UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 0-27212
ENDOCARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0618093
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7 STUDEBAKER, IRVINE, CALIFORNIA 92618
(Address of principal executive office) (Zip Code)
(949) 595-4770
(Registrant's 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. YES [X] NO [ ]
The number of shares of the Registrant's Common Stock, par value $.001 per
share, outstanding on August 6, 2001 was 16,820,868.
ENDOCARE, INC.
FORM 10-Q, QUARTER ENDED JUNE 30, 2001
INDEX
PAGE
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Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2001 and 2000 . . . 3
Condensed Consolidated Balance Sheets at June 30, 2001
and December 31, 2000 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. .Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II. Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature Page 21
ITEM 1. FINANCIAL STATEMENTS
ENDOCARE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
Revenues:
Net sales. . . . . . . . . . . . . . . . . $ 3,537,849 $ 1,565,213 $ 6,293,436 $ 2,876,242
Costs and expenses:
Cost of sales. . . . . . . . . . . . . . . 1,272,403 754,687 2,446,293 1,370,017
Research and development . . . . . . . . . 923,445 820,944 1,826,264 1,544,652
Selling, general and administrative. . . . 3,440,374 3,194,905 6,464,494 5,855,335
------------- ---------------- ------------ ---------------
Total costs and expenses . . . . . 5,636,222 4,770,536 10,737,051 8,770,004
------------- ---------------- ------------ ---------------
Loss from operations. . . . . . . . . . . . . (2,098,373) (3,205,323) (4,443,615) (5,893,762)
Interest income (expense), net. . . . . . . . 34,467 (146,070) 37,541 (471,299)
------------- ---------------- ------------ ---------------
Net loss. . . . . . . . . . . . . . . . . . . $ (2,063,906) $ (3,351,393) $(4,406,074) $ (6,365,061)
------------- ---------------- ------------ ===============
Net loss per share of common stock -
basic and diluted . . . . . . . . . . . . $ ( .13) $ (.27) $ ( .29) $ (.53)
============= ================ ============ ===============
Weighted average shares of common stock
outstanding 15,601,688 12,535,000 15,379,381 11,917,000
============= ================ ============ ===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
ENDOCARE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2001 2000
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . $ 15,927,694 $ 22,016,448
Accounts receivable, net . . . . . . . . . . . 3,670,629 2,113,766
Inventories. . . . . . . . . . . . . . . . . . 2,197,975 1,543,733
Prepaid expenses and other current assets. . 116,152 178,972
------------- -------------
Total current assets . .. . . . . . . . 21,912,450 25,852,919
Property and equipment, net . . . .. . . . . . . . 1,448,376 1,496,153
Investments, intangible and other assets, net . 4,557,689 1,495,718
------------- -------------
Total assets . . . . . . . . . . . . . $ 27,918,515 $ 28,844,790
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . 1,997,483 $ 2,231,344
Accrued compensation. . . . . . . . . . . . . . . . 1,822,198 1,646,079
Other accrued liabilities. . . . . . . . . . . . . 1,350,468 1,523,602
Credit facility . . . . . . . . . . . . . . . . . . 1,558,011 1,000,000
------------- -------------
Total current liabilities . . . . . . . 6,728,160 6,401,025
Convertible debentures. . . . . . . . . . . . . . 2,300,000 7,500,000
Note payable and other liabilities. . . . . . . . 54,971 74,268
------------- -------------
Total liabilities . . . . . . . . . . . 9,083,131 13,975,293
Shareholders' equity:
Preferred stock, $.001 par value; 1,000,000
shares authorized; none issued and outstanding -- --
Common stock, $.001 par value; 16,177,495 and
15,018,649 issued and outstanding at June 30,
2001 and December 31, 2000, respectivel 16,178 15,019
Additional paid-in capital. . . . . . . . . . . . 56,426,656 48,163,186
Note receivable from stock sale . . . . . . . (1,028,125) (1,135,457)
Accumulated deficit . . . . . . . . . . . . . . (36,579,325) (32,173,251)
------------- -------------
Total shareholders' equity. . . . . . .. . . . . . 18,835,384 14,869,497
Total liabilities and shareholders' equity. . . . . $ 27,918,515 $ 28,844,790
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
ENDOCARE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
2001 2000
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . $ (4,406,074) $ (6,365,061)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization . . . . .. . . 196,460 274,501
Amortization of warrant value . . . . .. . . 98,124 191,674
Amortization of deferred financing costs. . . 89,937 284,114
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . (1,556,863) (51,017)
Inventories . . . . . . . . . . . . . . . . . . (617,172) (527,334)
Prepaid expenses and other current assets . . . 38,656 37,460
Other assets. . . . . . . . . . . . . . . . . . (118,053) 386,612
Accounts payable. . . . . . . . . . . . . . . . (233,861) 630,027
Accrued compensation. . . . . . . . . . . . . . 176,119 98,278
Other accrued liabilities . . . . . . . . . . . (92,939) 238,081
Net cash used in operating activities . . . . . (6,425,665) (4,802,665)
------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment . . . . . . (117,054) (99,655)
Investment in alliances and patent. . . . . . . (458,850) (435,000)
------------- ----------------
Net cash used in investing activities . . . . . (575,904) (534,655)
------------- ----------------
Cash flows from financing activities:
Borrowings under the credit facility . . . 558,011 258,040
Issuance of common stock. . . . . . .. . . . . . 354,806 754,559
Issuance of convertible debentures. . . . . . . . -- 8,000,000
Financing costs . . . . . . . . . . . . . . . . . -- (585,000)
Net cash provided by financing activities . . . 912,814 8,427,599
------------- ----------------
Net decrease in cash and cash equivalents . . . (6,088,754) 3,090,279
Cash and cash equivalents, beginning of period. 22,016,448 7,364,951
------------- ----------------
Cash and cash equivalents, end of period. . . . $ 15,927,694 $ 10,455,230
============= ================
Non-cash activities:
Convertible debentures and accrued interest
converted to common stock, net of unamortized
deferred financing costs of $1,573,585 and
$217,750 in 2001 and 2000, respectiv
Issuance of common stock as investment. . . . . 2,837,293 --
Acquisition of trademark and domain name
through issuance of 20,000 shares of common stock -- 435,000
Transfer of inventory to property and equipment
for placement at customer sites. . . . . . . . . . 42,930 483,154
Forgiveness of recourse loan and compensation
To employees 81,747 --
------------- ----------------
Total non-cash activities. . . . . . . . . . . .$ 8,416,746 $ 7,524,318
============= ================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
ENDOCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Operations of the Company
Endocare, Inc. ("Endocare" or the "Company") is a vertically-integrated medical
device company that develops, manufactures and markets cryosurgical applications
in oncology and urology. Cryoablatoin is the use of sub-zero temperatures to
destroy abnormal tissue. The Company also operates a mobile cryosurgery
business. The Company has concentrated on developing devices for the treatment
of the two most common diseases of the prostate, prostate cancer and benign
prostate hyperplasia. The Company is also developing cryosurgical technologies
for treating tumors in other organs, including the kidney, breast, liver and
lung. Additionally, the Company is developing stent technologies for urological
disorders.
2. Financial Information
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements contain
all adjustments necessary (consisting only of normal recurring accruals) to
present fairly the financial information contained therein. These statements do
not include all disclosures required by accounting principles generally accepted
in the United States of America and should be read in conjunction with the
audited consolidated financial statements and other information included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
Financial results for this interim period are not necessarily indicative of
results to be expected for the full year 2001.
Accounting Principles
In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets." Statement
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria for intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of."
The Company is required to adopt the provisions of Statement 141 immediately,
except with regard to business combinations initiated prior to July 1, 2001, and
Statement 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-Statement 142 accounting literature. Goodwill and
intangible assets acquired in business combinations completed before July 1,
2001 will continue to be amortized prior to the adoption of Statement 142.
Because of the extensive effort needed to comply with adopting Statements 141
and 142, it is not practicable to reasonably estimate the impact of adopting
these Statements on the Company's financial statements, including whether any
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
3. Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
4. Supplemental Financial Statement Data
JUNE 30, DECEMBER 31,
2001 2000
Inventories:
Raw materials . . $1,078,188 $ 763,389
Work in process . 660,274 288,480
Finished goods. . 459,513 491,864
---------- -------------
Total inventories $2,197,975 $ 1,543,733
========== =============
5. Net Loss Per Share
Under SFAS No. 128, "Earnings Per Share", basic EPS is calculated by dividing
net earnings (loss) by the weighted-average common shares outstanding during the
period. Diluted EPS reflects the potential dilution to basic EPS that could
occur upon conversion or exercise of securities, options, convertible
debentures, or other such items, to common shares using the treasury stock
method based upon the weighted-average fair value of the Company's common shares
during the period. In accordance with SFAS 128, the consolidated net loss
(numerator), shares (denominator) and per-share amounts for the three months
ended June 30, 2000 and June 30, 2001 are $(3,351,393), 12,535,000 $(0.27), and
$(2,063,906), 15,601,688 and $(0.13), respectively. The consolidated net loss
(numerator), shares (denominator) and per share amount for the six months ended
June 30, 2000 and 2001 are $(6,365,061), 11,917,000 and $(0.53), and
$(4,406,074), 15,379,381 and $(0.29), respectively. As the Company has been in
a consolidated net loss position for the periods presented, the potential
dilution from the conversion of options, warrants and convertible debentures to
common stock of approximately 4,310,000 and 3,435,000 for the three months ended
June 30, 2000 and 2001, respectively, and 4,674,000 and 3,435,000 for the six
months ended June 30, 2000 and 2001, respectively, were not used to compute
diluted loss per share as the effect was antidilutive. Consequently, diluted
EPS equals basic EPS.
The Company's revenues are derived from cryosurgical product sales and
cryosurgery procedures. The Company's revenues from cryosurgical procedures for
the three and six month period ended June 30, 2001 and 2000 were $412,000,
$754,000, $172,000 and $345,000, respectively.
6. Collaborative Agreements
On June 30, 2001, the Company issued 213,010 shares of Common Stock valued at
their fair value of $2,837,293 in consideration for a membership interest, in
the form of Class A Units of U.S. Therapies, L.L.C. ("UST"), equal to
approximately five percent (5%) of the total issued and outstanding Class A
units of UST on a fully-diluted basis. In a related "Distributor Agreement",
U.S. Medical Devices Ltd. ("USMD"), a subsidiary of UST, was appointed a
distributor and given exclusive distribution rights to the Company's Cryocare
Probe Surgical System and associated disposabale products in certain
territories and for certain customers. The investment in UST is included in
investments, intangible and other assets in the accompanying consolidated
balance sheet for June 30, 2001. The Company has recorded sales of $1,310,000
and $1,955,000 to USMD for the three months and six months ended June 30,
2001, respectively.
In October 1999, the Company entered into a strategic alliance with Sanarus
Medical, Inc. ("Sanarus") to commercialize the Company's proprietary
cryosurgical technology in the treatment of breast cancer, benign breast tumors
and gynecological diseases. The terms of the related agreements included an
equity investment by the Company in Sanarus totaling $300,000 and a warrant
received by the Company to acquire at that time approximately 57% of Sanarus
common stock in consideration for entering into a manufacturing supply and
license agreement. In the event the Company were to exercise the warrant at
that time, the Company would then own a majority equity position in Sanarus. The
investment is included in other assets in the accompanying consolidated balance
sheets as of December 31, 2000 and June 30, 2001 and is reflected at cost, which
approximates fair market value, as the Company does not have significant
influence over the operations of Sanarus. In June 2001, the Company provided a
bridge loan to Sanarus in the amount of $250,000. This amount was subsequently
repaid in July 2001 upon Sanarus' receipt of a secondary equity financing round
from outside investors. Sanarus' second round of financing effectively reduced
the Company's ownership percentage to approximately 21% on a fully-diluted basis
at July 2001.
7. Debt
Convertible Debentures
On May 5, 2000, the Company received $8,000,000 from the sale of additional
debentures to the same institutional investors pursuant to certain call options
referenced above, of which $500,000 was converted into 74,074 shares of common
stock during the fourth quarter of 2000, $1,000,000 was converted into 148,148
shares of common stock during the first quarter of 2001 and $4,200,000 was
converted into 622,222 shares of common stock during the second quarter of 2001.
Financing costs totaling $585,000 associated with the transaction are being
amortized to interest expense over three years. In July 2001, the final
$2,300,000 was converted into 340,741 shares of common stock.
Credit Facility
On July 29, 1999, the Company entered into a Loan and Security Agreement with a
lender which originally provided for a revolving credit line in the amount of
$2,000,000 plus up to an additional $1,000,000 based on eligible accounts
receivable of the Company (the "Loan"). In April 2000, the Company increased
the revolving portion of its credit facility from $2,000,000 to $4,000,000 in
addition to the $1,000,000 based on eligible accounts receivable of the Company.
As of June 30, 2001, $1,558,000 of the loan was outstanding. The Loan accrued
interest at the highest prime or equivalent rate announced by certain designated
banks, plus 2% for the portion of the loan based on eligible accounts receivable
or 3.5%. The Loan was secured by a first priority lien on all of the assets of
the Company, except for intellectual property, was fully guaranteed by AMP, and
contained certain restrictive covenants. The Company was in compliance with
the restrictive covenants of the agreement as of June 30, 2001. The loan
matured on July 31, 2001 and was paid in full on that date.
8. Stockholders' Rights Plan
In April 1999, the Company adopted a stockholder rights plan in which
preferred stock purchase rights were distributed as a dividend at the rate of
one right for each share of common stock held as of the close of business on
April 15, 1999. The rights are designed to guard against partial tender offers
and other abusive and coercive tactics that might be used in an attempt to gain
control of the Company or to deprive the Company's stockholders of their
interest in the long-term value of the Company. The rights will be exercisable
only if a person or group acquires 15% or more of the Company's common stock
(subject to certain exceptions stated in the Plan) or announces a tender offer
the consummation of which would result in ownership by a person or group of 15%
or more of the Company's common stock. At any time on or prior to the close of
business on the first date of a public announcement that a person or group has
acquired beneficial ownership of 15% or more of the Company's common stock
(subject to certain exceptions stated in the Plan), the rights are redeemable
for one cent per right at the option of the Board of Directors.
9. Legal Proceedings
In March 2000, the Company filed in the U.S. District Court for the Central
District of California, two separate patent infringement lawsuits, one against
Israeli-based Galil Medical, Ltd, and its U.S. affiliate, Galil Medical USA,
Inc. (collectively, "Galil") and the other against Cryomedical Sciences, Inc.
("CMSI"). In March 2001 and December 2000, the parties reached a settlement in
these actions. Each of Galil and CMSI stipulated for purposes of their
respective settlement agreements that the Company's patent combining
cryo-cooling, ultrasound and temperature monitoring technology is valid and
enforceable. The settlements resulted in certain cross-licensing agreements
between Galil and Endocare and between CMSI and Endocare.
In the normal course of business, the Company is subject to various other legal
matters. While the results of litigation and claims cannot be predicted with
certainty, the Company believes that the final outcome of these matters will not
have a material adverse effect on its consolidated results of operations or
financial condition.
ITEM 2.
ENDOCARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following 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 Management's 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, 2000.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations may contain forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended and are
subject to the Safe Harbor provisions created by that statute. Our business and
results of operations are subject to various risks and uncertainties including,
but not limited to, those discussed under the caption "Factors That May Affect
Our Future Results and The Trading Price of Our Common Stock" included elsewhere
in this report, and in risk factors contained in our other periodic reports
filed with the Securities and Exchange Commission. Such risk factors include,
but are not limited to, limited operating history of our business with a history
of losses; fluctuations in our order levels; uncertainty regarding market
acceptance of our current and new products; uncertainty of product development
and the associated risks related to clinical trials; the rapid pace of
technological change in our industry; our limited sales, marketing and
manufacturing experience, and the ability to convince health care professionals
and third party payers of the medical and economic benefits of our Cryocare
System. The actual results that we achieve may differ materially from any
forward-looking statements due to such risks and uncertainties and we undertake
no obligation to update any such forward-looking statements.
General
We are a fully-integrated medical device company that develops, manufactures and
markets cryosurgical technologies and are developing stent technologies for
applications in oncology and urology. We have concentrated on developing
devices for the treatment of the two most common diseases of the prostate,
prostate cancer and benign prostate hyperplasia. We are also developing
cryosurgical technologies for treating tumors in other organs, including the
kidney, breast, liver and lung.
We derive revenues primarily from the sale of our Cryocare Systems, related
disposable Cryoprobes and revenue from mobile cryosurgical procedures. Revenues
are recognized upon the shipment of products, or in the case of our mobile
cryosurgical procedures, upon the completion of procedures.
Results of Operations
Three and six months ended June 30, 2001 and 2000
Net sales for the three months ended June 30, 2001 increased 126% to $3,538,000
compared to $1,565,000 for the three months ended June 30, 2000. The increase
was attributable primarily to the increased sales of our Cryocare System and
related disposable Cryoprobes following Medicare's July 1, 1999 implementation
of national coverage for localized prostate cancer due to the expanded
commercialization of the product and collaborative sales alliances. Our
business plan is focused primarily on the sale and placement of Cryocare Systems
and related disposables.
Net sales for the six months ended June 30, 2001 increased 119% to $6,293,000
compared to $2,876,000 in 2000. The increase is attributed to the reasons
stated above.
Gross margin on net sales was 64% for the three months ended June 30, 2001
compared to 52% for the three months ended June 30, 2000. The increase is due
primarily to a mix of higher margin cryosurgical system and probe sales coupled
with a reduction in product costs due primarily to increased manufacturing
efficiencies.
Gross margin on net products sales for the six months ended June 30, 2001 was
61% compared to 52% for the same period in 2000. The increase is due to the
reasons described above.
Research and development expense for the three months ended June 30, 2001
increased 12% to $923,000, compared to $821,000 for the three months ended June
30, 2000. The increase primarily reflects the investment we have made in the
form of additional personnel and related infrastructure to support general
product improvement in our Cryocare System, new product development efforts and
clinical costs associated with the Horizon Prostatic Stent .
Research and development expense for the six months ended June 30, 2001
increased 18% to $1,826,000, compared to $1,545,000 for the same period in 2000.
The increase is primarily attributable to continued investment in new product
development and the improvement of existing products.
Selling, general and administrative expense for the three months ended June 30,
2001 increased 8% to $3,440,000, compared to $3,195,000 for the three months
ended June 30, 2000. The increase reflects increased sales and marketing costs,
including increased sales commissions, associated with increased
commercialization of our cryosurgical product for prostate cancer.
Selling, general and administrative expense for the six months ended June 30,
2001 increased 10% to $6,464,000, compared to $5,855,000 for the same period in
2000. The increase is primarily attributable to increased sales, marketing and
infrastructure costs.
Interest income (expense), net for the three months ended June 30, 2001 was
$34,000, compared to $(146,000) for the three months ended June 30, 2001. The
increase was primarily due to increased interest income associated with a higher
balance of cash and cash equivalents in 2001, partially offset by interest
expense.
Interest income (expense), net for the six months ended June 30, 2001 was
$38,000 compared to $(471,000) for the six months ended June 30, 2000. The
increase is primarily due to increased interest income associated with a higher
balance of cash and cash equivalents in 2001, partially offset by interest
expense.
Our net loss for the three months ended June 30, 2001 was $2,064,000 or 13 cents
per share on 15,602,000 weighted average shares outstanding, compared to a net
loss of $3,351,000, or 27 cents per share on 12,535,000 weighted average shares
outstanding for the same period in 2000. The decrease in net loss primarily
resulted from increased revenues and lower cost of sales as a percentage of
sales and increased interest income, partially offset by higher research and
development and selling, general and administrative expenses.
Our net loss for the six months ended June 30, 2001 was $4,406,000 or 29 cents
per share on 15,379,000 weighted average shares outstanding compared to a net
loss of $6,365,000 or 53 cents per share on 11,917,000 weighted average shares
outstanding for the same period in 2000. The decrease in net loss is primarily
attributable to increased revenues and lower cost of sales as a percentage of
sales and increased interest income, partially offset by higher research and
development and selling, general and administrative expenses.
Liquidity and Capital Resources
At June 30, 2001, our cash and cash equivalent balance was $15,928,000 compared
to $22,016,000 at December 31, 2000. The decrease was due primarily to cash
used by operating activities. At June 30, 2001, our net working capital was
$15,184,000 and the ratio of current assets to current liabilities was 3 to 1.
For the six months ended June 30, 2001, net cash used in operating activities
was $6,426,000 compared to $4,803,000 for the same period in 2000. In
conjunction with the increased sales of our Cryocare System and related
disposable Cryoprobes for prostate cancer, inventory increased to $2,198,000 at
June 30, 2001, compared to $1,544,000 at the beginning of the year and net
accounts receivable increased to $3,671,000 at June 30, 2001, compared to
$2,114,000 at December 31, 2000. Additions to property and equipment during the
first six months of 2001 were approximately $117,000. Current liabilities
increased to $6,728,000 at June 30, 2001 from $6,401,000 at December 31, 2000.
On June 30, 2001, the Company issued 213,010 shares of Common Stock valued at
their fair value of $2,837,293 in consideration for a membership interest, in
the form of Class A Units of U.S. Therapies, L.L.C. ("UST"), equal to
approximately five percent (5%) of the total issued and outstanding Class A
units of UST on a fully-diluted basis. In a related "Distributor Agreement",
U.S. Medical Devices Ltd. ("USMD"), a subsidiary of UST, was appointed a
distributor and given exclusive distribution rights to the Company's Cryocare
Probe Surgical System and associated disposabale products in certain
territories and for certain customers. The investment in UST is included in
investments, intangible and other assets in the accompanying consolidated
balance sheet for June 30, 2001. The Company has recorded sales of $1,310,000
and $1,955,000 to USMD for the three months and six months ended June 30,
2001, respectively.
In June and July 1999, we received a total of $8,000,000 from the sale to
institutional investors of 7% convertible debentures due in three years from the
date of issuance. During the second quarter of 2000, the $8,000,000 in
convertible debentures was converted into 1,475,610 shares of common stock under
the terms of the agreements. On May 5, 2000, we received $8,000,000 from the
sale of the additional 7% convertible debentures to institutional investors
pursuant to the purchase options discussed above, of which $500,000 was
converted into 74,074 shares of common stock during the fourth quarter of 2000,
$1,000,000 was converted into 148,148 shares of common stock during the first
quarter of 2001 and $4,200,000 was converted into 622,222 shares of common stock
during the second quarter of 2001. In July 2001, the final $2,300,000 was
converted into 340,741 shares of common stock.
On July 29, 1999, the Company entered into a Loan and Security Agreement with a
lender which originally provided for a revolving credit line in the amount of
$2,000,000 plus up to an additional $1,000,000 based on eligible accounts
receivable of the Company (the "Loan"). In April 2000, the Company increased
the revolving portion of its credit facility from $2,000,000 to $4,000,000 in
addition to the $1,000,000 based on eligible accounts receivable of the Company.
As of June 30, 2001, $1,558,000 of the loan was outstanding. The Loan bears
interest at the highest prime or equivalent rate announced by certain designated
banks, plus 2% for the portion of the loan based on eligible accounts receivable
or 3.5%. The Loan is secured by a first priority lien on all of the assets of
the Company, except for intellectual property, is fully guaranteed by our
subsidiary, AMP, and contains certain restrictive covenants. The Company was
in compliance with the restrictive covenants of the agreement as of June 30,
2001. The loan matured on July 31, 2001. The credit facility was paid in full
on that date.
In November 2000, we sold 1,509,440 shares of our common stock at a price of
$13.25 per share in a private placement. After transaction fees, legal,
accounting, filing fees and other associated expenses of approximately
$1,648,000, the net contribution to our capital was approximately $18,352,000.
We believe that our existing cash resources will provide sufficient resources to
meet present and reasonably foreseeable working capital requirements and other
cash needs into 2002. If we elect to undertake or accelerate significant
research and development projects for new products or pursue corporate
acquisitions, we may require additional outside financing sooner than
anticipated. There can be no assurance that financing will be available on
acceptable terms or at all. We expect that to meet our long-term needs we may
need to raise substantial additional funds through the sale of our equity
securities, the incurrence of indebtedness or through funds derived through
entering into collaborative agreements with third parties.
FACTORS THAT MAY AFFECT OUR FUTURE RESULTS AND THE TRADING PRICE OF OUR COMMON
STOCK
WE HAVE A LIMITED OPERATING HISTORY AND WE EXPECT TO CONTINUE TO GENERATE LOSSES
Since our inception, we have engaged primarily in research and development
and have minimal experience in manufacturing, marketing and selling our products
in commercial quantities.
We have incurred annual operating losses since inception. For the fiscal
years ended December 31, 1998, 1999, 2000 and the six month period ended June
30, 2001, we had net losses of approximately $4.9 million, $9.3 million, $12.4
million and $4.4 million, respectively. As of June 30, 2001, our accumulated
deficit was approximately $36.6 million. We may not be able to successfully
develop or commercialize our current or future products, achieve significant
revenues from sales or procedures or achieve or sustain profitability. We
expect to continue to incur operating losses because our products will require
substantial expenditures relating to, among other matters, development, clinical
testing, regulatory compliance, manufacturing and marketing. If we do achieve
profitability, we cannot be certain that we will be able to sustain or increase
profitability on a quarterly or annual basis thereafter.
OUR PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE, WHICH COULD LIMIT OUR FUTURE
REVENUE
Our products, including our Cryocare System and related accessories and
disposable products, are in the early stages of market introduction. Our
products may not be accepted by potential customers. We believe that
recommendations and endorsements of physicians and patients and sufficient
reimbursement by health care payers will be essential for market acceptance of
our Cryocare System and other products, and these recommendations and
endorsements may not be obtained and sufficient reimbursement may not be
forthcoming. Cryosurgery has existed for many years, but has not been widely
accepted primarily due to concerns regarding safety and efficacy and widespread
use of alternative therapies. Use of our Cryocare System requires significant
physician education and training. Our ability to successfully market our
Cryocare System is dependent, among other things, upon acceptance of
cryosurgical procedures in the United States and certain international markets.
Any adverse side effects or future reported adverse events or other unfavorable
publicity involving patient outcomes from the use of cryosurgery, whether from
our products or the products of our competitors, could adversely affect
acceptance of cryosurgery. Emerging new technologies and procedures to treat
cancer, prostate enlargement and other prostate disorders also may negatively
affect the market acceptance of cryosurgery. Our Cryocare System and our other
products may not gain any significant degree of market acceptance among
physicians, patients and health care payers. If our products do not achieve
market acceptance, our future revenue will be limited.
WE MAY NOT BE SUCCESSFUL IN DEVELOPING OR MARKETING OUR PRODUCTS
Our growth depends in large part on continued ability to successfully
develop and commercialize our current products under development or any new
products. Several of our products are in varying stages of development. Our
Horizon Prostatic Stent is in clinical trials and has not been approved for
marketing in the United States. We also are developing enhancements to our
Cryocare System. We may experience difficulties that could delay or prevent the
successful development and commercialization of our current products under
development or any new products. Our products in development may not prove safe
and effective in clinical trials. Clinical trials may identify significant
technical or other obstacles that must be overcome prior to obtaining necessary
regulatory or reimbursement approvals. Our failure to successfully develop and
commercialize new products or to achieve significant market acceptance would
have a significant negative effect on our financial condition.
THERE IS UNCERTAINTY RELATING TO THIRD PARTY REIMBURSMENT WHICH IS CRITICAL TO
MARKET ACCEPTANCE OF OUR PRODUCTS
In the United States, health care providers, such as hospitals and
physicians, that purchase our products generally rely on third party payers,
principally federal Medicare, state Medicaid and private health insurance plans,
to reimburse all or part of the cost of medical procedures involving our
products and on reimbursement for our products and procedures. While certain
private health insurance companies pay for the procedures in which our products
are used in certain areas of the United States, private insurance reimbursement
may not be adopted nationally or by additional insurers and may be terminated by
those private insurance companies currently paying for procedures in which our
products are used. Reimbursement levels from Medicare, Medicaid or private
insurers may not be sufficient to induce physicians to perform, and patients to
elect, procedures utilizing our products. Further, we anticipate that, under
the prospective payment system used by private health care payers, the cost of
our products will be incorporated into the overall cost of the procedures in
which they are used and that there will be no separate, additional reimbursement
for our products. This also may discourage the use of our products.
Furthermore, we could be negatively affected by changes in reimbursement
policies of government or private health care payers, particularly to the extent
any such changes affect reimbursement for procedures in which our products are
used. Failure by physicians, hospitals and other users of our products to
obtain sufficient reimbursement from health care payers for procedures involving
our products could have a significant negative effect on our financial
condition.
Furthermore, significant attention is placed on reforming the healthcare
system in the United States and other countries. Any changes in Medicare,
Medicaid or third party medical expense reimbursement, which may arise from
healthcare reform, would likely have a material adverse effect on the price for
our products. In addition, changes to the healthcare system may also affect the
commercial acceptance of products we are currently developing and products we
may develop in the future. Several proposals have been made in the United
States Congress and various state legislatures recently that, if adopted, would
reform the healthcare system in the United States and potentially reduce
healthcare spending which may result in a material adverse effect on our
business.
WE HAVE LIMITED SALES AND MARKETING EXPERIENCE
We currently handle most of our own marketing, distribution and sales of
our Cryocare Systems. We have limited experience marketing and selling our
products, and do not have experience marketing and selling our products in
commercial quantities. If we are unable to expand our sales and marketing
capabilities, we may not be able to effectively commercialize our Cryocare
System product or other products.
We derive the majority of our revenues from the sales of Cryocare Systems
and expect that sales of Cryocare Systems will continue to constitute the
majority of our sales for the foreseeable future. Any factor negatively
impacting the sales or usage of Cryocare Systems would have a significant effect
on our business.
We believe that, to become and remain competitive, we will need to develop
third party international distribution channels and a direct sales force for our
products. If we enter into third party marketing arrangements, our percentage
share of product revenues is likely to be lower than if we directly marketed and
sold our products through our own sales force. Establishing marketing and sales
capabilities sufficient to support sales in commercial quantities will require
significant resources. We may not be able to recruit and retain direct sales
personnel, succeed in establishing and maintaining any third party distribution
channels or succeed in our future sales and marketing efforts.
WE ARE DEPENDENT UPON A LIMITED NUMBER OF THIRD PARTY SUPPLIERS TO MANUFACTURE
OUR PRODUCTS
We depend upon a limited number of unaffiliated third-party suppliers for
components and materials used in the manufacture of our products and, as such,
our business would be seriously harmed if we were unable to develop and maintain
relationships with suppliers that allow us to obtain sufficient quantities and
quality materials and components on acceptable terms. If our principal
suppliers cease to supply the materials and components we need to manufacture
our products, there may not be adequate alternatives to meet our needs, which
will have a material adverse effect on our business. To date, we have been able
to obtain the necessary components and materials used in the manufacture of our
products without material delays, however, there can be no assurance that we
will be able to obtain the necessary components and materials used in our
products in the future on a timely basis, if at all.
WE ARE DEPENDENT ON ADEQUATE PROTECTION OF OUR PATENT AND PROPRIETARY RIGHTS
We may not be able to obtain effective patents to protect our technologies
from use by other companies with competitive products, and patents of other
companies could prevent us from developing or marketing our products. Our
success will depend, to a significant degree, on our ability to secure and
protect intellectual proprietary rights and enforce patent and trademark
protections relating to our technology. While we believe that the protection of
patents or licenses is important to our business, we also rely on trade secrets,
know-how and continuing technological innovation to maintain our competitive
position. From time to time, litigation may be advisable to protect our patent
position. Any litigation in this regard could be costly, and it is possible
that we will not have sufficient resources to fully pursue this litigation or to
protect our other patent rights and could result in the rejection or
invalidation of our existing and future patents, if any. Any adverse outcome in
litigation relating to the validity of our patents, or any other failure to
pursue litigation or otherwise to protect our patent position, could materially
harm our business and financial condition. In addition, in the future, we may
receive correspondence alleging infringement of proprietary rights of third
parties. Even if infringement claims against us are without merit, defending a
lawsuit takes significant time, may be expensive and may divert management
attention from other business concerns. We try to preserve the confidentiality
of our technology by entering into confidentiality agreements with our
employees, consultants, customers, and key vendors and by other means. These
measures may not, however, prevent the unauthorized disclosure or use of such
technology. It is possible that these agreements will be breached or that they
will not be enforceable in every instance, and that we will not have adequate
remedies for any such breach. In addition, enforcement of these agreements may
be costly and time consuming.
WE ARE FACED WITH INTENSE COMPETITION AND RAPID TECHNOLOGICAL AND INDUSTRY
CHANGE
We are faced with intense competition and rapid technological and industry
change and, if our competitors' existing products or new products are more
effective than or considered superior to our products, the commercial
opportunity for our products will be reduced or eliminated. We face intense
competition from other surgical device manufacturers, as well as, in some cases,
from pharmaceutical companies. Many of our competitors are significantly larger
than us and have greater financial, technical, research, marketing, sales,
distribution and other resources than us. We believe there will be intense price
competition for products developed in our markets. Our competitors may develop
or market technologies and products, including drug-based treatments, that are
more effective or commercially attractive than any that we are developing or
marketing. Our competitors may succeed in obtaining regulatory approval, and
introducing or commercializing products before we do. Such developments could
have a significant negative effect on our financial condition. Even if we are
able to compete successfully, we may not be able to do so in a profitable
manner. The medical device industry generally, and the urological disease
treatment market in particular, are characterized by rapid technological change,
changing customer needs, and frequent new product introductions. Our products
may be rendered obsolete as a result of future innovations.
WE MAY NEED ADDITIONAL LONG-TERM FINANCING
If we undertake or accelerate significant research and development projects
for new products or pursue corporate acquisitions, we may require additional
outside financing. Such additional funds may be raised through the sale of our
equity securities or the incurrence of additional debt or through collaborative
arrangements. Any additional equity financing may be dilutive to shareholders,
and debt financing, if available, may involve interest expense and restrictive
covenants. Collaborative arrangements, if necessary to raise additional funds,
may require us to relinquish rights to certain of our technologies, products or
marketing territories. Our failure to raise capital when needed could have a
significant negative effect on our business, operating results, financial
condition and prospects.
WE HAVE LIMITED MANUFACTURING EXPERIENCE
We have limited experience in producing our products in commercial
quantities. Manufacturers often encounter difficulties in scaling up production
of new products, including problems involving production yields, quality control
and assurance, component supply and shortages of qualified personnel. Our
failure to overcome these manufacturing problems could negatively impact our
business and financial condition. We use internal manufacturing capacity in our
manufacturing efforts. Certain of our purchased components and processes are
currently available from or performed by a single vendor. Any supply
interruption from a single source vendor would have a significant negative
effect on our ability to manufacture our products until a new source of supply
is qualified and, as a result, could have a significant negative effect on our
business and financial condition. Our success will depend in part upon our
ability to manufacture our products in compliance with the FDA's Good
Manufacturing Practices regulations and other regulatory requirements in
sufficient quantities and on a timely basis, while maintaining product quality
and acceptable manufacturing costs. Failure to increase production volumes in a
timely or cost-effective manner or to maintain compliance with the FDA's Good
Manufacturing Practices or other regulatory requirements could have a
significant negative effect on our financial condition.
WE ARE DEPENDENT ON KEY PERSONNEL
Failure to attract and retain skilled personnel could hinder our research
and development and sales and marketing efforts. Our future success depends to a
significant degree upon the continued services of key technical and senior
management personnel, including Paul W. Mikus, our Chief Executive Officer.
None of these individuals is bound by an employment agreement or covered by an
insurance policy of which we are the beneficiary. Our future success also
depends on our continuing ability to attract, retain and motivate highly
qualified managerial, technical and sales personnel. Competition for such
personnel is intense, particularly in southern California where we are located.
The inability to retain or attract qualified personnel could have a significant
negative effect upon our research and development and sales and marketing
efforts and thereby materially harm our business and financial condition.
GOVERNMENT REGULATION CAN HAVE A SIGNIFICANT IMPACT ON OUR BUSINESS
Government regulation in the United States and other countries is a
significant factor affecting the research and development, manufacture and
marketing of our products. In the United States, the FDA has broad authority
under the federal Food, Drug and Cosmetic Act and the Public Health Service Act
to regulate the distribution, manufacture and sale of medical devices. Foreign
sales of drugs and medical devices are subject to foreign governmental
regulation and restrictions, which vary from country to country. The process of
obtaining FDA and other required regulatory approvals is lengthy and expensive.
We may not be able to obtain necessary approvals for clinical testing or for the
manufacturing or marketing of our products. Failure to comply with applicable
regulatory approvals can, among other things, result in fines, suspension of
regulatory approvals, product recalls, operating restrictions, and criminal
prosecution. In addition, governmental regulations may be established which
could prevent, delay modify or rescind regulatory approval of our products. Any
such position by the FDA, or change of position by the FDA, may adversely impact
our business and financial condition. Regulatory approvals, if granted, may
include significant limitations on the indicated uses for which our products may
be marketed. In addition, to obtain such approvals, the FDA and foreign
regulatory authorities may impose numerous other requirements on us. FDA
enforcement policy strictly prohibits the marketing of approved medical devices
for unapproved uses. In addition, product approvals can be withdrawn for
failure to comply with regulatory standards or the occurrence of unforeseen
problems following initial marketing. We may not be able to obtain regulatory
approvals for our products on a timely basis, or at all, and delays in receipt
of or failure to receive such approvals, the loss of previously obtained
approvals, or failure to comply with existing or future regulatory requirements
would have a significant negative effect on our financial condition. In
addition, the health care industry in the United States is generally subject to
fundamental change due to regulatory, as well as political, influences. We
anticipate that Congress and state legislatures will continue to review and
assess alternative health care delivery and payment systems. Potential
approaches that have been considered include controls on health care spending
through limitations on the growth of private purchasing groups and price
controls. We cannot predict what impact the adoption of any federal or state
health care reform measures may have on our business.
WE COULD BE NEGATIVELY IMPACTED BY FUTURE INTERPRETATION OR IMPLEMENTATION OF
FEDERAL AND STATE FRAUD AND ABUSE LAWS, INCLUDING ANTI-KICKBACK LAWS.
Federal anti-kickback laws and regulations prohibit the offer, payment,
solicitation and receipt of any form of remuneration in exchange for referrals
of products or services for which payment may be made by Medicare, Medicaid or
other federal healthcare programs. Violations of federal anti-kickback laws are
punishable by monetary fines, civil and criminal penalties and exclusion from
participation in Medicare, Medicaid and other federal healthcare programs.
Several states have similar laws. While we believe our operations are in
material compliance with the applicable Medicare and Medicaid fraud and abuse
laws, including the anti-kickback laws, there is a risk that the federal
government might investigate our arrangements with physicians and other third
parties. Such investigations, regardless of their outcome, could damage our
reputation and adversely affect important business relationships that we have
with third parties, including physicians, hospitals and others. If our
arrangements with physicians and other third parties were found to be illegal,
we could be subject to civil and criminal penalties, including fines and
possible exclusion from participation in governmental payor programs.
Significant fines could cause liquidity problems and adversely affect our
results of operations. Exclusion from participation from government payor
programs would eliminate an important source of revenue and adversely affect our
business.
WE COULD BE NEGATIVELY IMPACTED BY FUTURE INTERPRETATION OR IMPLEMENTATION OF
THE FEDERAL STARK LAW AND OTHER STATE AND FEDERAL ANTI-REFERRAL LAWS
We are also subject to federal and state statutes and regulations banning
payments for referrals of patients and referrals by physicians to healthcare
providers with whom the physicians have a financial relationship. The federal
Stark Law applies to Medicare and Medicaid and prohibits a physician from
referring patients for certain services to an entity with which the physician
has a financial relationship. A financial relationship includes both investment
interests in an entity and compensation arrangements with an entity. Many
states have similar laws. These state laws generally apply to services
reimbursed by both governmental and private payors. Violation of these federal
and state laws may result in prohibition of payment for services rendered, loss
of licenses, fines, criminal penalties and exclusion from governmental and
private payor programs, among other things. We have financial relationships
with physicians. Although we believe that our financial relationships with
physicians are not in violation of applicable laws and regulations, governmental
authorities might take a contrary position. If our financial relationships with
physicians were found to be illegal, we could be subject to civil and criminal
penalties, including fines, exclusion from participation in government and
private payor programs and requirements to refund amounts previously received
from government and private payors. In addition, expansion of our operations to
new jurisdictions, or new interpretations of laws in our existing jurisdictions,
could require structural and organizational modifications of our relationships
with physicians and others to comply with that jurisdiction's laws. Such
structural and organizational modifications could result in lower profitability
and failure to achieve our growth objectives.
WE MAY BE NEGATIVELY IMPACTED BY PRODUCT LIABILITY AND PRODUCT RECALL
The manufacture and sale of medical products entails significant risk of
product liability claims and product recalls. Our existing insurance coverage
limits may not be adequate to protect us from any liabilities we might incur in
connection with the clinical trials or sales of our products. We may require
increased product liability coverage as our products are commercialized.
Insurance is expensive and may not be available on acceptable terms, or at all.
A successful product liability claim or series of claims brought against us in
excess of our insurance coverage, or a recall of our products, would have a
significant negative effect on our business and financial condition. Even
unsuccessful claims could result in the significant expenditure of funds and
management time, could substantially harm our reputation and could harm our
business.
WE MAY EXPERIENCE FLUCTUATIONS IN OUR FUTURE OPERATING RESULTS
If our revenue declines in a quarter from the revenue in the previous
quarter our earnings will likely decline because many of our expenses are
relatively fixed. In particular, research and development, sales and marketing
and general and administrative expenses are not affected directly by variations
in revenue. In some future quarter or quarters, due to a decrease in revenue or
for some other reason, our operating results likely will be below the
expectations of securities analysts or investors. In this event, the market
price of our common stock may fall abruptly and significantly.
OUR BUSINESS IS EXPOSED TO RISKS RELATED TO ACQUISITIONS AND MERGERS
As part of our strategy to commercialize our products, we may acquire one
or more businesses, such as a related company that would use our products in
clinical applications. In June 1999, we consummated a business combination with
Advanced Medical Procedures, LLC, a regional mobile cryosurgery service company
that provides our cryosurgical equipment for the treatment of prostate and liver
cancer on a procedural basis. We may not be able to effectively integrate our
business with any other business we may acquire or merge with or effectively
utilize the business acquired to develop and market our products. The failure
to integrate an acquired company or acquired assets into our operations may
cause a drain on our financial and managerial resources, and thereby have a
significant negative effect on our business and financial results.
These difficulties could disrupt our ongoing business, distract our
management and employees or increase our expenses. Furthermore, any physical
expansion in facilities due to an acquisition may result in disruptions that
seriously impair our business. We are not experienced in managing facilities or
operations in geographically distant areas. In addition, our profitability may
suffer because of acquisition-related costs or amortization costs or impairment
of acquired goodwill and other intangible assets. Finally, in connection with
any future acquisitions, we may incur debt or issue equity securities as part or
all of the consideration for the acquired company's assets or capital stock. We
may be unable to obtain sufficient additional acquisition financing on favorable
terms or at all. In addition, equity issuances would be dilutive to our
existing stockholders.
OUR COMMON STOCK HAS A LIMITED MARKET AND TRADING HISTORY
If we fail to satisfy the continued listing requirements of the Nasdaq
National Market or Nasdaq SmallCap Market, our stock could become subject to the
SEC's Penny Stock Rules, making the stock difficult to sell. Our common stock
began trading on the Nasdaq SmallCap Market on February 28, 1997 and in May 2000
was listed and is currently traded on the Nasdaq National Market. If we are
unable to maintain the standards for quotation on the Nasdaq National Market or
the Nasdaq SmallCap Market, the ability of our investors to resell their shares
may be limited. In addition, our securities may be subjected to "penny stock"
rules that impose additional sales practice and market making requirements on
broker-dealers who sell or make a market in such securities. This could affect
the ability or willingness of broker-dealers to sell or make a market in our
securities and the ability of holders of our securities to sell their securities
in the secondary market.
OUR STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY
Our stock price has in the past fluctuated and is likely to continue to
fluctuate significantly, making it difficult to resell shares when an investor
wants to at prices they find attractive. The market prices for securities of
emerging companies have historically been highly volatile. Future announcements
concerning us or our competitors could cause such volatility including
announcements regarding: our operating results, technological innovations or
new commercial products, corporate collaborations, government and third party
reimbursement, government regulation, developments concerning proprietary
rights, litigation or public concern as to the safety of our products, investor
perception of us and our industry, and general economic and market conditions.
In addition, the stock market is subject to price and volume fluctuations that
affect the market prices for companies in general, and small-capitalization,
high technology companies in particular, which are often unrelated to the
operating performance of these companies. In addition, any failure by us to
meet or exceed estimates of financial analysts is likely to cause a decline in
our common stock price.
THE 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 and the conversion of convertible debentures
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.
Such 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.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER MAY HAVE A POSSIBLE NEGATIVE EFFECT ON
OUR STOCK PRICE
Certain provisions of our Certificate of Incorporation and Bylaws may have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of us. In
addition, in April 1999, our board of directors adopted a stockholder rights
plan in which preferred stock purchase rights were distributed as a dividend.
These provisions may make it more difficult for stockholders to take certain
corporation actions and may have the effect of delaying or preventing a change
in control. In addition, we are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law. Subject to specified
exceptions, this section provides that a corporation shall not engage in any
business combination with any interested stockholder during the three-year
period following the time that such stockholder becomes an interested
stockholder. This provision could have the effect of delaying or preventing a
change of control of Endocare. The foregoing factors could limit the price that
certain investors might be willing to pay in the future for shares of our common
stock.
CALIFORNIA ENERGY CRISIS
Our headquarters and principal operations are located in Orange County,
California. California has recently found itself in a utility crisis caused, in
part, by a lack of affordable power sources and the financial instability of
several of its primary power suppliers. Orange County has undergone several
periods of "rolling blackouts," a technique used by our power provider to
conserve its resources. Although our operations have not been halted as a
result of these conservation measures, potential suspensions of our operations
due to power disruptions could result in materially higher costs and lost
revenues, either of which would materially adversely impact our business,
financial condition and results of operations.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Our financial instruments include cash, cash equivalents, notes receivable and
credit facility debentures. At June 30, 2001, the carrying values of our
financial instruments approximated their fair values.
Our policy is not to enter into derivative financial instruments. We do not
have any significant foreign currency exposure since we do not transact business
in foreign currencies. Therefore, we do not have significant overall currency
exposure. In addition, we do not enter into any futures or forward contracts
and therefore we do not have significant market risk exposure with respect to
commodity prices.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, in March 2000, the Company filed two patent infringement
lawsuits against Israeli-based Galil Medical, Ltd, and its U.S. affiliate, Galil
Medical USA, Inc. (collectively, "Galil") in the U.S. District Court for the
Central District of California. Additional developments were also reported in
our first quarterly report for this fiscal year. In March 2001, the Company and
Galil reached a settlement. In the settlement, Galil stipulated for purposes of
the agreement that the Company's patent combining cryo-cooling, ultrasound and
temperature monitoring technology is valid and enforceable. The settlement
resulted in certain cross-licensing agreements between Galil and Endocare.
In the normal course of business, the Company is subject to various other legal
matters. While the results of litigation and claims cannot be predicted with
certainty, the Company believes that the final outcome of these matters will not
have a material adverse effect on its consolidated results of operations or
financial condition.
Item 2. Changes in Securities
In June 2001, in connection with the hiring of John V. Cracchiolo as our Chief
Operating Officer and Chief Financial Officer, Mr. Cracchiolo was granted
options to purchase an aggregate of 350,000 shares of the Company's common
stock. 50,000 of such options were granted pursuant to the Company's 1995 Stock
Plan, and 300,000 of such options were granted outside of the Company's existing
stock option plans. The exercise price for the approximately 322,332
non-qualified stock options issued to Mr. Cracchiolo is $13.75, and the exercise
price of the approximately 27,688 incentive stock options is $14.00 per share.
The 300,000 option shares granted outside of the Company's existing stock option
plans were issued in a private transaction exempt from the registration
requirements of the Securities Act in accordance with Section 4(2) of the
Securities Act. Of the 350,000 option shares granted, 300,000 of the option
shares will become exercisable in annual and monthly installments during Mr.
Cracchiolo's continued service as an officer of the Company and the remaining
50,000 option shares will vest upon the earlier of June 2006 or the attainment
of performance based objectives
In June 2001, the Company issued 213,010 shares of its common stock valued at
$2,837,293 in consideration for a membership equal to approximately 5% of the
total issued and outstanding Class A Units of U.S. Therapies, L.L.C. on a
fully-diluted basis. The Company issued the shares in a private transaction
exempt from the registration requirements of the Securities Act pursuant to
Regulation D promulgated under the Securities Act and/or Section 4(2) of the
Securities Act.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 22, 2001.
Proposal 1, submitted to a vote of security holders at the meeting was the
election of Directors. The following Directors, being all the Directors of the
Company, were elected at the meeting, with the total number of votes cast as
follows:
BROKER
NAME VOTES FOR VOTES AGAINST BROKER
OR WITHHELD ABSTENTIONS NON-VOTES
Paul W. Mikus. . . . . . 10,678,290 1,633,073 0 0
Peter F. Bernardoni. . . 12,293,991 17,372 0 0
Robert F. Byrnes . . . . 12,293,943 17,420 0 0
Benjamin Gerson, M.D.. . 12,294,143 17,220 0 0
Alan L. Kaganov, Sc.D. . 12,294,143 17,220 0 0
Michael J. Strauss, M.D. 12,294,143 17,220 0 0
Proposal 2, submitted to a vote of security holders at the meeting, was to
ratify the appointment of KPMG LLP as the Company's independent auditors for
fiscal year 2001. Votes cast were as follows:
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
12,222,786 83,979 4,558 0
The proposal was approved.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
3.1(1) Certificate of Incorporation
3.2(2) Amended and Restated Bylaws
10.1 Offer letter to John V. Cracchiolo, dated June 11, 2001
10.2 Compensation Agreement issued to John V. Cracchiolo dated
June 25, 2001
10.3* Distribution agreement with USMD, ltd., dated as of
June 27, 2001
(1) Previously filed with amendment number 1 to the Company's
application for registration on Form 10-SB filed with the SEC on
(2) Previously filed with
(*) Confidential portions of this exhibit were omitted by means of
marking such portins with an asterisk (the "Mark").
(b) Reports on Form 8-K -- None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 13, 2001
ENDOCARE, INC.
By: /s/ Paul W. Mikus
Paul W. Mikus
Chief Executive Officer and President
(Duly Authorized Officer )
By: /s/ John V. Cracchiolo
John V. Cracchiolo
Chief Operating Officer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)