 by $0.5 million and $1.1 million,
respectively. Additionally, net loss per share increased by
$0.02 and $0.04 for the three and six months ended June 30,
2005, respectively. In accordance with EITF 00-19, Accounting
for Derivative Financial Instruments Indexed To, and Potentially
Settled In, a Companys Own Stock, we have allocated a
portion of the offering proceeds to the warrants based on their
fair value. EITF 00-19 also requires that we revalue the
warrants as a derivative instrument periodically to compute the
value in connection with changes in the underlying stock price
and other assumptions, with the change in value recorded as
interest expense or interest income. We determined the fair
value of the warrants as follows as of June 30, 2005:
|
|
|
|
|
|
First, we used the Black-Scholes option-pricing model with the
following assumptions: an expected life equal to the remaining
contractual term of the warrants (4.75 years); no dividends; a
risk free rate of 3.71%, which equals the yield on Treasury
bonds at constant (or fixed) maturity equal to the remaining
contractual term of the warrants; and volatility of 88.6%. Under
these assumptions, the Black-Scholes option-pricing model
yielded a value of $2.86 for each of the Series A warrants
and $2.78 for each of the Series B warrants, for an
aggregate value of $11.1 million; |
|
|
|
|
|
Second, since the warrants are limited in the amount of
realizable profit to the holders as a result of the call
provision described above, we reduced the value of the warrants
to account for the probability that the stock price will reach
or exceed $6.50 and $7.50, respectively (i.e., the prices
above which we have the right to call the Series A and
Series B warrants, effectively compelling the holders to
exercise their warrants). We used a statistical formula to
calculate the probability that our stock price will reach or
exceed $6.50 and $7.50, respectively. Based on this formula, we
calculated that, for the Series A warrants, the probability
that the stock price of $6.50 will be reached or exceeded is
approximately 37.3%. Similarly, we calculated that, for the
Series B warrants, the probability that the stock price of
$7.50 will be reached or exceeded is approximately 32.5%. Based
on these probabilities, we reduced the valuation of each of the
Series A warrants to $1.79 (which equals one minus 37.3%,
multiplied by $2.86) and we reduced the valuation of each of the
Series B warrants to $1.87 (which equals one minus 32.5%,
multiplied by $2.78). This yields an aggregate value of the
warrants equal to $7.2 million; and |
|
|
|
|
|
Third, we further reduced the value of the warrants on the
assumption that our stock price on the day that the warrants are
exercised will be affected by dilution as a result of the
additional stock introduced into the market. Given that we have
approximately 30 million shares outstanding, we calculated
that the exercise of the warrants will result in dilution of
approximately 6%. Using the dilution figure of 6%, we reduced
the value of each of the Series A warrants to $1.68 and the
Series B warrants to $1.76. This yields an aggregate value
of the warrants equal to $6.8 million. |
|
As a result of this fair value calculation, we recorded interest
expense of $0.5 million for the three months ended
June 30, 2005, which represents the change in the fair
value of the warrants from March 31, 2005. This change was
primarily due to an increase in the fair value of the underlying
common
9
ENDOCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
stock from $3.49 as of March 31, 2005 to $4.00 as of
June 30, 2005. Total interest expense related to the
warrant valuation was $1.1 million for the six months ended
June 30, 2005.
Upon the earlier of the warrant exercise or expiration date, the
warrant liability will be reclassified into stockholders
equity. Until that time, the warrant liability will be recorded
at fair value based on the methodology described above. Changes
in fair value during each period will be recorded as interest
income or interest expense. Liquidated damages under the
registration rights agreement are expensed as incurred.
Two members of our management team made personal investments
totaling $0.7 million in the aggregate, and a member of our
board of directors invested $0.3 million.
Basic net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding for the
respective periods. Diluted loss per share, calculated using the
treasury stock method, gives effect to the potential dilution
that could occur upon the exercise of certain stock options and
warrants that were outstanding during the respective periods
presented. For periods when we reported a net loss, these
potentially dilutive common shares were excluded from the
diluted loss per share calculation because they were
anti-dilutive.
|
|
7. |
Stock-Based Compensation |
We have elected to follow Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations in accounting for
our employee stock options. Under APB 25, if the exercise
price of the employee and director stock options is less than
the estimated fair value of the underlying stock on the date of
grant, we record deferred compensation for the difference.
Option or stock awards issued to non-employees are recorded at
their fair value as determined by the Black-Scholes
option-pricing model in accordance with Emerging Issues Task
Force (EITF) 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods and Services. Such awards
are periodically revalued as the options vest and are recognized
as expense over the related service period or as performance
goals are achieved.
Pro forma information regarding our net loss is required by
SFAS 123, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure, and has been determined as if we
had accounted for our employee stock options under the fair
value method of SFAS 123, as amended by SFAS 148. The
pro forma effects of stock-based compensation on net loss and
net loss per share have been estimated at the date of grant
using the Black-Scholes option-pricing model.
10
ENDOCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table illustrates the effect on net losses if we
had applied the fair value recognition provisions of
SFAS 123 to stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Restated) | |
|
|
|
(Restated) | |
|
|
Net loss, as reported
|
|
$ |
(4,197 |
) |
|
$ |
(5,620 |
) |
|
$ |
(8,703 |
) |
|
$ |
(14,243 |
) |
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Stock-based employee compensation expense determined under
the intrinsic-value-based method for all awards
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
13 |
|
|
Less: Stock-based compensation expense determined under the
fair-value-based method for all awards expense
|
|
|
(919 |
) |
|
|
(759 |
) |
|
|
(1,820 |
) |
|
|
(1,356 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net adjustment
|
|
|
(919 |
) |
|
|
(755 |
) |
|
|
(1,820 |
) |
|
|
(1,343 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss, as adjusted
|
|
$ |
(5,116 |
) |
|
$ |
(6,375 |
) |
|
$ |
(10,523 |
) |
|
$ |
(15,586 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
(0.14 |
) |
|
$ |
(0.23 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.59 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted
|
|
$ |
(0.17 |
) |
|
$ |
(0.27 |
) |
|
$ |
(0.36 |
) |
|
$ |
(0.65 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
In December 2004, SFAS No. 123R, Share-Based
Payment, was issued (SFAS 123R). SFAS 123R is a
revision of SFAS No. 123, Accounting for Stock
Based Compensation, and supersedes APB 25. Among other
items, SFAS 123R eliminates the use of APB 25 and the
intrinsic value method of accounting, and requires companies to
recognize the cost of employee services received in exchange for
awards of equity instruments, based on the grant date fair value
of those awards, in the financial statements. We are required to
adopt SFAS 123R effective January 1, 2006.
SFAS 123R permits companies to adopt its requirements using
either a modified prospective method, or a
modified retrospective method. Under the
modified prospective method, compensation cost is
recognized in the financial statements beginning with the
effective date, based on the requirements of SFAS 123R for
all share-based payments granted after that date, and based on
the requirements of SFAS 123 for all unvested awards
granted prior to the effective date of SFAS 123R. Under the
modified retrospective method, the requirements are
the same as under the modified prospective method,
but also permits entities to restate financial statements of
previous periods based on proforma disclosures made in
accordance with SFAS 123.
We currently use the Black-Scholes standard option pricing model
to measure the fair value of stock options granted to employees.
While SFAS 123R permits us to continue to use such a model,
the standard also permits the use of a lattice
model. We have not yet determined which model we will use to
measure the fair value of employee stock options upon the
adoption of SFAS 123R.
SFAS 123R also requires that the benefits associated with
the tax deductions in excess of recognized compensation cost be
reported as a financing cash flow, rather than as an operating
cash flow as required under current literature. This requirement
will reduce net operating cash flows and increase net financing
cash flows in periods after the effective date. These future
amounts cannot be estimated, because they depend on, among other
things, when employees exercise stock options. Also, we have not
recognized the benefits for excess tax deductions in our
operating cash flows in prior periods due to the uncertainty of
when we will generate taxable income to realize such benefits.
11
ENDOCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We currently expect to adopt SFAS 123R effective
January 1, 2006; however, we have not yet determined which
of the aforementioned adoption methods we will use. The adoption
of SFAS 123Rs fair value method will have a
significant impact on our results of operations, although it
will have no impact on our overall financial position and cash
flows. The impact of adoption of SFAS 123R cannot be
predicted at this time because it will depend on levels of
share-based payments granted in the future. However, had we
adopted SFAS 123R in prior periods, the impact of that
standard would have approximated the impact of SFAS 123R as
described in the disclosure of pro forma net loss and loss per
share in the table above.
Inventories, consisting of raw materials, work-in-process and
finished goods, are stated at the lower of cost or market, with
cost determined by the first-in, first-out method. Reserves for
slow-moving and obsolete inventories are provided based on
historical experience and product demand. We evaluate the
adequacy of these reserves periodically.
The following is a summary of inventories:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Raw materials
|
|
$ |
1,981 |
|
|
$ |
1,727 |
|
Work in process
|
|
|
390 |
|
|
|
446 |
|
Finished goods
|
|
|
1,939 |
|
|
|
1,560 |
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
4,310 |
|
|
|
3,733 |
|
Less inventory reserve
|
|
|
(556 |
) |
|
|
(558 |
) |
|
|
|
|
|
|
|
|
Inventories, net
|
|
$ |
3,754 |
|
|
$ |
3,175 |
|
|
|
|
|
|
|
|
|
|
9. |
Commitments and Contingencies |
In November 2002, we were named as a defendant, together with
certain former officers, one of whom is also a former board
member, in a class-action lawsuit filed in the United States
District Court for the Central District of California. On
February 2, 2003, the court issued an order consolidating
this action with various other similar complaints and ordering
plaintiffs to file a consolidated complaint, which was filed on
October 31, 2003. The consolidated complaint asserted two
claims for relief, alleging that the defendants violated
sections of the Securities Exchange Act of 1934 by purportedly
issuing false and misleading statements regarding our revenues
and expenses in press releases and SEC filings. Plaintiffs
sought class certification and unspecified damages from us, as
well as forfeiture and reimbursement of bonus compensation
received by two of the individual defendants. On April 26,
2004, the court issued an order denying our motion to dismiss
the consolidated complaint. On November 8, 2004, we
executed a settlement agreement with the lead plaintiffs and
their counsel. Under the agreement, in exchange for a release of
all claims, certain individuals and we agreed to pay a total of
$8.95 million in cash. Our directors and officers
liability insurance carriers funded the total amount of
$8.95 million prior to December 31, 2004, subject to
reservations of rights by the carriers. On February 7,
2005, the Court issued a final order approving the agreement and
dismissing the class-action lawsuit.
Of the $8.95 million settlement referred to above, our
primary insurance carrier funded $1.25 million, our first
excess insurance carrier funded $5 million and our second
excess insurance carrier funded $2.7 million. As a result
of the insurance settlements disclosed in the current reports on
Form 8-K that we filed on December 20, 2004 and
February 25, 2005, the amounts funded by our primary
insurance carrier ($1.25 million) and our second excess
insurance carrier ($2.7 million) no longer are subject to
12
ENDOCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
reservations of rights. However, as disclosed in the
Form 8-K filings, we remain in arbitration with the first
excess insurance carrier. Therefore, the amount funded by our
first excess insurance carrier ($5 million) remains subject
to reservations of rights. If the first excess insurance carrier
were to prevail in its rescission claim, then we would be
required to repay $5 million to the first excess insurance
carrier.
On December 6, 2002, Frederick Venables filed a purported
derivative action against us and certain former officers,
certain former board members and one current board member in the
California Superior Court for the County of Orange alleging
breach of fiduciary duty, abuse of control, gross mismanagement,
waste of corporate assets and unjust enrichment. Pursuant to a
stipulation filed on or about April 23, 2004 and approved
by the court, the deadline to respond to the complaint was
stayed until 2005. The complaint sought unspecified monetary
damages, equitable relief and injunctive relief based upon
allegations that the defendants issued false and misleading
statements regarding our revenues and expenses in press releases
and SEC filings. On December 6, 2004, we executed a
settlement agreement with the plaintiff and his counsel. On
December 8, 2004, the Court issued a final order approving
the agreement and dismissing the derivative lawsuit. Under the
agreement, in exchange for the plaintiffs release of all
claims, we paid a total of $0.5 million in cash prior to
December 31, 2004 to cover the fees and expenses of the
plaintiffs counsel. The agreement also requires us to
maintain various corporate governance measures for a period of
at least two years, unless a modification is necessary in the
good faith business judgment of our Board of Directors.
The corporate governance measures include new signature
authorization and approval policy and procedures, new sales
order processing and invoicing procedures, new contracts
approval and management policies and procedures, new credit
policies, new purchasing controls, new policies and procedures
for cash management, collections and disbursements, new policy
for recognition and recording of revenues and expenses, employee
attestations, employee training, creation of risk oversight
committee, updated employee handbook, expanded corporate
compliance program, whistleblower hotline and upgraded
accounting and finance department.
We have been in settlement discussions with the staff of the SEC
regarding the terms of a settlement of the previously announced
investigation commenced by the SEC in January 2003 related to
allegations that we and certain of our current and former
officials and directors issued, or caused to be issued, false
and misleading financial statements in prior periods. The
proposed settlement which has been agreed upon by the staff and
remains subject both to final approval by the SEC and court
approval, includes the following principal terms: (i) we
would pay a total of $750,001, consisting of $1 in disgorgement
and $750,000 in civil penalties (which has been accrued as of
December 31, 2004); (ii) we would agree to a
stipulated judgment enjoining future violations of securities
laws; and (iii) we would agree to maintain various
improvements in our internal controls that have previously been
implemented. If approved, the proposed settlement would resolve
all claims against us relating to the formal investigation that
the SEC commenced in January 2003.
As previously announced, the Department of Justice (DOJ) is
conducting an investigation into allegations that we and certain
of our former officers, a former director and one current
employee intentionally issued, or caused to be issued, false and
misleading statements regarding our financial results and
related matters. The DOJs investigation is ongoing and is
not affected by the proposed settlement with the SEC described
above.
In addition, we are, in the normal course of business, subject
to various other legal matters, which we believe will not
individually or collectively have a material adverse effect on
our consolidated financial condition, results of operations or
cash flows. However, the results of litigation and claims cannot
be predicted with certainty, and we cannot provide assurance
that the outcome of various legal matters will not have a
material adverse effect on our consolidated financial condition,
results of operations or cash flows. As of June 30, 2005,
except for the matters indicated above for which we have accrued
$2.2 million
13
ENDOCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(of which $750,001 relates to the proposed settlement with the
SEC and the balance of which relates to the directors and
officers liability insurance matters referred to above),
we have not established a liability for contingencies in the
consolidated balance sheets since the likelihood of loss and the
potential liability cannot be reasonably estimated at this time.
Managements evaluation of the likelihood of an unfavorable
outcome with respect to these actions could change in the
future. Our directors and officers liability and
other insurance may fund certain losses, including defense
costs, related to the above litigation matters. These recoveries
will be recorded when the amounts are determined to be
recoverable from the insurance carriers.
From time to time, we have received correspondence alleging
infringement of proprietary rights of third parties. No
assurance can be given that any relevant claims of third parties
would not be upheld as valid and enforceable, and therefore we
could be prevented from practicing the subject matter claimed or
would be required to obtain licenses from the owners of any such
proprietary rights to avoid infringement. We do not expect any
material adverse effect on our consolidated financial condition,
results of operations, or cash flows because of such claims.
We reported no income tax expense for each of the six months
ended June 30, 2005 and 2004 due to our operating losses.
The continuing operating losses resulted in an increase in the
valuation allowance of $3.0 million and $5.7 million
during the six months ended June 30, 2005 and 2004,
respectively. Due to our history of operating losses, management
has determined that it is more likely than not that our deferred
tax assets will not be realized through future earnings.
Accordingly, valuation allowances were recorded to fully reserve
the deferred tax assets as of June 30, 2005 and 2004.
|
|
11. |
Results of Operations |
Revenues and cost of revenues related to the following products
and services for the periods ended June 30, 2005 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryocare Surgical Systems
|
|
$ |
120 |
|
|
$ |
121 |
|
|
$ |
263 |
|
|
$ |
248 |
|
|
Cryoablation disposable products and procedure fees
|
|
|
6,557 |
|
|
|
5,948 |
|
|
|
13,046 |
|
|
|
11,009 |
|
|
Cardiac royalties (CryoCath)
|
|
|
230 |
|
|
|
162 |
|
|
|
441 |
|
|
|
293 |
|
|
Erectile dysfunction products (Timm Medical)
|
|
|
2,171 |
|
|
|
2,081 |
|
|
|
4,455 |
|
|
|
4,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,078 |
|
|
$ |
8,312 |
|
|
$ |
18,205 |
|
|
$ |
15,694 |
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryocare Surgical Systems
|
|
$ |
158 |
|
|
$ |
38 |
|
|
$ |
315 |
|
|
$ |
82 |
|
|
Cryoablation disposable products and procedure fees
|
|
|
3,765 |
|
|
|
3,240 |
|
|
|
7,795 |
|
|
|
6,526 |
|
|
Cardiac royalties (CryoCath)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Erectile dysfunction products (Timm Medical)
|
|
|
657 |
|
|
|
1,035 |
|
|
|
1,537 |
|
|
|
1,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,580 |
|
|
$ |
4,313 |
|
|
$ |
9,647 |
|
|
$ |
8,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
ENDOCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenues from the sales of cryoablation disposable products and
cryoablation procedure fees are comprised of the following for
the periods ended June 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Disposable products
|
|
$ |
1,689 |
|
|
$ |
1,302 |
|
|
$ |
2,809 |
|
|
$ |
2,689 |
|
Procedure fees
|
|
|
4,868 |
|
|
|
4,646 |
|
|
|
10,237 |
|
|
|
8,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,557 |
|
|
$ |
5,948 |
|
|
$ |
13,046 |
|
|
$ |
11,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues for cryoablation disposable product sales and
procedure fees are combined for reporting purposes. Sales of
cryoablation disposable products and procedure fees both
incorporate similar inventory when sold and the Company does not
separately track the cost of disposals sold directly to
customers and those consumed in cryoablation procedures.
Cryoablation procedure services are provided to medical
facilities upon request to facilitate the overall delivery of
our technology into the marketplace.
|
|
12. |
Recent Accounting Pronouncements |
In May 2005, the Financial Accounting Standards Board
(FASB) issued Statement No. 154
(SFAS No. 154), Accounting Changes and Error
Corrections, which replaced APB Opinion No. 20,
Accounting Changes, and FASB Statement No. 3,
Reporting Changes in Interim Financial Statements.
SFAS No. 154 requires retrospective application to
prior periods financial statements of voluntary changes in
accounting principles and changes required by a new accounting
standard when the standard does not include specific transition
provisions. Previous guidance required most voluntary changes in
accounting principle to be recognized by including in net income
of the period in which the change was made the cumulative effect
of changing to the new accounting principle.
SFAS No. 154 carries forward existing guidance
regarding the reporting of the correction of an error and a
change in accounting estimate. SFAS No. 154 is
effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. Adoption
of SFAS No. 154 as of January 1, 2006 is not
expected to have a material effect on our consolidated financial
position or results of operations.
Other recent accounting pronouncements issued by the FASB
(including its Emerging Issues Task Force), the AICPA, and the
SEC did not, or are not believed by management to, have a
material impact on our present or future consolidated financial
statements.
15
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Item 2. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
The following discussion and analysis should be read in
conjunction with the unaudited condensed consolidated financial
statements and notes thereto included in Part I
Item 1 of this report, and the audited consolidated
financial statements and notes thereto, and Managements
Discussion and Analysis of Financial Condition and Results of
Operations contained in the Annual Report on Form 10-K for
the fiscal year ended December 31, 2004, as amended.
This discussion contains forward-looking statements based on
our current expectations. There are various factors
many beyond our control that could cause our actual
results or the occurrence or timing of expected events to differ
materially from those anticipated in these forward-looking
statements. Some of these factors are described below and other
factors are described elsewhere in this Quarterly Report on
Form 10-Q or in our Annual Report on Form 10-K
referred to above. In addition, there are factors not described
in this Quarterly Report on Form 10-Q or in our Annual
Report on Form 10-K that could cause our actual results or
the occurrence or timing of expected events to differ materially
from those anticipated in these forward-looking statements. All
forward-looking statements included in this Quarterly Report on
Form 10-Q are based on information available to us as of
the date hereof, and we assume no obligation to update any such
forward-looking statements.
Strategy, Key Metrics and Developments
Our goal is to achieve a leading position in the prostate and
renal cancer markets, and further develop and increase the
acceptance of our technology in the interventional radiology and
oncology markets for treatment of liver and lung cancers and
management of pain from bone metastases. At the same time, we
seek to achieve penetration across additional markets with our
proprietary cryoablation technology, while maintaining our
dominant position in vacuum technology for erectile dysfunction.
Our primary objective for our cryoablation business is to grow
market share, measured in terms of the number of procedures
performed with our Cryocare Surgical System, which we calculate
using two primary components. The first component is that we
include the actual number of cryoablation cases for which we
perform the service element on behalf of the healthcare
facility. In the second, we compute a procedure case equivalent
based on sales of our cryoablation disposable products by using
the expected disposable product usage for those sales.
Accordingly, procedure growth is an important metric to which we
refer in order to measure the success of our strategy. In the
past several years, we have been successful in increasing the
number of procedures on a year-over-year basis. Most recently,
in 2004 procedures increased 34.5 percent to 4,713 from
3,504 in 2003. In 2005, our objective is to increase the number
of procedures at a significant rate which is comparable to
growth rates we have achieved historically.
In addition to being a key business metric, procedure growth is
an important driver of revenue growth, because a significant
percentage of our revenues consists of sales of the disposable
products used in procedures performed with the Cryocare Surgical
System, as shown below under Results of Operations.
In 2003 we redirected our strategy for our cryoablation business
away from emphasizing sales of Cryocare Surgical Systems and
instead towards seeking to increase recurring sales of
disposable supplies.
The factors driving interest in and utilization of cryoablation
by urologists include:
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|
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|
|
increased awareness and acceptance of cryoablation by industry
thought leaders; |
|
|
|
continued publication of clinical follow up data on the
effectiveness of cryoablation, including recently published
10-year data resulting from a study conducted by an affiliate of
Roper Hospital in Charleston, South Carolina; |
|
|
|
increased awareness among patients of cryoablation and its
preferred outcomes as compared to other modalities; |
|
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the effectiveness of our dedicated cryoablation sales
force; and |
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our continued expenditure of funds on patient education and
advocacy. |
16
Results of Operations
Revenues and cost of revenues related to the following products
and services for the period ended June 30, 2005 are as
follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryocare Surgical Systems
|
|
$ |
120 |
|
|
$ |
121 |
|
|
$ |
263 |
|
|
$ |
248 |
|
|
Cryoablation disposable products and procedure fees
|
|
|
6,557 |
|
|
|
5,948 |
|
|
|
13,046 |
|
|
|
11,009 |
|
|
Cardiac royalties (CryoCath)
|
|
|
230 |
|
|
|
162 |
|
|
|
441 |
|
|
|
293 |
|
|
Erectile dysfunction products (Timm Medical)
|
|
|
2,171 |
|
|
|
2,081 |
|
|
|
4,455 |
|
|
|
4,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,078 |
|
|
$ |
8,312 |
|
|
$ |
18,205 |
|
|
$ |
15,694 |
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryocare Surgical Systems
|
|
$ |
158 |
|
|
$ |
38 |
|
|
$ |
315 |
|
|
$ |
82 |
|
|
Cryoablation disposable products and procedure fees
|
|
|
3,765 |
|
|
|
3,240 |
|
|
|
7,795 |
|
|
|
6,526 |
|
|
Cardiac royalties (CryoCath)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Erectile dysfunction products (Timm Medical)
|
|
|
657 |
|
|
|
1,035 |
|
|
|
1,537 |
|
|
|
1,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,580 |
|
|
$ |
4,313 |
|
|
$ |
9,647 |
|
|
$ |
8,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes revenues from the sales of
cryoablation disposable products and cryoablation procedure fees
for the periods ended June 30, 2005 and 2004.
Cost of revenues for cryoablation disposable product sales and
procedure fees are combined for reporting purposes. Sales of
cryoablation disposable products and procedure fees both
incorporate similar inventory when sold and the Company does not
separately track the cost of disposals sold directly to
customers and those consumed in cryoablation procedures.
Cryoablation procedure services are provided to medical
facilities upon request to facilitate the overall delivery of
our technology into the marketplace.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Disposable products
|
|
$ |
1,689 |
|
|
$ |
1,302 |
|
|
$ |
2,809 |
|
|
$ |
2,689 |
|
Procedure fees
|
|
|
4,868 |
|
|
|
4,646 |
|
|
|
10,237 |
|
|
|
8,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,557 |
|
|
$ |
5,948 |
|
|
$ |
13,046 |
|
|
$ |
11,009 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
We recognize revenues from sales of Cryocare Surgical Systems,
disposable cryoablation products and other urological products
when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable, and collectibility
is reasonably assured.
We also contract with medical facilities to provide cryoablation
services and for the use of the Cryocare Surgical Systems in
cryoablation treatments for which we charged a per-procedure
fee. The cryoablation services provided generally consist of
rental and transport of a Cryocare Surgical System, as well as
the services of a technician to assist the physician with the
set-up, use and monitoring the equipment.
Cost of revenues consists of fixed and variable costs incurred
in the manufacture of our products in addition to depreciation
of Cryocare Surgical Systems placed in the field with customers
under our placement program or with our sales and service
personnel. We incur an additional cost of revenues in the form
of a fee for equipment usage and other services when a procedure
is performed on a system owned by an unrelated service provider.
That portion of the procedure fee remitted to the third-party
service
17
provider is charged to cost of revenues when the procedure is
performed and billed. We retain a larger profit on procedures
performed on systems owned by us where no outside service fees
are incurred.
Research and development expenses are expensed when incurred and
include expenses associated with the design and development of
new products as well as significant enhancements to existing
products. These expenses consist primarily of salaries and
related benefits and overhead costs for staff engaged in
research and development activities, costs for materials and
supplies used in performing research and development activities,
costs of clinical trials conducted for the purpose of obtaining
regulatory approval of our products, consulting and advisory
fees for outside service providers directly involved in research
and development activities, and depreciation on equipment used
directly for research and development activities. Our research
and development efforts are periodically subject to significant
non-recurring expenses and fees that can cause some variability
in our quarterly research and development expenses.
Sales and marketing expenses primarily consist of salaries,
commissions and related benefits and overhead costs for
employees and activities in the areas of sales, marketing and
customer service. Expenses associated with advertising, trade
shows, promotional and training costs related to marketing our
products are also classified as sales and marketing expenses.
General and administrative expenses primarily consist of
salaries and related benefits and overhead costs for employees
and activities in the areas of legal affairs, finance,
information technology, human resources and administration. Fees
for attorneys, independent auditors and certain other outside
consultants are also included where their services are related
to general and administrative activities. This category also
includes reserves for bad debt, and litigation losses less
amounts recoverable under our insurance policies. Litigation
reserves and insurance recoveries are recorded when such amounts
are probable and can reasonably be estimated.
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|
|
Three Months Ended June 30, 2005 Compared to Three
Months Ended June 30, 2004 |
Revenues. Revenues for the three months ended
June 30, 2005 increased 9.2 percent to
$9.1 million compared to $8.3 million for the same
period in 2004. The increase in revenues was primarily
attributable to growth in sales of disposables and procedure
fees related to our cryoablation business.
The number of cryoablation procedures performed, and related
sales of disposable products used in these procedures, increased
25.4 percent to 1,620 in the second quarter of 2005 from
1,292 in the comparable period of 2004, while the related
revenues increased 10.2 percent to $6.6 million in the
second quarter of 2005 from $5.9 million for the comparable
period in 2004. Of the total procedures performed during the
three months ended June 30, 2005, 60.4 percent were
those in which we provided cryoablation services and
39.6 percent were from the sale of disposable cryoablation
products. This compares to 71.5 percent of cryoablation
procedures and 28.5 percent for sales of disposable
cryoablation products during the three months ended
June 30, 2004. Contributing to growth in sales of
cryoablation products was an increase in sales to a market
served by interventional radiologists, treating tumors in the
lung and liver and pain resulting from metastases of cancer in
the bone. These procedures generally have a lower average
selling price than procedures performed by urologists on
prostate and renal cancer, although cost of revenues are also
lower.
CyoCath royalty revenues also increased 42.0 percent or
$68,000 over the same period in 2004 while revenues from
Cryocare Surgical Systems remained flat due to our strategy of
promoting adoption of our technology through an emphasis on
growth in cryoablation procedures, rather than through sales of
capital equipment.
Sales of our Timm Medical product lines increased
4.3 percent to $2.2 million in the three months ended
June 30, 2005 from $2.1 million for the same period in
2004. This increase is primarily due to increased domestic sales
from increased focus on our erectile dysfunction sales force in
2005.
Cost of Revenues. Cost of revenues for the three months
ended June 30, 2005 increased 6.2 percent to
$4.6 million compared to $4.3 million for the same
period in 2004. The increase in cost of revenues resulted
primarily from growth in sales of cryoablation probes and
procedures. Cost of revenues related to
18
our cryoablation probes and procedures increased
16.2 percent to $3.8 million for the second quarter of
2005 from $3.2 million for the same period in 2004. This
increase was also driven by an increase in the number of
cryoablation procedures for which we subcontract substantially
all of the service to third party service providers at an
additional cost, partially offset by a 13.5 percent
decrease in the amount per procedure we pay to the third party
service providers. During the three months ended June 30,
2005 substantially all of our cryoablation procedures that
require a technician were performed by third party service
providers.
Cost of revenues for our Timm Medical product lines decreased
substantially to 30.3 percent for the three months ended
June 30, 2005 compared to 49.7 percent for the same
period in 2004. The primary cause of the decline was decreases
in manufacturing costs from changing the configuration of our
Timm Medical products as well as discounts taken from volume
discounts we received for buying larger quantities of raw
materials.
Gross Margins. Gross margins on revenues increased to
49.5 percent for the three months ended June 30, 2005
compared to 48.1 percent for the same period in 2004. The
positive trend in gross margins was related to factors including
continued reductions in manufacturing costs for our cryoablation
disposable products as well as a decline in the average fee we
paid to third parties to provide cryoablation procedures on our
behalf, partially offset by an increase in cryoablation
procedures where we contracted with third parties to perform the
procedures. Gross margins for our Timm Medical product lines
increased due to higher domestic sales of erectile dysfunction
products and production cost reductions.
Research and Development Expenses. Research and
development expenses for the three months ended June 30,
2005 increased 29.4 percent to $0.6 million compared
to $0.5 million for the comparable period in 2004. The
increase was primarily attributable to costs associated with
investments in new technology. As a percentage of revenues,
research and development expenses increased to 6.4 percent
from 5.4 percent during the three months ended
June 30, 2004.
Sales and Marketing Expenses. Sales and marketing
expenses for the three months ended June 30, 2005 declined
16.9 percent or $.8 million to $4.2 million as
compared to $5.0 million for the same period in 2004. The
decline in sales and marketing expenses is primarily due to the
reduction of staffing and consulting costs of $0.4 million,
the reduction of advertising costs of $0.2 million and the
reduction in proctor fees and related costs of
$0.2 million. The reduction is due primarily to our June
2004 cost reduction program as well as the consolidation of
certain sales functions and territories, the elimination of
certain marketing activities and the restructuring of our sales
and marketing programs. The term proctor fees refers
to the fees we pay physicians to train other physicians
regarding how to use our cryosurgical products.
General and Administrative Expenses. General and
administrative expenses for the three months ended June 30,
2005 declined 10.2 percent or $0.4 million to
$3.7 million as compared to $4.1 million for the same
period in 2004. The primary contributor to the decline in
general and administrative expenses was a reduction in costs for
legal, accounting and consulting totaling $0.8 million
which was offset by a $0.4 million reduction taken in the
bad debt provision for the same period in 2004. Prior period
legal and accounting costs were significantly higher due to a
greater level of activity in 2004 related to investigations into
our historical accounting and financial reporting. While these
investigations have continued during 2005, the related costs
have decreased.
Interest Income (Expense), Net. Interest expense, net,
for the three months ended June 30, 2005 was
$0.3 million compared to interest income of $77,000 for the
same period in 2004. Interest expense, net for the three months
ended June 30, 2005 includes $0.5 million in interest
expense recorded in connection with the change in the fair value
of common stock warrants issued in connection with our private
placement in March 2005. This interest expense represents the
change in the fair value of the warrants from March 31,
2005. Interest income (expense), net in the 2004 and 2005 period
also includes $51,000 and $62,000 respectively, of interest
income on a note receivable for the sale of our urinary
incontinence product line in 2003 with the remaining interest
income in 2005 due primarily to interest earned from the
investment of the $14.6 million in net proceeds from the
March 2005 private placement.
19
Net Loss. Net loss for the three months ended
June 30, 2005 was $4.2 million or $0.14 per basic
and diluted share on 30.0 million weighted average shares
outstanding, compared to a net loss of $5.6 million, or
$0.23 per basic and diluted share on 24.0 million
weighted average shares outstanding for the same period in 2004.
|
|
|
Six Months Ended June 30, 2005 Compared to Six Months
Ended June 30, 2004 |
Revenues. Revenues for the six months ended June 30,
2005 increased 16.0 percent to $18.2 million compared
to $15.7 million in 2004. Reasons for the revenue increase
include the number of cryoablation procedures performed, and
related sales of disposable products used in these procedures in
the six months ended June 30, 2005 compared to the same
period in 2004. Procedures increased 32.4 percent to 3,112
for the six months ended June 30, 2005 from 2,350 in the
comparable period of 2004, while the related revenues increased
at 18.5 percent to $13.0 million from
$11.0 million for the comparable period in 2004. Of the
total procedures performed during the six months ended
June 30, 2005, 66.2 percent were those during which we
provided cryoablation services and 33.8 percent were from
the sale of disposable cryoablation products. This compares to
72.0 percent for cryoablation procedures and
28.0 percent for sales of disposable cryoablation products
during the six months ended June 30, 2004. Cardiac royalty
revenue increased 50.5 percent while the revenue from the
sale of Cryocare Surgical Systems remained flat.
Sales of our Timm Medical product lines increased
7.5 percent to $4.5 million in the six months ended
June 30, 2005 from $4.1 million for the same period in
2004. This increase is primarily due to increased domestic sales
from increased focus on our erectile dysfunction sales force in
2005.
Cost of Revenues. Cost of revenues for the six months
ended June 30, 2005 increased 12.9 percent to
$9.6 million compared to $8.5 million for the same
period in 2004. Cost of revenues related to our cryoablation
probes and procedures increased 19.4 percent to
$7.8 million for 2005 from $6.5 million, for the same
period in the 2004. The increase was driven by an increase in
the number of cryoablation procedures for which we subcontract
substantially all of the service to third party service
providers at an additional cost, partially offset by a
15.1 percent decrease in the amount per procedure we pay to
the third party service providers. During the six months ended
June 30, 2005 substantially all of our cryoablation
procedures that require a technician were performed by third
party service providers.
Cost of revenues for our Timm Medical product lines decreased
substantially to 34.5 percent for the six months ended
June 30, 2005 compared to 46.8 percent for the same
period in June 2004. The primary cause of the decline was
decreases in manufacturing costs from changing the configuration
of our Timm Medical products as well as discounts taken from
volume discounts we received for buying larger quantities of raw
materials.
Gross Margins. Gross margins on revenues increased to
47.0 percent for the six months ended June 30, 2005
compared to 45.5 percent for the same period in 2004. The
positive trend in gross margins was related to factors including
continued reductions in manufacturing costs for our cryoablation
disposable products as well as a decline in the average fee we
paid to third parties to provide cryoablation procedures on our
behalf, partially offset by an increase in cryoablation
procedures where we contracted with third parties to perform the
procedures. Gross margins for our Timm Medical product lines
increased due to higher domestic sales of erectile dysfunction
products and production cost reductions.
Research and Development. Research and development
expenses for the six months ended June 30, 2005 decreased
8.3 percent to $0.9 million compared to
$1.0 million for the comparable period in 2004. The
decrease was primarily attributable to a $0.2 million
reduction in consulting and staffing costs initiated in our June
2004 cost reduction program offset by a $0.1 million
increase in costs associated with investments in new technology.
As a percentage of revenues, research and development expenses
decreased to 5.0 percent from 6.3 percent during the
six months ended June 30, 2004.
Sales and Marketing. Sales and marketing expenses for the
six months ended June 30, 2005 declined 14.0 percent
or $1.3 million to $8.2 million as compared to
$9.5 million for the same period in 2004. Driving the
decrease were staffing and consulting costs which decreased
$0.7 million, advertising
20
costs which decreased $0.2 million and proctor fees and
related costs decreased $0.4 million. The term
proctor fees refers to the fees we pay physicians to
train other physicians regarding how to use our cryosurgical
products.
General and Administrative Expenses. General and
administrative expenses for the six months ended June 30,
2005 declined 26.3 percent or $2.8 million to
$7.9 million as compared to $10.7 million for the same
period in 2004. The decline resulted from decreases in legal,
accounting and consulting costs of $3.0 million and
staffing-related costs of $0.2 million and which were
offset by a $0.4 million reduction taken in the bad debt
provision for the same period in 2004.
Impairment Charge. During the quarter ended
September 30, 2004, we recorded $15.8 million in
impairment charges to write down the goodwill and amortizable
intangibles in conjunction with Timm Medical and our ownership
interests in certain mobile prostate treatment businesses. The
charge represented the excess of the carrying value of these
entities compared to their fair value, less estimated costs to
sell. With the completion of a $15.6 million private
placement of our common stock during the first quarter of 2005,
management ceased actively marketing Timm Medical for sale and
reversed $0.6 million of estimated costs to sell that had
been previously recorded to impairment charge.
Interest Income (Expense), Net. Interest expense, net,
for the six months ended June 30, 2005 was
$0.8 million compared to interest income of
$0.1 million respectively, for the same period in 2004.
Interest expense, net for the six months ended June 30,
2005 includes $1.1 million in interest expense recorded in
connection with the change in the fair value of common stock
warrants issued in connection with our private placement in
March 2005. This interest expense represents the change in the
fair value of the warrants from March 11, 2005, the date of
issuance. Interest income (expense), net in the 2004 and 2005
period also includes $51,000 and $62,000 respectively, of
interest income on a note receivable for the sale of our urinary
incontinence product line in 2003 with the remaining interest
income in 2005 due primarily to interest earned from the
investment of the $14.6 million in net proceeds from the
March 2005 private placement.
Minority Interests. Minority interests represent earnings
attributable to minority investors in the mobile prostate
treatment businesses we acquired in 2002. During the fourth
quarter of 2004 and the first quarter of 2005 we sold or
dissolved a majority of these businesses. The businesses
dissolved or remaining during the first quarter of 2005 had no
operations and therefore no minority interest amounts were
recorded in the first or second quarter of 2005.
Net Loss. Net loss for the six months ended June 30,
2005 was $8.7 million or $0.30 per basic and diluted
share on 29.0 million weighted average shares outstanding,
compared to a net loss of $14.2 million, or $0.59 per
basic and diluted share on 24.1 million weighted average
shares outstanding for the same period in 2004.
Liquidity and Capital Resources
Since inception, we have incurred losses from operations and
have reported negative cash flows. As of June 30, 2005, we
had an accumulated deficit of approximately $160.7 million
and cash and cash equivalents of approximately
$12.7 million.
We do not expect to reach break-even or cash flow positive in
2005, and we expect to continue to generate losses from
operations for the foreseeable future. These losses have
resulted primarily from our continued investment to gain
acceptance of our technology. We believe the success of our
strategy is reflected in the revenue growth for cryoprobes,
disposables products and cryoablation procedure fees. These
revenues comprised 40.8 percent of total revenues in 2002
compared to 67.6 percent of total revenues in 2004
representing a 75.4 percent increase from
$12.6 million in 2002 to $22.1 million in 2004.
While we expected these losses to decline over time, our cash
use from quarter to quarter may fluctuate, due to timing issues,
investments in inventory and the costs related to ongoing
investigations and regulatory compliance discussed below.
21
We also continue to incur significant costs associated with
ongoing investigations and other matters related to historical
accounting and financial reporting, including obligations to
indemnify our former officers and former directors in connection
with those investigations. Total professional services costs for
the six months ended June 30, 2005 were $2.9 million
and for the year ended December 31, 2004 were
$7.8 million of which a large percentage of these costs
relate to these matters.
For the six months ended June 30, 2005 and the year ended
December 31, 2004, $0.6 million and $2.3 million,
respectively, of these costs also related to our efforts to
achieve compliance with the integral control reporting
requirements of Section 404 of the Sarbanes-Oxley Act. We
also face large cash expenditures in the future related to past
due state and local tax obligations, for which we estimated and
accrued $3.4 million as of June 30, 2005. We currently
are in negotiations with various states to resolve past due
taxes but have not yet entered into any settlement agreements.
On March 11, 2005, we issued 5,635,378 shares of our
common stock, warrants to purchase an additional
1,972,374 shares of common stock at $3.50 per share
and warrants to purchase an additional 1,972,374 shares of
common stock at $4.00 per share for an aggregate gross cash
proceeds of $15.6 million ($2.77 per share) less
transaction costs of $1.0 million, in a private placement
financing. We believe that the proceeds of this offering provide
us with the means to eventually improve our business to a
positive cash flow status.
We intend to continue investing in our sales and marketing
efforts to physicians in order to raise awareness and gain
further acceptance of our technology. This investment is
required in order to increase the physicians usage of our
technology in the treatment of prostate and renal cancers, lung
and liver cancers and in the management of pain from bone
metastases. Such costs will be reported as current period
charges under generally accepted accounting principles. We will
use existing cash reserves and the net proceeds from the
$15.6 million private placement of our common stock
described above along with continued expense management efforts
to finance our projected operating and cash flow needs.
Risks Related to Our Business
The risks and uncertainties described below are not the only
ones we face. For information regarding other risks related to
our business, please see Risks Related to Our
Business in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2004, as amended.
Furthermore, additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair
our operations. The occurrence of any of these risks could harm
our business. In that case, the trading price of our common
stock could decline, and you may lose all or part of your
investment.
|
|
|
We face risks related to investigations by the SEC and
DOJ. |
As previously reported, the SEC and the DOJ are conducting
investigations into allegations that we and certain of our
current and former officers and directors issued, or caused to
be issued, false and misleading statements regarding our
financial results for 2001 and 2002 and related matters,
including whether we prematurely recognized revenue from the
sale of Cryocare systems and improperly delayed posting of
expenses. Although we have fully cooperated with these
governmental agencies in these matters and intend to continue to
fully cooperate, these agencies may determine we have violated
federal securities laws. We cannot predict when these
investigations will be completed or their outcomes. If it is
determined that we have violated federal securities laws or
other laws or regulations, we may face sanctions, including, but
not limited to, significant monetary penalties and injunctive
relief.
In addition, we are generally obliged under indemnification
agreements to the extent permitted by law, to pay the legal and
other expenses for our directors and officers who are named
defendants in legal proceedings related to their service.
22
|
|
|
Our management members have spent considerable time and
effort dealing with internal and external investigations. |
In addition to the challenges of the SEC investigation, the DOJ
investigation, a shareholder class-action and a derivative
lawsuit and other legal proceedings described in our Annual
Report on Form 10-K filed on March 16, 2005, our
management members have spent considerable time and effort
dealing with internal and external investigations involving our
previous internal controls, accounting policies and procedures,
disclosure controls and procedures and corporate governance
policies and procedures. The significant time and effort spent
has adversely affected our operations and may continue to do so
in the future.
|
|
|
Our success will depend on our ability to attract and
retain key personnel. |
In order to execute our business plan, we need to attract,
retain and motivate a significant number of highly qualified
managerial, technical, financial and sales personnel. If we fail
to attract and retain skilled scientific and marketing
personnel, our research and development and sales and marketing
efforts will be hindered. Our future success depends to a
significant degree upon the continued services of key management
personnel, including Craig T. Davenport, our Chief Executive
Officer, William J. Nydam, our President and Chief Operating
Officer, and Michael R. Rodriguez, our Senior Vice President,
Finance and Chief Financial Officer. None of our key management
personnel is covered by an insurance policy of which we are the
beneficiary.
|
|
|
Future sales of shares of our common stock may negatively
affect our stock price. |
Future sales of our common stock, including shares issued upon
the exercise of outstanding options and warrants or hedging or
other derivative transactions with respect to our stock, could
have a significant negative effect on the market price of our
common stock. These sales also might make it more difficult for
us to sell equity securities or equity-related securities in the
future at a time and price that we would deem appropriate. We
had an aggregate of 30,059,977 shares of common stock
outstanding as of June 30, 2005, which included
5,635,378 shares of our common stock that we issued on
March 11, 2005 in connection a financing described in the
Form 8-K that we filed on March 16, 2005. Investors in
that financing also received warrants to purchase an aggregate
of 1,972,374 shares of our common stock at an exercise
price of $3.50 per share and 1,972,374 shares of our
common stock at an exercise price of $4.00 per share. We
entered into a registration rights agreement in connection with
the financing pursuant to which we agreed to register for resale
by the investors the shares of common stock issued and issuable
upon exercise of the warrants issued in the financing. We have
filed a registration statement with the SEC to register these
shares but the registration statement has not yet been declared
effective. Once the registration statement is declared
effective, the shares covered by the registration statement may
be sold, which could have a significant negative effect on the
market price of our common stock.
|
|
|
Our common stock was delisted from the Nasdaq Stock Market
and, as a result, trading of our common stock has become more
difficult. |
Our common stock was delisted from The Nasdaq Stock Market on
January 16, 2003 because of our failure to keep current in
filing our periodic reports with the SEC. Trading is now
conducted in the over-the-counter market in the so-called
pink sheets. Consequently, selling our common stock
is more difficult because smaller quantities of shares can be
bought and sold, transactions can be delayed and security
analyst and news media coverage of us may be reduced. These
factors could result in lower prices and larger spreads in the
bid and ask prices for shares of our common stock as well as
lower trading volume. We have been in discussions with the
American Stock Exchange (AMEX) and Nasdaq regarding
the relisting of our common stock. We hope that our common stock
will be relisted with either AMEX, the Nasdaq SmallCap Market or
the Nasdaq National Market System by the end of 2005, but we
cannot assure you that our common stock will be relisted within
any particular time period, or at all. As noted below, we may
effectuate a reverse stock split in order to qualify our stock
for relisting.
23
As a result of the delisting of our common stock from The Nasdaq
Stock Market, our common stock has become subject to the
penny stock regulations, including Rule 15g-9
under the Securities Exchange Act of 1934. That rule imposes
additional sales practice requirements on broker-dealers that
sell low-priced securities to persons other than established
customers and institutional accredited investors. For
transactions covered by this rule, a broker-dealer must make a
special suitability determination for the purchaser and have
received the purchasers written consent to the transaction
prior to sale. Consequently, the rule may affect the ability of
broker-dealers to sell our common stock and affect the ability
of holders to sell their shares of our common stock in the
secondary market. To the extent our common stock remains subject
to the penny stock regulations, the market liquidity for the
shares will be adversely affected.
|
|
|
In order to qualify our stock for relisting, we may
effectuate a reverse stock split, which could adversely affect
our stockholders. |
In order to qualify our stock for relisting, we may effectuate a
reverse stock split. We believe that we currently satisfy all of
the objective criteria for relisting on AMEX, and we believe
that we currently satisfy all of the objective criteria for
relisting on the Nasdaq SmallCap Market and the Nasdaq National
Market System, except for the minimum bid price requirement
applicable to the Nasdaq National Market System. AMEX requires a
minimum bid price of $3.00, the Nasdaq SmallCap Market requires
a minimum bid price of $4.00 and the Nasdaq National Market
System requires a minimum bid price of $5.00. As of
June 30, 2005, the closing price for our common stock as
reported on the pink sheets was $4.00 per
share. Of course, we cannot predict whether this share price
will be maintained or increased in the future.
Any reverse stock split would require the prior approval of our
stockholders at a stockholders meeting, because our charter
prohibits stockholder action by written consent. We recently
announced a special stockholders meeting to be held on
August 30, 2005 for the purpose of obtaining approval for a
reverse stock split. As noted in the definitive proxy statement
that we filed with the SEC on July 18, 2005, we are asking
our stockholders to approve the combination of any whole number
of shares of common stock between and including two and five
into one share of common stock, i.e., each of the
following combination ratios: one for two, one for three, one
for four and one for five. If our stockholders approve the
reverse stock split and our board decides to proceed with the
reverse stock split, then the board will determine the exact
ratio within the range described in the previous sentence. If
the board does not implement a reverse stock split prior to the
one-year anniversary of the special stockholders meeting, then
stockholder approval again would be required prior to
implementing any reverse stock split.
In many instances historically the markets have reacted
negatively to the effectuation of a reverse stock split. We
cannot assure you that our stock will not be negatively affected
if our board decides to proceed with a reverse stock split.
However, we believe that our circumstances and rationale for the
reverse stock split differentiate us from many other companies
that have effectuated reverse stock splits. Among other things,
we would be effectuating a reverse stock split to qualify our
common stock for listing, whereas many other companies have
effectuated reverse stock splits to avoid delisting in the face
of dire financial or operational circumstances.
|
|
Item 4. |
Controls and Procedures |
(a) Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in
our reports pursuant to the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange
Commissions rules and forms and that such information is
accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as
appropriate, to allow for timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls
and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of
24
achieving the desired control objectives, and management is
required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As required by Rule 13a-15(b) of the Securities Exchange
Act of 1934, as amended, we carried out an evaluation, under the
supervision and with the participation of our management,
including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the quarter
covered by this report. Based on the foregoing, our chief
executive officer and chief financial officer concluded that our
disclosure controls and procedures were effective at the
reasonable assurance level.
As explained in Note 2 to the financial statements included
herein, in order to correct the financial statements so that
they comply with U.S. generally accepted accounting principles,
we have restated our unaudited condensed consolidated statements
of operations, unaudited condensed consolidated balance sheet
and unaudited condensed consolidated statements of cash flows as
of and for the three and six months ended June 30, 2005 to
reflect a reclassification from equity to non-current liability
of the warrants that we issued in March 2005, and to reflect
interest expense to represent the change in the fair value of
the warrants since issuance, as described in Note 5 to the
financial statements. Notwithstanding this restatement, our
management continues to believe that our disclosure controls and
procedures were effective at a reasonable assurance level as of
June 30, 2005. We believe that the restatements are the
result of different accounting judgments with respect to the
proper application of generally accepted accounting principles
in an emerging area of accounting, rather than an indication
that our disclosure controls and procedures were ineffective.
The accounting ultimately applied in the restatement is one of
three views discussed under Issue Summary No. 1 of the
proposed Emerging Issues Task Force Statement No. 05-4 and
the Task Force has not yet publicly reached a consensus. It is
possible that the accounting reflected in the restatement may
differ from the Task Forces final consensus.
(b) Changes in Internal Controls. There was no
change in our internal control over financial reporting during
our second fiscal quarter for 2005 that has materially affected,
or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II OTHER INFORMATION
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
2 |
.1(1) |
|
Agreement and Plan of Reorganization dated February 21,
2002, by and among the Company, Technologies, Inc., TMT
Acquisition Corporation and certain stockholders of Timm Medical
Technologies, Inc. Certain schedules and other attachments to
this exhibit were omitted. We agree to furnish supplementally a
copy of any omitted schedules or attachments to the Commission
upon request. |
|
2 |
.2(2) |
|
Agreement and Plan of Merger dated June 30, 1999, by and
among the Company, Advanced Medical Procedures, Inc., Advanced
Medical Procedures, L.L.C., Gary M. Onik, M.D., Robert F.
Byrnes and Jerry Anderson. Certain schedules and other
attachments to this exhibit were omitted. We agree to furnish
supplementally a copy of any omitted schedules or attachments to
the Commission upon request. |
|
2 |
.3(3) |
|
Asset Purchase Agreement, dated February 6, 2002, by and
between the Company and Gary M. Onik, M.D. Certain
schedules and other attachments to this exhibit were omitted. We
agree to furnish supplementally a copy of any omitted schedules
or attachments to the Commission upon request. |
|
2 |
.4(3) |
|
Asset Purchase Agreement dated May 28, 2002, by and among
the Company and Cryomedical Sciences, Inc. Certain schedules and
other attachments to this exhibit were omitted. We agree to
furnish supplementally a copy of any omitted schedules or
attachments to the Commission upon request. |
25
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
2 |
.5(4) |
|
Partnership and Limited Liability Company Membership Interest
Purchase Agreement, dated as of August 12, 2002, by and
among Endocare, Inc. and U.S. Medical Development, Inc.,
U.S.M.D., Ltd. and U.S.M.D. I, L.L.C. Certain schedules and
exhibits referenced in this exhibit have been omitted. We agree
to furnish supplementally a copy of any omitted schedules or
attachments to the Commission upon request. |
|
2 |
.6(5) |
|
Amendment No. 1 to Partnership and Limited Liability
Company Membership Interest Purchase Agreement, dated as of
August 12, 2002, by and among Endocare, Inc. and
U.S. Medical Development, Inc., U.S.M.D., Ltd. and
U.S.M.D. I, L.L.C. |
|
2 |
.7(6) |
|
Agreement of Purchase and Sale, dated as of April 7, 2003,
by and among American Medical Systems, Inc., the Company and
Timm Medical Technologies, Inc. |
|
2 |
.8(7)* |
|
Asset Purchase and Technology License Agreement, dated as of
April 29, 2003, by and between the Company and
CryoCathTechnologies Inc. |
|
2 |
.9(8) |
|
Agreement of Purchase and Sale, dated as of October 15,
2003, by and between SRS Medical Corp. and Timm Medical
Technologies, Inc. |
|
2 |
.10(9) |
|
Amendment No. 2 to Partnership and Limited Liability
Company Membership Interest Purchase Agreement, dated as of
February 27, 2004, by and among Endocare, Inc. and
U.S. Medical Development, Inc., U.S.M.D., Ltd. and
U.S.M.D. I, L.L.C. |
|
2 |
.11(9) |
|
Service Fee Agreement, dated as of February 26, 2004, by
and among Endocare, Inc. and the Limited Partners of Mid-America
Cryotherapy, L.P. |
|
2 |
.12(9) |
|
First Amendment to Agreement of Purchase and Sale, dated as of
March 25, 2004, by and between SRS Medical Corp. and Timm
Medical Technologies, Inc. |
|
2 |
.13(10) |
|
First Amendment to Asset Purchase Agreement, dated as of
August 18, 2004, by and between Endocare, Inc. and Gary
Onik, M.D. |
|
3 |
.1(2) |
|
Certificate of Amendment of Restated Certificate of
Incorporation of the Company. |
|
3 |
.2(2) |
|
Certificate of Designation of Series A Junior Participating
Preferred Stock of the Company. |
|
3 |
.3(2) |
|
Restated Certificate of Incorporation. |
|
3 |
.4(11) |
|
Amended and Restated Bylaws of the Company. |
|
4 |
.1(12) |
|
Form of Stock Certificate. |
|
4 |
.2(13) |
|
Form of Series A Warrant. |
|
4 |
.3(13) |
|
Form of Series B Warrant. |
|
4 |
.4(14) |
|
Rights Agreement, dated as of March 31, 1999, between the
Company and U.S. Stock Transfer Corporation, which includes
the form of Certificate of Designation for the Series A
Junior Participating Preferred Stock as Exhibit A, the form
of Rights Certificate as Exhibit B and the Summary of
Rights to Purchase Series A Preferred Shares as
Exhibit C. |
|
4 |
.5(15) |
|
Amendment No. 1 to Rights Agreement, dated as of
June 24, 2005, between the Company and U.S. Stock
Transfer Corporation. |
|
10 |
.1(16) |
|
First Amendment to Employment Agreement with Craig T. Davenport,
dated as of April 28, 2005. |
|
31 |
.1 |
|
Certification under Section 302 of the Sarbanes-Oxley Act
of 2002 for Craig T. Davenport. |
|
31 |
.2 |
|
Certification under Section 302 of the Sarbanes-Oxley Act
of 2002 for Michael R. Rodriguez. |
|
32 |
.1 |
|
Certification under Section 906 of the Sarbanes-Oxley Act
of 2002 for Craig T. Davenport. |
|
32 |
.2 |
|
Certification under Section 906 of the Sarbanes-Oxley Act
of 2002 for Michael R. Rodriguez. |
|
|
|
|
* |
Certain confidential portions of this exhibit were omitted and
provided separately to the SEC pursuant to a request for
confidential treatment. |
|
|
|
|
|
Management contract or compensatory plan or arrangement |
|
|
|
|
|
(1) |
Previously filed as exhibits to our Form 8-K filed on
March 5, 2002. |
|
|
|
|
(2) |
Previously filed as exhibits to our Registration Statement on
Form S-3 filed on September 20, 2001. |
|
26
|
|
|
|
|
(3) |
Previously filed as exhibits to our Form 10-Q filed on
August 14, 2002. |
|
|
|
|
(4) |
Previously filed as exhibits to our Form 8-K filed on
August 16, 2002. |
|
|
|
|
(5) |
Previously filed as an exhibit to our Form 8-K filed on
October 15, 2002. |
|
|
|
|
(6) |
Previously filed as an exhibit to our Form 8-K filed on
April 22, 2003. |
|
|
|
|
(7) |
Previously filed as an exhibit to our Form 8-K filed on
April 29, 2003. |
|
|
|
|
(8) |
Previously filed as an exhibit to our Form 8-K filed on
October 20, 2003. |
|
|
|
|
(9) |
Previously filed as an exhibit to our Form 10-Q filed on
May 10, 2004. |
|
|
|
|
(10) |
Previously filed as an exhibit to our Form 10-Q filed on
November 9, 2004. |
|
|
(11) |
Previously filed as an exhibit to our Form 10-K filed on
March 15, 2004. |
|
(12) |
Previously filed as an exhibit to our Form 10-K for the
year ended December 31, 1995. |
|
(13) |
Previously filed as an exhibit to our Form 8-K filed on
March 16, 2005. |
|
(14) |
Previously filed as an exhibit to our Form 8-K filed on
June 3, 1999. |
|
(15) |
Previously filed as an exhibit to our Form 8-K filed on
June 28, 2005. |
|
(16) |
Previously filed as an exhibit to our Form 8-K filed on
May 3, 2005. |
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this amendment no. 1 on
Form 10-Q/ A to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
By: |
/s/ CRAIG T. DAVENPORT |
|
|
|
Craig T. Davenport |
|
Chief Executive Officer and |
|
Chairman of the Board |
|
(Duly Authorized Officer) |
Date: September 16, 2005
28
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
2 |
.1(1) |
|
Agreement and Plan of Reorganization dated February 21,
2002, by and among the Company, Technologies, Inc., TMT
Acquisition Corporation and certain stockholders of Timm Medical
Technologies, Inc. Certain schedules and other attachments to
this exhibit were omitted. We agree to furnish supplementally a
copy of any omitted schedules or attachments to the Commission
upon request. |
|
2 |
.2(2) |
|
Agreement and Plan of Merger dated June 30, 1999, by and
among the Company, Advanced Medical Procedures, Inc., Advanced
Medical Procedures, L.L.C., Gary M. Onik, M.D., Robert F.
Byrnes and Jerry Anderson. Certain schedules and other
attachments to this exhibit were omitted. We agree to furnish
supplementally a copy of any omitted schedules or attachments to
the Commission upon request. |
|
2 |
.3(3) |
|
Asset Purchase Agreement, dated February 6, 2002, by and
between the Company and Gary M. Onik, M.D. Certain
schedules and other attachments to this exhibit were omitted. We
agree to furnish supplementally a copy of any omitted schedules
or attachments to the Commission upon request. |
|
2 |
.4(3) |
|
Asset Purchase Agreement dated May 28, 2002, by and among
the Company and Cryomedical Sciences, Inc. Certain schedules and
other attachments to this exhibit were omitted. We agree to
furnish supplementally a copy of any omitted schedules or
attachments to the Commission upon request. |
|
2 |
.5(4) |
|
Partnership and Limited Liability Company Membership Interest
Purchase Agreement, dated as of August 12, 2002, by and
among Endocare, Inc. and U.S. Medical Development, Inc.,
U.S.M.D., Ltd. and U.S.M.D. I, L.L.C. Certain schedules and
exhibits referenced in this exhibit have been omitted. We agree
to furnish supplementally a copy of any omitted schedules or
attachments to the Commission upon request. |
|
2 |
.6(5) |
|
Amendment No. 1 to Partnership and Limited Liability
Company Membership Interest Purchase Agreement, dated as of
August 12, 2002, by and among Endocare, Inc. and
U.S. Medical Development, Inc., U.S.M.D., Ltd. and
U.S.M.D. I, L.L.C. |
|
2 |
.7(6) |
|
Agreement of Purchase and Sale, dated as of April 7, 2003,
by and among American Medical Systems, Inc., the Company and
Timm Medical Technologies, Inc. |
|
2 |
.8(7)* |
|
Asset Purchase and Technology License Agreement, dated as of
April 29, 2003, by and between the Company and
CryoCathTechnologies Inc. |
|
2 |
.9(8) |
|
Agreement of Purchase and Sale, dated as of October 15,
2003, by and between SRS Medical Corp. and Timm Medical
Technologies, Inc. |
|
2 |
.10(9) |
|
Amendment No. 2 to Partnership and Limited Liability
Company Membership Interest Purchase Agreement, dated as of
February 27, 2004, by and among Endocare, Inc. and
U.S. Medical Development, Inc., U.S.M.D., Ltd. and
U.S.M.D. I, L.L.C. |
|
2 |
.11(9) |
|
Service Fee Agreement, dated as of February 26, 2004, by
and among Endocare, Inc. and the Limited Partners of Mid-America
Cryotherapy, L.P. |
|
2 |
.12(9) |
|
First Amendment to Agreement of Purchase and Sale, dated as of
March 25, 2004, by and between SRS Medical Corp. and Timm
Medical Technologies, Inc. |
|
2 |
.13(10) |
|
First Amendment to Asset Purchase Agreement, dated as of
August 18, 2004, by and between Endocare, Inc. and Gary
Onik, M.D. |
|
3 |
.1(2) |
|
Certificate of Amendment of Restated Certificate of
Incorporation of the Company. |
|
3 |
.2(2) |
|
Certificate of Designation of Series A Junior Participating
Preferred Stock of the Company. |
|
3 |
.3(2) |
|
Restated Certificate of Incorporation. |
|
3 |
.4(11) |
|
Amended and Restated Bylaws of the Company. |
|
4 |
.1(12) |
|
Form of Stock Certificate. |
|
4 |
.2(13) |
|
Form of Series A Warrant. |
|
4 |
.3(13) |
|
Form of Series B Warrant. |
29
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
4 |
.4(14) |
|
Rights Agreement, dated as of March 31, 1999, between the
Company and U.S. Stock Transfer Corporation, which includes
the form of Certificate of Designation for the Series A
Junior Participating Preferred Stock as Exhibit A, the form
of Rights Certificate as Exhibit B and the Summary of
Rights to Purchase Series A Preferred Shares as
Exhibit C. |
|
4 |
.5(15) |
|
Amendment No. 1 to Rights Agreement, dated as of
June 24, 2005, between the Company and U.S. Stock
Transfer Corporation. |
|
10 |
.1(16) |
|
First Amendment to Employment Agreement with Craig T. Davenport,
dated as of April 28, 2005. |
|
31 |
.1 |
|
Certification under Section 302 of the Sarbanes-Oxley Act
of 2002 for Craig T. Davenport. |
|
31 |
.2 |
|
Certification under Section 302 of the Sarbanes-Oxley Act
of 2002 for Michael R. Rodriguez. |
|
32 |
.1 |
|
Certification under Section 906 of the Sarbanes-Oxley Act
of 2002 for Craig T. Davenport. |
|
32 |
.2 |
|
Certification under Section 906 of the Sarbanes-Oxley Act
of 2002 for Michael R. Rodriguez. |
|
|
|
|
* |
Certain confidential portions of this exhibit were omitted and
provided separately to the SEC pursuant to a request for
confidential treatment. |
|
|
|
|
|
Management contract or compensatory plan or arrangement |
|
|
|
|
(1) |
Previously filed as exhibits to our Form 8-K filed on
March 5, 2002. |
|
|
(2) |
Previously filed as exhibits to our Registration Statement on
Form S-3 filed on September 20, 2001. |
|
|
(3) |
Previously filed as exhibits to our Form 10-Q filed on
August 14, 2002. |
|
|
(4) |
Previously filed as exhibits to our Form 8-K filed on
August 16, 2002. |
|
|
(5) |
Previously filed as an exhibit to our Form 8-K filed on
October 15, 2002. |
|
|
(6) |
Previously filed as an exhibit to our Form 8-K filed on
April 22, 2003. |
|
|
(7) |
Previously filed as an exhibit to our Form 8-K filed on
April 29, 2003. |
|
|
(8) |
Previously filed as an exhibit to our Form 8-K filed on
October 20, 2003. |
|
|
(9) |
Previously filed as an exhibit to our Form 10-Q filed on
May 10, 2004. |
|
|
(10) |
Previously filed as an exhibit to our Form 10-Q filed on
November 9, 2004. |
|
(11) |
Previously filed as an exhibit to our Form 10-K filed on
March 15, 2004. |
|
(12) |
Previously filed as an exhibit to our Form 10-K for the
year ended December 31, 1995. |
|
(13) |
Previously filed as an exhibit to our Form 8-K filed on
March 16, 2005. |
|
(14) |
Previously filed as an exhibit to our Form 8-K filed on
June 3, 1999. |
|
(15) |
Previously filed as an exhibit to our Form 8-K filed on
June 28, 2005. |
|
(16) |
Previously filed as an exhibit to our Form 8-K filed on
May 3, 2005. |
30