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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
FOR ANNUAL AND TRANSITION
REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007; or
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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
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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
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(State of
incorporation)
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(I.R.S. Employer Identification
No.)
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201 Technology, Irvine, CA
(Address
of principal executive offices)
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92618
(Zip
Code)
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Registrants telephone number, including area code:
(949) 450-5400
Securities registered pursuant to Section 12(b) of the
Act: None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $.001 par value
Rights to Purchase Shares of Series A Junior
Participating Preferred Stock
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
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No
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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
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No
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(2) Yes
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No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
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Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act). Yes
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No
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The aggregate market value of the common stock of the Registrant
held by non-affiliates as of June 30, 2007 was
approximately $93,265,692 (based on the last sale price for
shares of the Registrants common stock as reported on the
OTC Bulletin Board for that date). Shares of common stock
held by each executive officer, director and holder of
10 percent or more of the outstanding common stock have
been excluded in that such persons may be deemed affiliates.
Exclusion of shares held by any person should not be construed
to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of management or
policies of the Registrant, or that such person is controlled by
or under common control with the Registrant.
There were 11,773,293 shares of the Registrants
common stock issued and outstanding as of February 29, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Definitive Proxy Statement related to
our 2008 Annual Meeting of Stockholders, which Definitive Proxy
Statement we expect to file under the Securities Exchange Act of
1934, as amended, within 120 days of the end of our fiscal
year ended December 31, 2007, are incorporated by reference
into Part III of this Annual Report on
Form 10-K.
Certain exhibits filed with our prior registration statements,
proxy statement and
Forms 10-K,
8-K and
10-Q are
incorporated herein by reference into Part IV of this
Annual Report on
Form 10-K.
Endocare,
Inc.
Form 10-K
For the
Fiscal Year Ended December 31, 2007
TABLE OF
CONTENTS
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PART I
This Annual Report on
Form 10-K
may contain forward-looking statements that involve risks and
uncertainties. Such statements typically include, but are not
limited to, statements containing the words
believes, intends,
anticipates, expects, hopes,
estimates, should, could,
may, plans, planned and
words of similar import. Our actual results could differ
materially from any such forward-looking statements as a result
of the risks and uncertainties, including but not limited to
those set forth below in Risks Factors and in other
documents we file from time to time with the Securities and
Exchange Commission, including our Quarterly Reports on
Form 10-Q.
Any such forward-looking statements reflect our
managements opinions only as of the date of this Annual
Report on
Form 10-K,
and we undertake no obligation to revise or publicly release the
results of any revisions to these forward-looking statements.
Readers should carefully review the risk factors set forth below
in Risks Factors and in other documents we file from
time to time with the Securities and Exchange Commission,
including our Quarterly Reports on
Form 10-Q.
AutoFreeze®,
CGCtm,
Cryocare®,
Cryocare
CS®,
Cryocare Surgical
System®,
CryoDisc®,
CryoGridtm,
CryoGuide®,
Direct
Accesstm,
Endocare®,
FastTrac®,
Integrated
Ultrasoundtm,
SmartTemptm,
TCAPtm,
Targeted Cryoablation of the Prostate
TCAP®,
Tempprobe®,
Urethral
Warmertm,
R-Probetm,
V-Probe®,
Cryocare
CN2tm,
PerCryo®,
CryoProbe
CN2tm
and Cryocare
SLtm
are our trademarks; and, Renal
Cryo®,
Salvage
Cryo®,
Focal
Cryo®
and Primary
Cryo®
are our servicemarks. This Annual Report on
Form 10-K
may also include trademarks and trade names owned by other
parties, and all other trademarks and trade names mentioned in
this Annual Report on
Form 10-K
are the property of their respective owners.
Overview
We are a specialty medical device company focused on improving
patients lives through the development, manufacturing and
distribution of health care products for cryoablation. Our
strategy is to achieve a dominant position in the prostate and
renal cancer markets, further developing and increasing the
acceptance of our technology in the interventional radiology and
oncology markets for treatment of liver and lung tumors as well
as palliative intervention (treatment of pain associated with
metastases), while achieving penetration across additional
markets with our proprietary cryoablation technology. The term
cryoablation refers to the creation inside the body
of extremely low freezing temperatures which causes the
destruction of cells within tissue and tumors, for therapeutic
purposes. The term cryoablation technology refers to
technology relating to the use of ice in surgical procedures,
including cryoablation procedures.
Today, our Food and Drug Administration (FDA)-cleared Cryocare
Surgical System occupies a growing position in the urological
market for treatment of prostate and renal cancer. Because of
our initial concentration on prostate and renal cancer, the
majority of our sales and marketing resources are directed
toward the promotion of our technology to urologists. We also
employ a dedicated sales team focused on the interventional
radiology market in which our products are used to treat renal,
liver and lung cancer and for palliative intervention. In
addition to selling our cryoablation systems and disposable
products to hospitals and mobile service companies, we also
contract directly with hospitals for the use of our Cryocare
Surgical System and disposable products on a fee-for-service
basis for a small portion of our business.
We were incorporated under the laws of the State of Delaware in
May 1994. We maintain our executive offices at 201 Technology
Drive, Irvine, California 92618, and our telephone number at
that address is
(949) 450-5400.
Information regarding our financial condition and results of
operations can be found in a separate section of this Annual
Report on
Form 10-K,
beginning on
page F-1.
We previously owned Timm Medical Technologies, Inc., a company
focused on erectile dysfunction products. We sold Timm Medical
to UK-based Plethora Solutions Holdings plc on February 10,
2006.
Advent of
Cryoablation
Throughout the past two decades, the medical community has moved
increasingly toward minimally invasive treatments for destroying
cancerous tumors. This shift has been prompted by a variety of
medical innovations
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including 1) major advancements in our ability to image or
see inside the body using visualization
technologies; 2) ablative technologies such as
cryoablation, which can be performed from outside the body
percutaneously and 3) more precise methods for diagnosing,
characterizing and targeting tumors inside the body.
Endocare is a pioneer of modern cryoablation, a minimally
invasive procedure that freezes tissue to destroy tumor cells.
Cryoablation was first developed in the 1960s and focused on the
prostate cancer market. The early cryoablation technology, which
used cold probes, or cryoprobes, was explored as a
method to kill prostate tissue but was limited by imprecise
targeting techniques and the inability to control the amount of
tissue frozen during the procedure.
In more recent years, progress in ultrasound imaging and the
advent of the Endocare Cryocare Surgical System and later
Cryocare
CStm
Surgical System prompted the further evolution of cryoablation.
Ultrasound allows a physician to guide the cryoprobes to the
targeted tissue where the freezing system can be activated and
the growth of ice around the diseased tissue can be more
precisely controlled and monitored.
Existing
Markets for Cryoablation
Endocare initially focused on the prostate cancer market.
Incidence of prostate cancer has grown since 1980 and that
disease is now the second most common cause of cancer-related
deaths among men in the United States. The American Cancer
Society in 2008 estimated there would be approximately 186,000
new cases of prostate cancer diagnosed and approximately 28,000
deaths associated with the disease in the United States during
2008. Prostate cancer incidence and mortality increase with age.
Prostate cancer is found most often in men who are over the age
of 50. According to the American Cancer Society, about
64 percent of men diagnosed with prostate cancer are
age 65 or older. Incidence rates are higher in African
American men. In addition to age and race, other risk factors
are linked to prostate cancer, such as genetics, diet and
exposure to environmental toxins.
Recently, we have added a new focus: the growing renal, or
kidney, cancer market. The American Cancer Society estimates
that approximately 54,000 people are diagnosed with renal
cancer each year. Recent data, including five-year outcomes
presented by The Cleveland Clinic for laparoscopic renal
cryoablation and a Mayo Clinic study presented at the
Radiological Society of North America conference in November
2007, have demonstrated the effectiveness of cryoablation in the
destruction of renal tumors leading to increased cancer-free
rates for patients when performed as a percutaneous procedure
(without making an incision). Based on a recommendation from the
American Medical Association, Medicare in 2007 created a
clinical reimbursement code for percutaneous renal cryoablation.
Other treatments that make up our competition in the prostate
and renal cancer markets generally include surgery, radiation
(both external beam and seed, or brachytherapy) and other
ablative treatments. For the urologist, however, cryoablation is
the first minimally invasive procedure they can perform
independently. For radiation therapies, urologists must refer a
patient for treatment to a radiation oncologist. Cryoablation
offers the urologist both the opportunity to maintain continuity
of patient care and to generate additional revenue, while
providing clinical results on par with or superior to other
treatment modalities.
Potential
Future Markets
We are placing a renewed emphasis on four other cancer markets
within our currently FDA-cleared indications for use: liver,
lung, a broad market called palliative intervention, which
includes tumors that have metastasized to such areas of the body
as the bones, and an expansion of the prostate cancer market
called focal or partial gland treatment.
According to American Cancer Society estimates, in the United
States approximately 215,000 people a year will be
diagnosed with lung cancer and approximately 21,000 will be
diagnosed with liver cancer.
The bone cancer market, which is estimated to be
100,000 patients annually, is considered an important
opportunity because of recent studies led by physicians at Mayo
Clinic. Initial results indicate that cryoablation could play a
significant role in the treatment of these patients because it
first destroys these metastasized tumors, but in so doing it
also relieves the often debilitating and excruciating pain
caused by the cancer. Based on the positive results of an
initial study at The Mayo Clinic in the use of cryoablation as a
treatment to relieve bone pain, the
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National Cancer Institute of the National Institutes of Health
is supporting a multi-center study comparing the pain-reducing
palliative effects of cryoablation and radiation therapy for
patients who are experiencing focal pain from cancer that has
metastasized to their bones. The prospective, randomized study,
called Cryoablation And Radiation Effectiveness (CARE) for Bone
Pain is evaluating the efficacy of percutaneous cryoablation
compared to external beam radiation therapy as measured by pain
relief, quality of life, analgesic use and complication rates.
We are working with some of the nations leading urologists
and interventional radiologists in advancing a technique called
focal or partial prostate gland treatment. Focal cryoablation is
a prostate cancer treatment in which the ablation is confined to
the known tumor location, thereby sparing surrounding tissue and
avoiding side effects such as impotence or incontinence in the
majority of patients. Much like the evolution that took place
30 years ago in the treatment of breast cancer in women,
mens health professionals are asking themselves if it is
necessary to remove or destroy the entire prostate when the
disease may be confined to only a portion of that gland. New
diagnostic methods and the precision of ablative technologies
such as our Cryocare
CStm
Surgical System have convinced leading physicians that focal
cryoablation should become an important option for many men
facing prostate cancer.
Endocare
Cryoablation Technology Development
We have sought to develop our technology over time to increase
the safety and efficacy of our products. In 1996, we developed
our first generation eight-probe argon-based cryoablation
system. Argon allows for room temperature gas to safely pass
through the cryoprobe to create a consistent highly sculpted
ablation zone. In 1997, we incorporated temperature-monitoring
software to allow for continual feedback from the thermocouple
tips. In 1998, we launched our CryoGuide intraoperative planning
software, which allowed physicians better planning and targeting
technology for use during a procedure. In 2000, we launched our
2.4 mm DirectAccess CryoProbe and CryoGrid which we believe
shortened the time necessary to perform a procedure and added to
the safety and ease of the procedure. In 2002, we developed and
launched AutoFreeze, our innovative software technology that
provides computer-controlled automated freeze/thaw cycles. In
2003, we launched our second generation Cryocare Surgical
System, which we refer to as Cryocare CS, which
integrated all the past and latest technology, including an
on-board, integrated ultrasound device, into one complete system.
At the Annual Meeting of the American Urological Association in
May 2006, we introduced the first variable cryoablation probe,
referred to as the V-Probe. The V-Probe provides physicians the
ability to sculpt different sized ablation zones to
encompass tumors and tissue based on individual patient anatomy
and needs. As previously announced, we currently are in the
planning and design stage for the development of a
nitrogen-based cryoablation system, which we refer to as the
Cryocare CN2 System. Once development is complete,
we expect to market the Cryocare CN2 System primarily to our
interventional radiology and oncology customers and to customers
in international markets where argon gas is not widely available.
Our
System Solution: Cryocare CS
We believe Cryocare CS is the most sophisticated prostate
cryoablation system currently available and combines the latest
technology to enhance the speed and effectiveness of the
procedure. Exclusive features of the Cryocare CS include an
on-board training module, integrated color Doppler ultrasound
designed specifically for the needs of prostate cryoablation,
CryoGuide our patented intraoperative planning module, and
AutoFreeze our patented treatment software that provides
computer-controlled automated freeze/thaw cycles based upon
target endpoint temperatures and continual feedback from the
thermocouple tips.
The argon gas-based Cryocare CS accommodates up to eight
independently operated cryoprobes and six thermocouples to allow
physicians to monitor temperatures of tissue adjacent to the
prostate in real-time. Our proprietary suite of cryoprobes is
engineered to consistently produce sculpted ice conforming to
the unique anatomy of the prostate. Our vacuum-insulated
DirectAccess CryoProbes help deliver lethal ice in a
controllable and repeatable fashion. Our CryoGrid, which is
similar to a brachytherapy grid, is affixed to the ultrasound
stepper and aids the physician with placement of the cryoprobes
so that ice formation and lethal temperatures occur where
necessary to destroy cancerous tissue but do not affect areas
where tissue damage could cause harm.
3
Key
Clinical Advantages of Our Cryocare CS System
Cryocare CS provides the following potential clinical advantages
relative to other principal treatment options for prostate
cancer:
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High quality of life following treatment. Our
minimally invasive procedure typically offers patients a short
recovery period for prostate cancer therapy and may result in a
lower incidence of certain side effects, including incontinence.
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Treatment of patients who have failed radiation therapy.
Patients who have failed radiation therapy have limited
options. Cryoablation is an option that can be used to treat
these patients effectively with potentially fewer side effects
than radical surgery.
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Treatment can be performed more than
once. Regardless of what therapy is chosen, there
is always a chance that the cancer will recur. Unlike radiation
therapy or surgery, cryoablation can be repeated without
increased morbidity.
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Focal or partial gland treatment. Focal
cryoablation is a prostate cancer treatment in which the
ablation is confined to the known tumor location, thereby
sparing surrounding tissue.
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Marketing
and Strategy
Cryoablation
Products
Our objective in urology is to establish cryoablation as a
primary treatment option for prostate and renal cancers. Our
earlier commercial efforts were focused on direct-sales to
hospitals and distributor sales of systems to third party
service providers who would provide systems and technicians to
hospitals where cryoablation procedures were performed.
In 2003, we redirected our urology strategy away from attempting
to drive acceptance of cryoablation through sales of capital
equipment into the urology market. Our primary objective for the
urology portion of our business is now to grow market share,
measured in terms of procedures and revenues, by establishing
cryoablation as a primary treatment option for prostate and
renal cancers. In 2004, 2005 and 2006, we derived a significant
percentage of our revenues from recurring sales of disposable
products used with the Cryocare Surgical System.
A cryoablation procedure requires the necessary sterile
disposable products that are usually provided in the form of a
kit. In addition to the cryoablation disposable products
component, there is a service component. This service component
consists of transportation and provision of equipment used in
the procedure, plus the services of a technician to assist the
urologist with use and monitoring of this equipment. In addition
to the use of a Cryocare Surgical System, an ultrasound device
is needed for visual monitoring of the prostate and ice
formation, unless our Cryocare CS is used, since the Cryocare CS
includes an on-board, integrated ultrasound unit. Tanks of argon
and helium gas are needed for freezing and warming during the
procedure. Frequently, this equipment is not stored on site but
is mobilized and brought into the hospital for procedures by an
independent third party who performs the service component of
the procedure.
For urology procedures we typically sell the cryoablation
disposable products to hospitals either as part of a procedure
fee or separately, that is, without the service component. We
also continue to sell our Cryocare Surgical Systems both to
hospitals and service providers. For interventional radiology we
will often place a system with a new customer under our
placement program and sell cryoprobes directly to the hospitals
or enter into an agreement to provide cryoablation services to
the hospital, which includes providing the equipment,
technicians and cryoablation disposable products necessary to
perform the procedures. These agreements generally include the
services of a third party provider contracted by us or the
hospital to provide these services.
An important challenge we face in the prostate cancer market is
to educate physicians and then to overcome any initial
reluctance on the part of urologists so that they are able to
incorporate cryoablation as a primary treatment option. Many
times a physicians initial reluctance may be based on her
or his experiences or perception of the clinical failures
experienced during earlier efforts to introduce the technology
by other companies. See above under Advent of
Cryoablation. In addition, we compete with other therapies
that have proven effective in treating
4
prostate cancer. Over 30 years of clinical data exist
documenting the safety and efficacy of radical prostatectomy for
prostate cancer. There are 20 years of clinical data
supporting use of various forms of radiation treatment options
such as brachytherapy and beam radiation treatments, which we
estimate are used to treat over one third of all prostate cancer
cases each year in the United States.
We believe cryoablation has clinical advantages for many
patients over both the current most popular forms of treatment.
While there are long-term clinical data available on radical
prostatectomy, this treatment approach, typical of surgery in
general, is characterized by a long recovery period combined
with a relatively high incidence of side effects, including
impotence and urinary incontinence. The appeal of radiation as a
treatment alternative, particularly to patients, is that it is
less invasive than surgery. Like radiation, cryoablation is less
invasive and therefore has potentially fewer side effects than
radical prostatectomy. Unlike radiation treatments, however,
cryoablation treatments can be repeated on the same patient. In
fact, our initial clinical successes in prostate cancer
treatment were in treating patients who had failed radiation
therapy. We also believe that cryoablation has significant
economic benefits for payers. These benefits include shorter
hospital stays for recovery and shorter procedure time as
compared to radical prostatectomy, long term hormone treatment
or radiation therapies, resulting in reduced expense to the
payer.
Key elements in our strategy for overcoming the challenges we
face in establishing cryoablation as a primary treatment option
for prostate cancer are:
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Increasing awareness in the urological community regarding the
clinical benefits of cryoablation through our presence at major
technical meetings and trade shows, publication of numerous
scientific papers and articles on cryoablation and formation of
a scientific advisory board to provide guidance and counsel to
us regarding clinical matters and physician education;
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Conducting post-market clinical studies to further demonstrate
the safety and efficacy of cryoablation as a primary treatment
of prostate cancer;
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Conducting post-market clinical studies to further demonstrate
the safety and efficacy of cryoablation as a salvage treatment
for prostate cancer patients who have failed radiation
treatments;
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Conducting post-market clinical studies to further demonstrate
the safety and efficacy of cryoablation as a treatment for renal
tumors which is another important component of the urology
market for cryoablation;
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Creating a significant number of new practicing cryosurgeons
each year through our physician education program;
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Endeavoring to ensure that reimbursement for cryoablation by
Medicare and other payers is appropriate given the costs and
benefits of the treatment;
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Driving patient awareness through our direct-to-consumer
marketing programs; and
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Marketing our products to physicians and hospitals through our
direct sales force.
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Because of our initial concentration on prostate cancer, the
majority of our sales and marketing resources are directed
towards the promotion of cryoablation technology to urologists
for the treatment of prostate and renal cancers. However, we are
also expanding the reach of our technology across a number of
other markets, including ablation of tumors in the lung and
liver, as well as for palliative intervention (treatment of pain
associated with metastases). Procedures for treatment of these
cancers are typically performed percutaneously, using CT
scanning technology, and are provided by interventional
radiologists. In order to better understand and address the
distinct needs of this new market, we have formed a dedicated
sales team to work in developing these opportunities for
application of our cryoablation technology.
Key elements in our strategy to establish new markets for
cryoablation treatment of tumors, specifically in the
interventional radiology and radiation oncology markets, are:
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Conducting key clinical studies to demonstrate the safety and
efficacy of cryoablation as a primary treatment for lung and
liver tumors as well as for palliative intervention (treatment
of pain associated with metastases), and
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Formation of a dedicated sales group focused on the
opportunities for cryoablation treatment approaches in these new
markets.
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Products
We currently market the following products:
Prostate and Renal Cancer:
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Cryocare Surgical System A cryoablation system with
eight cryoprobe capability.
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Cryocare CS System A Cryocare Surgical System with
onboard ultrasound.
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CryoGuide A computerized cryoprobe placement,
simulation and guidance system for cryoablation.
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Cryoprobes Disposable probes used with the Cryocare
Surgical System.
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FasTrac Percutaneous access device that allows
one-step insertion of cryoprobes.
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Urethral Warming Catheter Disposable catheter used
in prostate cryoablation procedures.
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Additional
Cryoablation Markets:
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Cryocare Surgical System A cryoablation system with
eight cryoprobe capability specially configured for
interventional radiology and oncology.
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Raw
Materials
We rely on third party suppliers to provide certain critical
components for all of our product lines. In certain cases, the
suppliers are our sole source of supply for these components.
Our policy is to enter into long-term supply agreements that
require suppliers to maintain adequate inventory levels and
which contain other terms and conditions protecting us against
unforeseen interruptions in their production. We endeavor to
maintain adequate stock levels at our own locations to ensure an
uninterrupted source of supply. We typically seek to establish
secondary sources of supply or other manufacturing alternatives.
Nevertheless, despite these efforts, it is possible that we may
experience an interruption in supply of one or more of our
critical components resulting in backorders to our customers.
However, we believe that we could locate alternative sources of
supply upon such terms and within such a timeframe as would not
result in a material adverse effect on our business.
Patents
and Intellectual Property
As of December 31, 2007, we have rights to 46 issued United
States patents relating to cryoablation technology. Included
within these 46 issued United States patents are 6 patents in
which we have licensed-in rights. The remainder of the patents
are assigned to us. Most of these patents relate to our
cryoprobe technology for creating the freeze zone and precisely
controlling the shape of the freeze zone produced by the
cryoprobes. Additionally, certain patents relate to our computer
guided system for assisting surgeons in properly placing
cryoprobes in a patient, a computer-controlled cryoablation
apparatus and method, a cryoablation integrated control and
monitoring system and urethral warming technology. We also have
rights to 17 pending United States patent applications relative
to cryoablation technology. Additionally, we have rights to 55
foreign patents and pending foreign patent applications in this
technology area. The earliest of our patents do not expire until
2011. Most of the earliest patents in our core technology area
do not expire until about 2016.
Our policy is to secure and protect intellectual property rights
relating to our technology through patenting inventions and
licensing others when necessary. While we believe that the
protection of patents and licenses is important to our business,
we also rely on trade secrets, know-how and continuing
technological innovation to maintain our competitive position.
Given our technology and patent portfolio, we do not consider
the operation of our business to be materially dependent upon
any one patent, group of patents or single technological
innovation.
Our policy is to sell our products under trademarks and to
secure trademark protection in the United States and elsewhere
where we deem such protection important.
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No assurance can be given that our processes or products will
not infringe patents or other intellectual property rights of
others or that any license required would be made available
under any such patents or intellectual property rights, on terms
acceptable to us or at all. In the past, we have received
correspondence alleging infringement of intellectual property
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 could be required to
obtain licenses from the owners of any such intellectual
property rights to avoid infringement.
We seek to preserve the confidentiality of our technology by
entering into confidentiality agreements with our employees,
consultants, customers and key vendors and by other means. No
assurance can be given, however, that these measures will
prevent the unauthorized disclosure or use of such technology.
Research
Strategy
Our research goal is to develop innovative cryoablation
technology that dramatically improves patient outcomes. Our
primary focus is on developing devices for the treatment of
prostate, kidney, lung and liver tumors and for palliative
intervention. To that end, we endeavor to develop innovations
that improve the safety and efficacy of our Cryocare Surgical
System, as well as to explore new applications for use of our
technology platform in the body.
We spent approximately $2.3 million, $2.8 million and
$2.6 million for the years ended 2005, 2006 and 2007,
respectively, on research and development activities from
continuing operations.
Sales
We sell our products primarily to hospitals and third party
service providers and have both domestic and international
customers. One of our customers, Advanced Medical Partners,
Inc., accounted for 42.1 percent of our total revenues in
2007. The following products and services account for
15 percent or more of total revenues from continuing
operations for each of the years ended December 31:
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2005
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2006
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2007
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Cryoablation and urological products:
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Cryocare Surgical Systems
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*
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*
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*
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Cryoprobes, disposables and procedures
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94
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%
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94
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%
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93
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%
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Cardiac products (CryoCath)
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*
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*
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*
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* |
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These products account for less than 15 percent of total
revenues. |
We currently sell our cryoablation products domestically through
our direct sales force, which as of December 31, 2007
consisted of 36 people, including 31 sales representatives
and sales managers and 5 cryoablation field technicians. Our
strategy is to continue to introduce the clinical benefits of
cryoablation to new physicians as well as educating physicians
already performing cryoablation so that they are able to
increasingly incorporate cryoablation into their practice. We
also intend to create patient demand by providing education
regarding the benefits of cryoablation therapy versus
alternative treatment options and by using national advertising
and other programs targeted directly at prostate cancer patients.
Internationally, our cryoablation products are sold primarily
through independent distributors. Our international sales from
continuing operations represented approximately
6.9 percent, 5.8 percent and 7.2 percent of our
total revenue in 2005, 2006 and 2007, respectively.
7
We derive our revenues from continuing operations from the
following geographic regions for each of the years ended
December 31, based on shipping destination:
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2005
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2006
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2007
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(In thousands)
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United States
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$
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26,322
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$
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26,379
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$
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27,548
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International:
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China
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567
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451
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690
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Canada
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1,015
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796
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892
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Other
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370
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364
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557
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Total international
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1,952
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1,611
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2,139
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Total revenues
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$
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28,274
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$
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27,990
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$
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29,687
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Reimbursement
We sell our Cryocare Surgical System and related disposable
products to hospitals and third party service companies that
provide services to hospitals. While patients occasionally pay
for cryoablation procedures directly, most patients depend upon
third-party payers to pay for their procedures, including
Medicare, Medicaid, Tricare and other federal health care
programs, as well as private insurers.
Accordingly, our revenue is dependent upon third-party
reimbursement, particularly Medicare, since the majority of
patients receiving prostate cryoablation treatments using our
products are Medicare beneficiaries. The mix of public/private
payers for other cryoablation procedures varies by type of
procedure.
Medicare reimbursement for cryoablation procedures using our
products as a primary treatment alternative for localized
prostate cancer began in July 1999. Effective July 2001,
Medicare coverage was approved for secondary cryoablation
treatment of prostate cancer patients who have failed radiation
therapy.
When Medicare-reimbursed services are provided on an inpatient
basis, the hospital is reimbursed under the Medicare prospective
payment system, based on the applicable diagnosis related group.
A single payment covers all facility services.
Outpatient reimbursement for cryoablation procedures for
Medicare beneficiaries is in accordance with the Hospital
Outpatient Prospective Payment System, or HOPPS. Under HOPPS,
the hospital is paid on a per procedure basis, based on the
ambulatory payment classification for the procedure. The payment
to the hospital includes the per procedure share of the cost for
any depreciable equipment, such as our Cryocare Surgical System,
and the provision of disposable devices, such as our temperature
probes and cryoprobes.
Clinical studies are in process and planned for percutaneous
cryoablation of cancerous tissue in the kidney, lung and liver
and palliative intervention for pain associated with metastases.
After studies are complete coverage decisions and unique
reimbursement codes will be sought from Medicare and private
payers. As of January 1, 2008, a clinical CPT Category I
code has been established for percutaneous renal cryoablation.
Clearance to market a new device or technology by the FDA does
not guarantee payment by Medicare or other payers. Future
devices and technology that we develop would have to be approved
for coverage by Medicare after we obtain FDA approval or
clearance. The Medicare approval process is lengthy and there is
no assurance that Medicare approval would be granted. Each
private insurer makes its own determination whether to cover a
device or procedure and sets its own reimbursement rate.
Backlog
As of December 31, 2007, we had no backlog for our
products. Our policy is to carry enough inventory to be able to
ship most orders within a few days of receipt of order.
Historically, most of our orders have been for shipment within
30 days of the placement of the order. Therefore, we rely
on orders placed during a given period for sales during that
period.
8
Manufacturing
We manufacture our Cryocare Surgical System and related
disposables at our facilities in Irvine, California. Our
facility has been inspected by the California Department of
Health Services and has been issued a Device Manufacturing
License.
Our current manufacturing facility has been subjected to Quality
System Regulation compliance inspections by the FDA most
recently in June 2004, and also in February and March 2003 and
September 2002. These audits have been closed by the FDA. We
most recently received ISO 13485:2003, CE Marking and Canadian
CMDCAS certifications, indicating compliance with European
standards for a robust Quality Management System, quality
assurance and manufacturing process control.
Government
Regulation
Governmental regulation in the United States and other countries
is a significant factor affecting the research and development,
manufacture and marketing of medical devices, including our
products. In the United States, the FDA has broad authority
under the Federal Food, Drug and Cosmetic Act (the FD&C
Act) to regulate the development, distribution, manufacture,
marketing and sale of medical devices. Foreign sales of medical
devices are subject to foreign governmental regulation and
restrictions that vary from country to country.
Medical devices intended for human use in the United States are
classified into one of three categories, depending upon the
degree of regulatory control to which they will be subject. Such
devices are classified by regulation into either Class I
general controls, Class II special standards or
Class III pre-market approval (PMA), depending upon the
level of regulatory control required to provide reasonable
assurance of the safety and effectiveness of the device.
Most Class I devices are exempt from pre-market
notification (510(k)) or PMA. However Class I devices are
subject to general controls, including compliance
with FDA manufacturing requirements (Quality System Regulation
(QSR), sometimes referred to as current good manufacturing
practices or cGMPs), adverse event reporting, labeling and other
requirements. Class II devices are subject to general
controls and to the pre-market notification requirements under
Section 510(k) of the FD&C Act. For a 510(k) to be
cleared by the FDA, the manufacturer must demonstrate to the FDA
that a device is substantially equivalent to another legally
marketed device that was either cleared through the 510(k)
process or on the market prior to 1976. It generally takes four
to twelve months from the date of submission to obtain 510(k)
clearance although it may take longer. Class III is the
most stringent regulatory category for devices. Class III
devices are those for which insufficient information exists to
assure safety and effectiveness solely through general or
special controls. Class III devices are usually those that
support or sustain human life, are of substantial importance in
preventing impairment of human health, or which present a
potential, unreasonable risk of illness or injury.
Class III devices also include devices that are not
substantially equivalent to other legally marketed devices. To
obtain approval to market a Class III device, a
manufacturer must obtain FDA approval of a PMA application. The
PMA process requires more data, including ordinarily data from
clinical studies testing the device in humans, takes longer and
is typically a significantly more complex and expensive process
than the 510(k) procedure. Clinical studies of devices in humans
is also subject to regulation by the FDA. Testing must be
conducted in compliance with the investigational device
exemption (IDE) regulations.
Our Cryocare Surgical Systems have been cleared for marketing
through the 510(k) process.
We can provide no assurance that we will be able to obtain
clearances or approvals for clinical testing or for
manufacturing and sales of our existing products for all
applications in all targeted markets, or that we will be able to
obtain clearances or approvals needed to introduce new products
and technologies. After a device is placed on the market,
numerous regulatory requirements apply.
These include:
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quality system regulation, which requires manufacturers to
follow design, testing, control, documentation and other quality
assurance procedures during the manufacturing process;
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labeling regulations, which prohibit the promotion of products
for unapproved or off-label uses and impose other
restrictions on labeling; and
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medical device reporting regulations, which require that
manufacturers report to the FDA if their device may have caused
or contributed to a death or serious injury or malfunctioned in
a way that would likely cause or contribute to a death or
serious injury if it were to recur.
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Failure to comply with applicable regulatory requirements can
result in enforcement action by the FDA, which may include any
of the following sanctions:
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fines, injunctions, and civil penalties;
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recall or seizure of our products;
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operating restrictions, partial suspension or total shutdown of
production;
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refusing our request for 510(k) clearance or premarket approval
of new products;
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withdrawing 510(k) clearance or premarket approvals that are
already granted; and
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criminal prosecution.
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Medical device laws are also in effect in many of the countries
outside of the United States in which we do business. These laws
range from comprehensive device approval and quality system
requirements for some or all of our medical device products to
simple requests for product data or certifications. The number
and scope of these requirements are increasing. In June 1998,
the European Union Medical Device Directive became effective,
and all medical devices must meet the Medical Device Directive
standards and receive CE mark certification. CE mark
certification involves a comprehensive Quality System program,
and submission of data on a product to the Notified Body in
Europe.
We have obtained the CE mark certification for distribution of
our Cryocare Surgical System in Europe and approval for
distribution in Australia, Canada, New Zealand, China, Taiwan,
Korea and Mexico.
Health
Care Regulatory Issues
The health care industry is highly regulated and the regulatory
environment in which we operate may change significantly in the
future. In general, regulation of health care-related companies
is increasing. We anticipate that Congress and state
legislatures will continue to review and assess alternative
health care delivery and payment systems. We cannot predict what
impact the adoption of any federal or state health care reform
measures may have on our business.
We regularly monitor developments in statutes and regulations
relating to our business. We may be required to modify our
agreements, operations, marketing and expansion strategies from
time to time in response to changes in the statutory and
regulatory environment. We plan to structure all of our
agreements, operations, marketing and strategies in accordance
with applicable law, although we can provide no assurance that
our arrangements will not be challenged successfully or that
required changes may not have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
We believe that the following discussion summarizes all of the
material health care regulatory requirements to which we
currently are subject. Complying with these regulatory
requirements may involve expense to us, delay in our operations
and/or
restructuring of our business relationships. Violations could
potentially result in the imposition of civil
and/or
criminal penalties.
Anti-Kickback
Laws
The federal health care program anti-kickback law
prohibits the knowing and willful offer, payment, solicitation
or receipt of any form of remuneration in return for, or in
order to induce, (i) the referral of a person for services,
(ii) the furnishing or arranging for the furnishing of
items or services or (iii) the purchase, lease or order or
arranging or recommending purchasing, leasing or ordering any
item or service, in each case, reimbursable under any federal
health care program. Because our products are reimbursable under
Medicare, Medicaid and other
10
federal health care programs, the anti-kickback law applies.
Many states have similar anti-kickback or anti-referral laws,
and in many cases these laws apply to all patients, not just
federal health care program beneficiaries. Noncompliance with,
or violation of, the federal anti-kickback law can result in
exclusion from federal health care programs and civil and
criminal penalties. Similar penalties are provided for violation
of state anti-kickback laws. Several federal courts have held
that the anti-kickback law is violated if just one purpose of
payment is to induce the referral of patients. To the extent
that we are deemed to be subject to these federal or similar
state laws, we believe that our activities and contemplated
activities comply in all material respects with such statutes
and regulations.
Regulations to the federal anti-kickback law specify payment
practices that will not be subject to prosecution under the
anti-kickback law. These are known as the
safe-harbors. Failure to comply fully within a
safe-harbor does not mean the practice is per se illegal, and
many common arrangements in the health care industry do not fit
with a safe harbor, yet are not violations of the anti-kickback
law. Rather, if a practice does not fit within a safe
harbor, no guarantee can be given that the practice will
be exempt from prosecution; it will be viewed under the totality
of the facts and circumstances.
Many of our relationships with customers, such as volume and
other discounts, fit within a safe harbor. However, our service
agreements with physician-owned entities do not fit completely
within a safe harbor. For example, the safe harbor for equipment
leases and the safe harbor for personal services both require
that the aggregate amount of the rental or service payment be
fixed in advance for the term of the arrangement, which must be
at least one year. However, where the need for medical
procedures is not known in advance, it is sometimes more
appropriate to arrange for payment on a per procedure basis,
rather than determining a years total compensation in
advance. For the reasons described below, certain of our
arrangements with physician-owned entities provide for payment
on a per procedure basis.
In the case of cryoablation, as well as other procedures that
involve new or expensive technology, hospitals often do not want
to invest in the required capital equipment. Rather, hospitals
enter into arrangements with specialty mobile service providers
or equipment manufacturers to obtain the use of the necessary
equipment and disposable products (such as cryoprobes), as well
as technician services, where applicable, on a per procedure
basis. In the case of cryoablation equipment and disposables,
some physicians have formed or invested in mobile service
providers that provide cryoablation equipment, disposables and
services directly to hospitals. In such cases, our relationship
to the physician-owned entities is only as a seller of our
products, where discounts are provided in accordance with the
discount safe harbor. However, in some cases, we contract
directly with hospitals to provide the necessary
equipment/disposables and technical support. These contracts
generally provide for the hospital to pay for the
equipment/disposables and support package on a per procedure
basis. Since we are primarily in the business of selling our
equipment and disposable products, not providing services, when
we contract to provide equipment to hospitals we typically
subcontract with a mobile service provider or other equipment
owner to furnish the equipment as our subcontractor. A
significant number of these businesses are owned entirely or in
part by urologists who purchase the equipment in order to make
cryoablation available in their communities. Since the hospitals
pay us on a per procedure basis, we in turn pay our
subcontractors on a per procedure basis pursuant to service
agreements. These service agreements do not meet a safe harbor
since, as noted above, the safe harbors for equipment leases and
service arrangements require that the aggregate payment for the
term of the arrangement must be set in advance. Although the
service agreements do not meet a safe harbor, our service
agreements with physician-owned entities include the following
elements intended to address anti-kickback law concerns:
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Physician-owned subcontractors are not compensated or otherwise
treated differently than non-physician-owned entities;
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The per procedure payments under the subcontracts are intended
to reflect fair market value for the products and services
provided by the subcontractors;
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Subcontracts are in writing and typically include a number of
representations regarding health care regulatory compliance
issues, including requiring the subcontractor to represent that
distributions to physician owners of the subcontractor are not
based on referrals; and
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Physicians must make significant investments in order to
purchase our equipment. The fact that the physicians have
assumed bona fide business risk is an important factor in
demonstrating that the arrangement is not simply a way for
physicians to profit from their referrals.
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Patient
Referral Laws
The Stark law prohibits a physician from referring a Medicare
patient for designated health services, or DHS, to
an entity with which the physician has a direct or indirect
financial relationship, whether in the nature of an ownership
interest or a compensation arrangement, subject only to limited
exceptions. The Stark law also prohibits the recipient of a
prohibited referral from billing for the DHS provided pursuant
thereto. DHS include inpatient and outpatient hospital services.
The entity that bills Medicare for the DHS is considered to be
the provider of the DHS for Stark law purposes. Therefore, we
are not providers of DHS. Rather, the hospitals where the
procedures are performed are the providers of DHS, because they
bill Medicare for the cryoablation procedures, and inpatient and
outpatient hospital services are DHS.
Physicians who have an ownership or compensation relationship
with the entities (such as mobile vendors) that furnish our
equipment to hospitals, and the hospitals that obtain equipment
and services directly or indirectly from such entities, are
considered to have an indirect compensation
arrangement, and therefore that relationship must meet a
Stark law exception in order for the physicians to make DHS
referrals to the hospital. There is a Stark law exception for
indirect compensation arrangements that applies if:
(1) Fair Market Value Compensation. The
compensation to the physician under the arrangement (or, if the
first link in the chain of arrangements between the parties is
an ownership or investment interest by the referring physician,
the first entity up the chain that has a direct compensation
arrangement with next link in the chain) represents fair market
value and is not determined in a manner that takes into account
the volume or value of referrals or other business generated by
the physician for the DHS entity;
(2) Written Contract. The arrangement is
set out in writing, signed by the parties and specifies the
services covered by the arrangement; and
(3) Anti-Kickback Law Compliance. The
arrangement does not violate the anti-kickback law.
Here, as noted above in connection with discussion of the
anti-kickback law, our service agreements are in writing, the
per procedure payments are intended to reflect fair market value
and are not determined in a manner that takes into account
referrals by owner-physicians to the hospital, and we believe
that the arrangements do not violate the anti-kickback law.
Proposed amendments to the Stark law regulations could cause
certain types of mobile service providers to be characterized as
DHS entities. We cannot predict whether the proposed amendments
will be adopted in a form that causes mobile providers of
cryosurgical equipment and services to be considered DHS
entities. However, if such an amendment is adopted, physician
owners of a mobile provider would have a direct ownership
interest in a DHS entity, and there would be no applicable Stark
Law exception that would permit the physician owners to refer
Medicare beneficiaries to the entity. Therefore, some of these
entities may be forced to restructure, and we may be required to
restructure our relationships that involve these types of
entities.
Many states also have patient referrals laws, some of which are
more restrictive than the Stark law and regulate referrals by
all licensed healthcare practitioners for any health care
services to an entity with which the licenses has a financial
relationship unless an exception applies. Such laws in
particular states may prohibit us from entering into
relationships with physicians and physician-owned entities,
which may limit business development.
HIPAA and
Other Privacy Laws
As of April 14, 2003, the privacy regulations developed
under the Health Insurance Portability and Accountability Act of
1996, referred to as HIPAA, took effect. The privacy
regulations place limitations on a covered
entitys use and disclosure of identifiable patient
information, including research data. While Endocare is not a
covered entity under HIPAA, Endocares
relationships with covered entities, such as hospitals and
physicians, sometimes implicate HIPAA. Accordingly, Endocare has
adopted policies and procedures regarding confidentiality
12
and each employee who comes into contact with Protected Health
Information (PHI or patient data) is trained in the proper
handling of such information. Endocare has also established
procedures to determine when Endocare is required to sign a
business associate agreement with a covered entity
in connection with receipt of PHI and when such measures are not
required.
We believe that we have implemented appropriate measures to
ensure that our relationships with covered entities are
appropriate and consistent with HIPAA. However, there are many
uncertainties remaining about how HIPAA applies to medical
device companies, and no assurance can be given that HIPAA will
not be interpreted in a manner that will hamper our ability to
conduct medical research and receive medical information for
other purposes as well.
Other
United States Regulatory Requirements
In addition to the regulatory framework for product approvals,
we are and may be subject to regulation under federal and state
laws, including requirements regarding occupational health and
safety, laboratory practices and the use, handling and disposing
of toxic or hazardous substances. We may also be subject to
other present and future local, state, federal and foreign
regulations.
Seasonality
We believe that holidays, major medical conventions and
vacations taken by physicians, patients and patient families may
have a seasonal impact on our sales of cryoablation products
because cryoablation procedures can be scheduled in advance. For
example, for the past several years, we have noted that the
three months ended September 30 each year result in revenues
that are lower than during the three months ended June 30 each
year.
Competition
The medical device industry is subject to intense competition.
Significant competitors in the area of prostate cancer and other
tumor ablation (renal, liver, lung and palliative intervention)
include companies that offer: surgical devices (such as robotic
surgery equipment); brachytherapy seeds and other forms of
radiation therapy; and ablation products, including cryoablation
products and radiofrequency ablation (RFA) products. Additional
devices in development such as high intensity focused ultrasound
(HIFU), microwave and others may be competitive devices in the
future. Many of our competitors have significantly greater
financial and human resources than we do.
We believe that currently only Galil Medical offers cryoablation
products that compete with our cryoablation products. However,
we believe that our cryoablation products provide superior
technology and greater functionality, at a price that is
competitive.
We believe the principal competitive factors in the cryoablation
product market include:
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the safety and efficacy of treatment alternatives;
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acceptance of a procedure by physicians and patients;
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technology leadership and superiority;
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price;
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availability of government or private insurance
reimbursement; and
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speed to market.
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Employees
As of December 31, 2007, we had a total of
117 employees. Of these employees, 8 are engaged directly
in research and development activities, 7 in regulatory
affairs/quality assurance, 26 in manufacturing, 52 in sales,
marketing, clinical support and customer service and 24 in
general and administrative positions. We have never experienced
a work stoppage, none of our employees are represented by a
labor organization, and we consider our employee relations to be
good.
13
Available
Information
Our website address is www.endocare.com. All filings we make
with the SEC, including our annual report on
Form 10-K,
our quarterly reports on
Form 10-Q,
and our current reports on
Form 8-K,
and any amendments thereto, are available at no charge through
links displayed on our website as soon as reasonably practicable
after they are filed or furnished to the SEC. The reference to
our website address does not constitute incorporation by
reference of the information contained on the website, and the
information contained on the website is not part of this
document.
The risks and uncertainties described below are not the only
ones we face. 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 the following 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.
Risks
Associated With our Business
We have a
limited operating history with significant losses and expect
losses to continue for the foreseeable future.
We have yet to establish any history of profitable operations.
We have incurred losses from operations of $9.3 million,
$15.4 million and $16.6 million, respectively, during
the fiscal years ended December 31, 2007, 2006, and 2005.
As a result, at December 31, 2007 we had an accumulated
deficit of $189.8 million. We have incurred net losses from
continuing operations of $8.9 million, $11.1 million
and $14.8 million, respectively, during the fiscal years
ended December 31, 2007, 2006 and 2005. Our revenues have
not been sufficient to sustain our operations. We expect that
our revenues will not be sufficient to sustain our operations
for the foreseeable future. We can give no assurances when or
whether we will ever be profitable.
We may
require additional financing in the future to sustain our
operations and without it we may not be able to continue
operations.
We had an operating cash flow deficit of $4.6 million,
$13.6 million and $14.7 million for the years ended
December 31, 2007, 2006 and 2005.
On May 25, 2007, we sold $7.0 million in stock to
Frazier Healthcare V, L.P. (Frazier). In addition, as of
December 31, 2007, we had sold $1.6 million in stock
under our $16.0 million common stock purchase agreement
with Fusion Capital Fund II, LLC (Fusion Capital).
The availability of funds under the $16.0 million common
stock purchase agreement with Fusion Capital and our
$4.0 million credit agreement with Silicon Valley Bank is
subject to many conditions, some of which are predicated on
events that are not within our control. Accordingly, we cannot
guarantee that these capital resources will be available or will
be sufficient to fund our ongoing operations.
We only have the right to receive $100,000 every four business
days under the agreement with Fusion Capital unless our stock
price equals or exceeds $4.50, in which case we can sell greater
amounts to Fusion Capital as the price of our common stock
increases. Fusion Capital does not have the obligation to
purchase any shares of our common stock on any business day that
the market price of our common stock is less than $3.00. Since
we have authorized 2,666,666 shares for sale to Fusion
Capital under the common stock purchase agreement, the selling
price of our common stock to Fusion Capital will have to average
at least $6.00 per share for us to receive the maximum proceeds
of $16.0 million.
Under our credit agreement with Silicon Valley Bank, funds
available for borrowing are based on eligible trade receivables
and inventory as defined. The credit agreement contains a
subjective acceleration clause and a requirement to maintain a
lockbox with the lender to which all receivable collections are
deposited. Under the subjective acceleration clause, the lender
may accelerate repayment of amounts borrowed
and/or cease
making advances to us if it determines that a material adverse
change has occurred in our business or our ability to meet our
obligations under the agreement. In addition, the proceeds from
the lock box will be applied to reduce the
14
outstanding borrowings upon an event of default (including the
occurrence of a material adverse change) or if trigger events
occur. Our ability to access funds under the credit agreement
will be subject to our ability to meet all restrictive covenants
and comply with all representations and warranties.
The extent to which we rely on Fusion Capital as a source of
funding will depend on a number of factors including the
prevailing market price of our common stock and the extent to
which we are able to secure working capital from other sources,
such as through the sale of our products. If sufficient
financing from Fusion Capital were to prove unavailable or
prohibitively dilutive and if we are unable to sell enough of
our products, we may need to secure another source of funding in
order to satisfy our working capital needs. Even if we are able
to access the full $16.0 million under the common stock
purchase agreement with Fusion Capital, we may still need
additional capital to fully implement our business, operating
and development plans. Should the financing we require to
sustain our working capital needs be unavailable or
prohibitively expensive when we require it, the consequences
could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
The sale
of our common stock to Fusion Capital may cause dilution and the
sale of the shares of common stock acquired by Fusion Capital
could cause the price of our common stock to decline.
In connection with entering into the common stock purchase
agreement with Fusion Capital, we authorized the sale to Fusion
Capital of up 2,666,666 shares of our common stock, in
addition to the 157,985 shares that we issued to Fusion
Capital as a commitment fee. The number of shares ultimately
offered for sale by Fusion Capital is dependent upon the number
of shares purchased by Fusion Capital under the agreement. The
purchase price for the common stock to be sold to Fusion Capital
pursuant to the common stock purchase agreement will fluctuate
based on the price of our common stock. All
2,824,652 shares that we have registered pursuant to our
registration rights agreement with Fusion Capital are freely
tradable. It is anticipated that shares registered will be sold
over a period of up to 24 months. Depending upon market
liquidity at the time, a sale of shares by Fusion Capital at any
given time could cause the trading price of our common stock to
decline. Fusion Capital may ultimately purchase all or some of
the 2,666,666 shares of common stock authorized for sale to
Fusion Capital under the common stock purchase agreement. After
it has acquired such shares, it may sell all, some or none of
such shares. Therefore, sales to Fusion Capital by us under the
common stock purchase agreement may result in substantial
dilution to the interests of other holders of our common stock.
The sale of a substantial number of shares of our common stock
by Fusion Capital, or anticipation of such sales, could make it
more difficult for us to sell equity or equity-related
securities in the future at a time and at a price which we might
otherwise wish to effect sales. However, we have the right to
control the timing and amount of any sales of our shares to
Fusion Capital and the agreement may be terminated by us at any
time at our discretion without any cost to us. As of
February 29, 2008, we had sold an aggregate of
293,397 shares to Fusion Capital under the common stock
purchase agreement, in addition to the 157,985 shares that
we issued to Fusion Capital as a commitment fee.
Our
business may be materially and adversely impacted by the loss of
our largest customer or the reduction, delay or cancellation of
orders from this customer; in addition, our business may be
materially and adversely impacted if this customer delays
payment or fails to pay for products sold to this
customer.
For the three and twelve months ended December 31, 2007 our
largest customer accounted for 43.3% and 42.1%, respectively, of
our revenues, and as of December 31, 2007 this customer
accounted for 38.9% of our accounts receivable. Our sales to
this customer may be materially and adversely impacted by
various factors relating to this customers business,
financial condition, results of operations and cash flows. Our
business, financial condition, results of operations and cash
flows may be materially and adversely impacted by the loss of
this customer, or the reduction, delay or cancellation of
orders. In addition, our business, financial condition, results
of operations and cash flows may be materially and adversely
impacted if this customer delays payment or fails to pay for
products sold. This customer is not obligated to purchase a
specific quantity of our products or provide binding forecasts
of purchases for any period.
We may be
required to make tax payments that exceed our settlement
estimates.
As of December 31, 2006 and 2007 we estimated that we owed
$2.8 million and $2.2 million, respectively, as of
each balance sheet date in state and local taxes, primarily
sales and use taxes, in various jurisdictions in the United
15
States. We are in the process of negotiating resolutions of the
past due tax obligations with the applicable tax authorities.
While we hope that these obligations can be settled for less
than the amounts accrued, we cannot predict whether we will
obtain favorable settlement terms from the various tax
authorities, or that, after settling, we will satisfy the
conditions necessary to avoid violating the settlements. Our
failure to obtain favorable settlement terms or to satisfy the
settlement conditions may result in a material adverse effect on
our business, financial condition, results of operations and
cash flows.
We may
incur significant expenses in the future as a result of our
obligation to pay legal fees for and otherwise indemnify former
officers and former directors.
As described below under Part I, Item 3, Legal
Proceedings, certain former officers and former directors
continue to be involved in investigations and related legal
proceedings brought by the Securities and Exchange Commission
(the SEC) and the Department of Justice (the DOJ). We are
contractually obligated to pay legal fees for and otherwise
indemnify these former officers and former directors. We may
incur significant expenses in the future as a result of these
obligations. The amount of these expenses is unpredictable and
outside of our control and could have a material adverse effect
on our business, financial condition, results of operations and
cash flows.
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 sales 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.
None of our key management personnel is covered by an insurance
policy of which we are the beneficiary.
Our
success is reliant on the acceptance by doctors and patients of
the Cryocare Surgical System as a preferred treatment for tumor
ablation.
Cryoablation 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. Because the
technology previously lacked precise monitoring capabilities,
prostate cryoablation procedures performed in the 1970s resulted
in high cancer recurrence and negative side effects, such as
rectal fistulae and incontinence, and gave cryoablation
treatment negative publicity. To overcome these negative side
effects, we have developed ultrasound guidance and temperature
sensing to enable more precise monitoring in our Cryocare
Surgical System. Nevertheless, we will need to overcome the
earlier negative publicity associated with cryoablation in order
to obtain market acceptance for our products. In addition, use
of our Cryocare Surgical System requires significant physician
education and training. As a result, we may have difficulty
obtaining recommendations and endorsements of physicians and
patients for our Cryocare Surgical System. We may also have
difficulty raising the brand awareness necessary to generate
interest in our Cryocare Surgical System. Any adverse side
effects, including impotence or incontinence, recurrence of
cancer or future reported adverse events or other unfavorable
publicity involving patient outcomes from the use of
cryoablation, whether from our products or the products of our
competitors, could adversely affect acceptance of cryoablation.
In addition, emerging new technologies and procedures to treat
prostate cancer may negatively affect the market acceptance of
cryoablation. If our Cryocare Surgical System does not achieve
broad market acceptance, we will likely remain unprofitable.
We are
faced with intense competition and rapid technological and
industry change, which may make it more difficult for us to
achieve significant market penetration.
The medical device industry generally, and the cancer treatment
market in particular, are characterized by rapid technological
change, changing customer needs and frequent new product
introductions. 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
companies in the cryoablation marketplace as well as companies
offering other treatment options, including radical
prostatectomy, radiation therapy and hormone therapy. If we are
successful in penetrating the market for treatment of prostate
cancer with our cryoablation treatment, other medical device
companies may be attracted to the marketplace. Many
16
of our potential competitors are significantly larger than we
are and have greater financial, technical, research, marketing,
sales, distribution and other resources than we do. We believe
there will be intense price competition for products developed
in our markets. Our competitors may develop or market
technologies and products that are more effective or
commercially attractive than any that we are developing or
marketing. Our competitors may obtain regulatory approval and
introduce and commercialize products before we do. These
developments could have a material adverse effect on our
business, financial condition, results of operations and cash
flows. Even if we are able to compete successfully, we may not
be able to do so in a profitable manner.
If we are
unable to continue to enhance our Cryocare Surgical System, our
business will suffer.
Our growth depends in part on continued ability to successfully
develop, manufacture and commercialize enhancements to our
Cryocare Surgical System. We may experience difficulties that
could delay or prevent the successful development, manufacturing
and commercialization of these 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 before obtaining necessary
regulatory or reimbursement approvals. In addition, our
competitors may succeed in developing commercially viable
products that render our products obsolete or less attractive.
Failure to successfully develop, manufacture and commercialize
new products and enhancements could have a material adverse
effect on our business, financial condition, results of
operations and cash flows.
There is
uncertainty relating to third-party reimbursement, which is
critical to market acceptance of our products.
Hospitals and other health care providers in the United States
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. While private health insurers in some
areas of the United States provide reimbursement for procedures
in which our products are used, we can provide no assurance that
private insurance reimbursement will be adopted nationally or by
additional insurers. Furthermore, those private insurance
companies currently paying for procedures in which our products
are used may terminate such coverage. If reimbursement levels
from Medicare, Medicaid, other governmental health care programs
or private insurers are not sufficient, physicians may choose
not to recommend, and patients may not choose, procedures using
our products.
International market acceptance of our products may depend, in
part, upon the availability of reimbursement within prevailing
health care payment systems. Reimbursement and health care
payment systems in international markets vary significantly by
country, and include both government sponsored health care and
private insurance. We may not obtain international reimbursement
approvals in a timely manner, if at all. Our failure to receive
international reimbursement approvals may negatively impact
market acceptance of our products in the international markets
in which those approvals are sought.
From time to time significant attention has been focused on
reforming the health care system in the United States and other
countries. Any changes in Medicare, Medicaid or third-party
medical expense reimbursement, which may arise from health care
reform, may have a material adverse effect on reimbursement for
our products or procedures in which our products are used and
may reduce the price we are able to charge for our products. In
addition, changes to the health care system may also affect the
commercial acceptance of products we are currently developing
and products we may develop in the future. Potential changes
that have been considered include controls on health care
spending and price controls. Several proposals have been made in
the United States Congress and various state legislatures
recently that, if adopted, would potentially reduce health care
spending, which may result in a material adverse effect on our
business, financial condition, results of operations and cash
flows.
If we
fail to protect our intellectual property rights, our
competitors may take advantage of our ideas and compete directly
against us.
Our success will depend to a significant degree on our ability
to secure and protect intellectual property rights and to
enforce patent and trademark protections relating to our
technology. From time to time, litigation may be advisable to
protect our intellectual property position. However, these legal
means afford only limited protection and may not adequately
protect our rights or permit us to gain or keep any competitive
advantage. Any litigation in
17
this regard could be costly, and it is possible that we will not
have sufficient resources to fully pursue litigation or to
protect our other intellectual property rights. Litigation could
result in the rejection or invalidation of our existing and
future patents. Any adverse outcome in litigation relating to
the validity of our patents, or any failure to pursue litigation
or otherwise to protect our patent position, could have a
material adverse effect on our business, financial condition,
results of operations and cash flows. Also, even if we prevail
in litigation, the litigation would be costly in terms of
management distraction as well as in terms of money. In
addition, confidentiality agreements with our employees,
consultants, customers, and key vendors may not prevent the
unauthorized disclosure or use of our technology. It is possible
that these agreements could be breached or that they might not
be enforceable in every instance, and that we might not have
adequate remedies for any such breach. Enforcement of these
agreements may be costly and time consuming. Furthermore, the
laws of foreign countries may not protect our intellectual
property rights to the same extent as the laws of the United
States.
Because
the medical device industry is litigious, we may be sued for
allegedly violating the intellectual property rights of
others.
The medical technology industry has in the past been
characterized by a substantial amount of litigation and related
administrative proceedings regarding patents and intellectual
property rights. In addition, major medical device companies
have used litigation against emerging growth companies as a
means of gaining or preserving a competitive advantage.
Should third parties file patent applications or be issued
patents claiming technology also claimed by us in pending
applications, we may be required to participate in interference
proceedings in the United States Patent and Trademark Office to
determine the relative priorities of our inventions and the
third parties inventions. We could also be required to
participate in interference proceedings involving our issued
patents and pending applications of another entity. An adverse
outcome in an interference proceeding could require us to cease
using the technology or to license rights from prevailing third
parties.
Third parties may claim we are using their patented inventions
and may go to court to stop us from engaging in our normal
operations and activities. These lawsuits are expensive to
defend and conduct and would also consume and divert the time
and attention of our management. A court may decide that we are
infringing a third partys patents and may order us to
cease the infringing activity. A court could also order us to
pay damages for the infringement. These damages could be
substantial and could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
If we are unable to obtain any necessary license following an
adverse determination in litigation or in interference or other
administrative proceedings, we would have to redesign our
products to avoid infringing a third partys patent and
could temporarily or permanently have to discontinue
manufacturing and selling some of our products. If this were to
occur, it would negatively impact future sales and, in turn, our
business, financial condition, results of operations and cash
flows.
If we
fail to obtain or maintain necessary regulatory clearances or
approvals for products, or if approvals are delayed or
withdrawn, we will be unable to commercially distribute and
market our products or any product modifications.
Government regulation has 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 Food and Drug Administration (FDA) has broad authority under
the federal FD&C Act to regulate the development,
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 clearances and approvals (collectively,
approvals) is lengthy and expensive. We may not be able to
obtain or maintain 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 or withdrawal 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 of these actions by the
FDA,
18
or change in FDA regulations, could have a material adverse
effect on our business, financial condition, results of
operations and cash flows.
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 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 unforeseen problems
following initial marketing. We may not be able to obtain or
maintain 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 could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
Our
products may be subject to product recalls even after receiving
FDA clearance or approval, which would harm our reputation and
our business.
The FDA and similar governmental authorities in other countries
have the authority to request and, in some cases, require the
recall of our products in the event of material deficiencies or
defects in design, manufacture or labeling or in the event of
patient injury. A governmental mandated or voluntary recall by
us could occur as a result of component failures, manufacturing
errors or design defects. Any recall of product would divert
managerial and financial resources and harm our reputation with
customers and our business, impact our ability to distribute the
recalled product in the future, require costly redesign or
manufacturing changes and leave the company vulnerable to
additional regulatory sanctions and product liability litigation.
We could
be negatively impacted by future interpretation or
implementation of the federal anti-kickback and Stark laws and
other federal and state anti-self-referral and anti-kickback
laws.
Centers for Medicare & Medicaid Services (CMS) recently
issued a final rule, making a number of changes to the current
Stark law regulations. The final rule, which was effective
December 4, 2007, does not change the current status of our
financial relationships. However, CMS also recently issued
additional proposed changes to the Stark Law regulations which
could, depending on the final version of those regulations and
how they are interpreted, change the status of certain
physician-owned entities that purchase or lease our products. As
of November 2007, CMS has decided to delay publication of the
final version of those proposed Stark law rules. We expect that
CMS will issue the new rules, and may issue additional guidance,
in 2008. However, we are unable to predict whether, and the
extent to which, the new rules or guidance will affect our
business. Depending on the content of the new rules or guidance,
we may incur significant time and expenses in the future to
restructure existing business relationships.
If we
become subject to product liability claims, we may be required
to pay damages that exceed our insurance coverage.
Our business exposes us to potential product liability claims
that are inherent in the testing, production, marketing and sale
of medical devices. While we believe that we are reasonably
insured against these risks, we may not maintain insurance in
amounts or scope sufficient to provide us with adequate
coverage. A claim in excess of our insurance coverage would have
to be paid out of cash reserves, which could have a material
adverse effect on our business, financial condition, results of
operations and cash flows. In addition, any product liability
claim could harm our reputation in the industry and our business.
Our
intangible assets could become impaired.
Intangible assets acquired in a purchase, such as intellectual
property or developed technology, are generally amortized over
various periods depending on their anticipated economic benefits
or useful lives. Long-lived assets, including amortizable
intangibles, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to undiscounted future net cash flows expected to be
generated by the asset. Following a review, if such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying value of the assets
exceeds the fair value of the assets.
19
Significant estimates, including assumptions regarding future
events and circumstances that cannot be easily predicted, are
required to perform an analysis of the value of intangible
assets. These estimates and assumptions may differ materially
from actual outcomes and occurrences.
Our
facilities and systems are vulnerable to natural disasters or
other catastrophic events.
Our headquarters, cryoablation products manufacturing
facilities, research facilities and much of our infrastructure,
including computer servers, are located in California, an area
that is susceptible to earthquakes and other natural disasters.
A natural disaster or other catastrophic event, such as an
earthquake, fire, flood, severe storm, break-in, terrorist
attack or other comparable problems could cause interruptions or
delays in our business and loss of data or render us unable to
accept and fulfill customer orders in a timely manner, or at
all. We have no formal disaster recovery plan and our business
interruption insurance may not adequately compensate us for
losses that may occur. In the event that an earthquake, natural
disaster or other catastrophic event were to destroy any part of
our facilities or interrupt our operations for any extended
period of time, or if harsh weather conditions prevent us from
delivering products in a timely manner, it could have a material
adverse effect on our business, financial condition, results of
operations and cash flows.
Risks
Associated with an Investment in Our Common Stock.
The
market price of our common stock is highly volatile.
The market price of our common stock has been and is expected to
continue to be highly volatile. Various factors, including
announcements of technological innovations by us or other
companies, regulatory matters, new or existing products or
procedures, concerns about our financial position, operating
results, litigation, government regulation, developments or
disputes relating to agreements, patents or proprietary rights,
may have a significant impact on the market price of our stock.
If our operating results are below the expectations of
securities analysts or investors, the market price of our common
stock may fall abruptly and significantly.
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 11,773,293 shares of common stock
outstanding as of February 29, 2008, which includes
1,878,448 shares of our common stock that we issued on
March 11, 2005 in a private placement financing,
451,382 shares of our common stock that we have issued to
Fusion Capital since October 2006 (which includes the
157,985 shares issued to Fusion Capital as a commitment
fee) and 1,085,271 shares of our common stock that we
issued to Frazier on May 25, 2007.
Investors in our March 2005 financing also received warrants to
purchase an aggregate of 657,446 shares of our common stock
at an exercise price of $10.50 per share and 657,446 shares
of our common stock at an exercise price of $12.00 per share.
These warrants have an anti-dilution clause that in certain
circumstances reduces the effective exercise price of the
warrants and proportionately increases the number of shares
underlying the warrants to preserve the ownership of the warrant
holders. As a result of our issuances to Fusion Capital and
Frazier described above, the exercise price of the Series A
Warrants decreased to $10.02 to effectively provide holders the
right to purchase an additional 31,667 shares and the
exercise price of the Series B Warrants decreased to $11.37
to effectively provide holders the right to purchase an
additional 37,191 shares.
We entered into registration rights agreements in connection
with these financings pursuant to which we agreed to register
for resale by the investors the shares of common stock issued.
Sales of shares covered by these registration statements could
have a material adverse effect on the market price of our shares.
20
We could
be difficult to acquire due to anti-takeover provisions in our
charter, our stockholders rights plan and Delaware
law.
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 our company. In addition, we have 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 corporate actions and
may have the effect of delaying or preventing a change in
control. These provisions also could deter or prevent
transactions that stockholders deem to be in their interests. 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 may 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 our company. The foregoing
factors could reduce the price that investors or an acquirer
might be willing to pay in the future for shares of our common
stock.
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Item 1B.
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Unresolved
Staff Comments
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Not applicable.
Our executive offices, as well as our principal manufacturing
and research facilities, are located in a 28,000 square
foot facility in Irvine, California. The lease for this facility
expires in 2010, with an option to extend the lease for an
additional five years. We believe that our property and
equipment are generally well maintained, in good operating
condition and are sufficient to meet our current needs.
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Item 3.
|
Legal
Proceedings
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We are a party to lawsuits in the normal course of our business.
Litigation and governmental investigation can be expensive and
disruptive to normal business operations. Moreover, the results
of complex legal proceedings are difficult to predict.
Significant judgments or settlements in connection with the
legal proceedings described below may have a material adverse
effect on our business, financial condition, results of
operations and cash flows. Other than as described below, we are
not a party to any legal proceedings that we believe to be
material.
Governmental
Legal Proceedings
As previously reported, on April 9, 2007, two former
officers of the Company were indicted by a federal grand jury in
Orange County, California. The indictment charges the former
officers with eighteen counts of wire fraud, two counts of
securities fraud, one count of false certification of financial
reports, one count of false statements in reports filed with the
SEC, one count of lying to accountants and four counts of
honest services wire fraud. These former officers
left the Company in 2003. The trial for these former officers is
currently scheduled to begin on September 30, 2008. In
addition to the criminal charges, on August 9, 2006, the
SEC filed civil fraud charges in federal district court against
these two former officers. The SECs civil case has been
stayed pending the outcome of the DOJs criminal case
against them. The SEC also may decide to file civil charges
against one or more former directors. The Company is
contractually obligated to pay legal fees for and otherwise
indemnify these former officers and former directors.
As reported in the
Form 8-K
that we filed on July 20, 2006, we executed a consent to
entry of judgment in favor of the SEC on July 14, 2006, and
entered into a non-prosecution agreement with the DOJ on
July 18, 2006. These two agreements effectively resolved
with respect to the Company the investigations begun by the SEC
and by the DOJ in January 2003.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
|
Not applicable.
21
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Market
Information
On October 21, 2005, our stock began to trade on the OTC
Bulletin Board or OTCBB. On October 10,
2007, our stock began to trade on The NASDAQ Capital Market
under the symbol ENDO.
The following table sets forth for the fiscal quarters
indicated, the high and low sales prices for our common stock as
reflected on the OTCBB or The NASDAQ Capital Market, as
applicable. Such prices represent inter-dealer prices without
retail mark up, mark down or commission and may not necessarily
represent actual transactions. All prices have been adjusted to
reflect the one-for-three reverse stock split that occurred on
August 20, 2007.
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High
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Low
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Year Ended December 31, 2007:
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First Quarter
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$
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7.02
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$
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4.86
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Second Quarter
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8.85
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5.25
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Third Quarter
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|
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8.79
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|
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5.91
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Fourth Quarter
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10.00
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|
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6.65
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Year Ended December 31, 2006:
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First Quarter
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$
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10.50
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$
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8.04
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Second Quarter
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10.65
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|
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7.05
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Third Quarter
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8.40
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|
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4.50
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Fourth Quarter
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6.15
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4.71
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Holders
As of February 29, 2008, there were 217 holders of record
of our common stock. This number was derived from our
stockholder records and does not include beneficial owners of
our common stock whose shares are held in the names of various
dealers, clearing agencies, banks, brokers, and other
fiduciaries.
Dividends
We have never paid any cash dividends on our capital stock. We
anticipate that we will retain any future earnings to support
operations and to finance the growth and development of our
business. Therefore, we do not expect to pay cash dividends in
the foreseeable future. Any determination to pay dividends in
the future will be at the discretion of our Board of Directors
and will depend on existing conditions, including our financial
condition, contractual restrictions, capital requirements and
business prospects.
Recent
Sales of Unregistered Securities
None, except as previously reported in a Quarterly Report on
Form 10-Q
or Current Report on
Form 8-K.
Issuer
Purchases of Equity Securities
Not applicable.
|
|
Item 6.
|
Selected
Consolidated Financial Data
|
The selected financial data set forth below should be read in
conjunction with Part II, Item 7
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and related notes included elsewhere in
this Annual Report on
Form 10-K.
As discussed below in Part II, Item 7
Managements Discussion and Analysis of Financial
Condition and Results of Operations, effective
January 1, 2006, we adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), Share
22
Based Payment, which changed the way we account for our
stock-based compensation. Our historical results are not
necessarily indicative of operating results to be expected in
the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Revenues from continuing operations
|
|
$
|
19,604
|
|
|
$
|
24,181
|
|
|
$
|
28,274
|
|
|
$
|
27,990
|
|
|
$
|
29,687
|
|
Loss from continuing operations(a),(b)
|
|
$
|
(24,963
|
)
|
|
$
|
(31,901
|
)
|
|
$
|
(14,838
|
)
|
|
$
|
(11,076
|
)
|
|
$
|
(8,941
|
)
|
Net loss per share of common stock basic and diluted
(continuing operations)
|
|
$
|
(3.09
|
)
|
|
$
|
(3.93
|
)
|
|
$
|
(1.54
|
)
|
|
$
|
(1.10
|
)
|
|
$
|
(0.80
|
)
|
Weighted-average shares of common stock outstanding
|
|
|
8,054
|
|
|
|
8,088
|
|
|
|
9,659
|
|
|
|
10,084
|
|
|
|
11,122
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
71,997
|
|
|
$
|
34,374
|
|
|
$
|
32,237
|
|
|
$
|
16,246
|
|
|
$
|
21,261
|
|
Common stock warrant liability(c)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,023
|
|
|
$
|
1,307
|
|
|
$
|
|
|
|
|
|
(a) |
|
Loss from continuing operations in 2003 includes a
$10.0 million gain from the sale of our cardiac arrhythmias
product line to CryoCath Technologies, Inc. |
|
(b) |
|
Loss from continuing operations in 2004 includes a
$9.9 million impairment charge in the third quarter to
write-off the goodwill ($9.8 million) and covenant not to
compete ($0.1 million) related to our mobile prostate
treatment businesses and a loss of $0.7 million in the
fourth quarter upon the final sale of these businesses. |
|
(c) |
|
Common stock warrants were issued in conjunction with our March
2005 private placement. The warrants were accounted for as
derivatives and reported as non-current liabilities at
December 31, 2005 and 2006. Effective January 1, 2007,
we adopted the provisions of FASB Staff Position (FSP) EITF
No. 00-19-2, Accounting for Registration Payment
Arrangements, and reclassified the warrants into
stockholders equity. |
Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with
Item 1 Business,
Item 1A Risk Factors,
Item 6 Selected Consolidated Financial
Data and Item 8 Financial
Statements and Supplementary Data, as well as our
consolidated financial statements and related notes contained
elsewhere in this Annual Report on
Form 10-K.
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 Annual Report on
Form 10-K,
including above under Risks Factors in Item 1A
of this Annual Report on
Form 10-K.
In addition, there are factors not described in this 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 Annual Report on
Form 10-K
are based on information available to us as of the date hereof,
and we assume no obligation to update any such forward-looking
statements.
Overview
We are an innovative medical device company focused on the
development of minimally invasive technologies for tissue and
tumor ablation through cryoablation, which is the use of ice to
destroy tissue, such as tumors, for therapeutic purposes. We
develop and manufacture devices for the treatment of prostate
and renal cancer and we believe that our proprietary
technologies have broad applications across a number of markets,
including the ablation of tumors in the lung and liver and
palliative intervention (treatment of pain associated with
metastases).
Today, our FDA-cleared Cryocare Surgical System occupies a
growing position in the urological market for treatment of
prostate and renal cancers. Because of our initial concentration
on prostate and renal cancers, the majority of our sales and
marketing resources are directed toward the promotion of our
technology to urologists. We also employ a dedicated sales team
focused on the interventional radiology market in which our
products are used to treat renal, liver and lung cancer and for
palliative intervention. In addition to selling our cryoablation
disposable products to hospitals and mobile service companies,
we contract directly with hospitals for the use of our Cryocare
23
Surgical System and disposable products on a fee-for-service
basis. We intend to continue to identify and develop new markets
for our cryoablation products and technologies, particularly in
the area of tumor ablation.
We previously owned Timm Medical Technologies, Inc. (Timm
Medical), a company focused on erectile dysfunction products. We
sold Timm Medical to UK-based Plethora Solutions Holdings plc on
February 10, 2006.
Strategy
and Key Metrics
Our strategy is to achieve a dominant 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
palliative intervention (treatment of pain associated with
metastases). At the same time, we seek to achieve penetration
across additional markets with our proprietary cryoablation
technology.
The factors driving interest in and utilization of cryoablation
include increased awareness and acceptance of cryoablation by
industry thought leaders, continued publication of clinical data
on the effectiveness of cryoablation, increased awareness among
patients of cryoablation and its preferred outcomes as compared
to other modalities, the efforts of our sales force and our
continued expenditure of funds on patient education and advocacy.
Our primary objective is to grow market share, which we have
historically measured in terms of the estimated number of
domestic cryoablation procedures performed with our Cryocare
Surgical System, which we calculate using two primary
components. The first component is the actual number of
cryoablation cases for which we perform the service element on
behalf of the healthcare facility and provide the required
disposable products. In the second, we compute a procedure case
equivalent based on direct sales of our cryoablation disposable
products (without the service element) by using the expected
disposable product usage for each procedure for those sales.
In 2005, we began gradually shifting our revenue model from
providing the service component of our cryoablation procedure
(revenues from cryoablation procedure fees) to focusing on
selling our cryoablation disposable products without
responsibility for the service element of the procedure
(revenues from sales of cryoablation disposable products),
thereby reducing the incremental revenues associated with our
business in favor of a more straightforward disposable sales
model. We did so recognizing that this strategic business model
change would result in a flattened revenue curve until the
change was complete since the average revenue per case where we
only sell the disposables is less than that for a case where we
also provide the service component. Because of that, we
continued to communicate the estimated number of procedures
performed each quarter so that the users of our financial
information could monitor market adoption and progress within
our markets.
Today, the transition is largely complete and the remaining
transition should be relatively small in future periods.
Therefore, we believe that revenue growth will once again become
one of our most important business metrics going forward.
Because our customers are now directly purchasing and carrying
inventories of our disposables and because of the resulting
variability of probe use across patients and applications,
making precise determinations about how many procedures are
performed is increasingly difficult. As a consequence, we have
decided that, beginning with our operating results for the three
months ended December 31, 2007, we will report the number
of cryoprobes sold during the period.
The following table summarizes for the periods presented the
total estimated domestic cryoablation procedures our customers
performed or which are represented by the procedure case
equivalent we computed from sales of our cryoablation disposable
products. We also summarize the number of probes sold for each
period. We are providing this summary to allow users of the
financial information greater clarity regarding the transition
from the
24
former metric (procedure growth) we reported to the new metric
(revenue growth measured by the number of probes sold) we will
report going forward.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Three Months Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Estimated domestic cryoablation procedures
|
|
|
6,407
|
|
|
|
7,802
|
|
|
|
9,373
|
|
|
|
2,220
|
|
|
|
2,269
|
|
Number of cryoprobes sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Straight probes
|
|
|
29,943
|
|
|
|
33,598
|
|
|
|
38,909
|
|
|
|
9,180
|
|
|
|
9,057
|
|
Right-angle probes
|
|
|
2,803
|
|
|
|
4,590
|
|
|
|
6,308
|
|
|
|
1,391
|
|
|
|
1,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
32,746
|
|
|
|
38,188
|
|
|
|
45,217
|
|
|
|
10,571
|
|
|
|
10,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of cryoprobes sold represents the domestic sales of
cryoprobes during the periods presented. Straight probes are
typically, although not always, used in prostate procedures and
right-angle probes are typically used in procedures other than
prostate procedures.
Results
of Operations
Revenues and cost of revenues from continuing operations related
to the following products and services for the three-year period
ended December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products
|
|
$
|
6,790
|
|
|
$
|
13,948
|
|
|
$
|
21,157
|
|
Cryocare Surgical Systems
|
|
|
743
|
|
|
|
1,096
|
|
|
|
1,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,533
|
|
|
|
15,044
|
|
|
|
22,730
|
|
Cryoablation procedure fees
|
|
|
19,780
|
|
|
|
12,298
|
|
|
|
6,418
|
|
Cardiac royalties
|
|
|
889
|
|
|
|
604
|
|
|
|
386
|
|
Other
|
|
|
72
|
|
|
|
44
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,274
|
|
|
|
27,990
|
|
|
|
29,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products and procedure fees
|
|
$
|
15,278
|
|
|
|
11,541
|
|
|
|
9,006
|
|
Cryocare Surgical Systems
|
|
|
460
|
|
|
|
802
|
|
|
|
774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,738
|
|
|
$
|
12,343
|
|
|
$
|
9,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues for cryoablation disposable products and
procedure fees are combined for reporting purposes. Sales of
cryoablation disposable products and procedure fees incorporate
similar inventory when sold and we do not separately track the
cost of disposable products sold directly to customers and those
consumed in cryoablation procedures. Procedure fees relate to
services which are provided to medical facilities upon request
to facilitate the overall delivery of our technology into the
marketplace.
We recognize revenues from sales of Cryocare Surgical Systems
and disposable cryoprobes when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed and
determinable, and collectibility is reasonably assured. Revenues
are deferred when we have continuing obligations until those
obligations are fulfilled. When we contract with medical
facilities for the use of the Cryocare Surgical Systems and
provide the service element in addition to the disposables
required in cryoablation treatments, we charge a per-procedure
fee. Cryoablation services 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 setup and
monitoring of the equipment.
25
Costs of revenues consist 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. When we provide the service element in a cryoablation
procedure, we incur additional cost of revenues in the form of a
fee for equipment usage and other services when the procedure is
performed on a system owned by an unrelated service provider.
The fee paid to the third-party service provider is charged to
costs of revenues when the procedure is performed and billed.
Research and development expenses include expenses associated
with the design and development of new products as well as
enhancements to existing products. We expense research and
development costs when incurred. Our research and development
efforts are occasionally subject to significant non-recurring
expenses and fees that can cause some variability in our
quarterly research and development expenses.
Selling and marketing expenses primarily consist of salaries,
commissions and related benefits and overhead costs for
employees and activities in the areas of selling, marketing and
customer service. Expenses associated with advertising, trade
shows, promotional and training costs related to marketing our
products are also classified as selling 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 be reasonably estimated.
Effective January 1, 2006, we adopted Statement of
Financial Accounting Standards No. 123 (revised 2004),
Share Based Payment (SFAS No. 123R) using the
modified-prospective transition method. Under that transition
method, compensation cost is recognized for (a) all
share-based payments granted prior to, but not yet vested as of
January 1, 2006 based on the grant-date fair value
estimated in accordance with the original provisions of
SFAS 123 Accounting for Stock-Based
Compensation and (b) all share-based payments
granted, modified or settled subsequent to January 1, 2006,
based on the grant-date fair value estimated in accordance with
the provisions of SFAS 123R. Results for prior periods have
not been restated. Total stock-based compensation expense was
$2.8 million and $3.9 million for 2006 and 2007,
respectively. As a result of adopting SFAS No. 123R,
our net loss for 2006 and 2007 is $2.6 million and
$2.5 million greater, respectively, than if we had
continued to account for stock-based compensation under
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, As of December 31, 2007,
there was $1.7 million of total unrecognized compensation
costs related to unvested stock options. That cost is expected
to be amortized on a straight-line basis over a weighted average
service period of 0.9 years less any stock options
forfeited prior to vesting. Unrecognized compensation for
deferred and restricted stock units was $2.1 million at
December 31, 2007 (assuming that all service and
performance milestones will be met) and will be recognized over
a weighted average period of 1.9 years.
26
Costs, expenses, gains and losses from continuing operations for
the three-year period ended December 31, 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cost of revenues
|
|
$
|
15,738
|
|
|
$
|
12,343
|
|
|
$
|
9,780
|
|
Research and development
|
|
|
2,283
|
|
|
|
2,781
|
|
|
|
2,555
|
|
Selling and marketing
|
|
|
13,001
|
|
|
|
15,195
|
|
|
|
14,855
|
|
General and administrative
|
|
|
13,858
|
|
|
|
13,107
|
|
|
|
12,506
|
|
Goodwill impairment and other charges
|
|
|
26
|
|
|
|
|
|
|
|
|
|
Gain on legal settlement
|
|
|
|
|
|
|
|
|
|
|
(677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
$
|
44,906
|
|
|
$
|
43,426
|
|
|
$
|
39,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
$
|
308
|
|
|
$
|
452
|
|
|
$
|
391
|
|
Interest expense related to common stock warrants
|
|
$
|
657
|
|
|
$
|
3,716
|
|
|
$
|
|
|
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cryoablation disposable products
|
|
$
|
21,157
|
|
|
$
|
13,948
|
|
|
$
|
7,209
|
|
|
|
51.7
|
%
|
Cryocare Surgical Systems
|
|
|
1,573
|
|
|
|
1,096
|
|
|
|
477
|
|
|
|
43.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,730
|
|
|
|
15,044
|
|
|
|
7,686
|
|
|
|
51.1
|
%
|
Cryoablation procedure fees
|
|
|
6,418
|
|
|
|
12,298
|
|
|
|
(5,880
|
)
|
|
|
(47.8
|
)%
|
Cardiac royalties
|
|
|
386
|
|
|
|
604
|
|
|
|
(218
|
)
|
|
|
(36.1
|
)%
|
Other
|
|
|
153
|
|
|
|
44
|
|
|
|
109
|
|
|
|
247.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,687
|
|
|
$
|
27,990
|
|
|
$
|
1,697
|
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Although our total number of estimated domestic procedures
increased approximately 20 percent to 9,373 for the year
ended December 31, 2007 from 7,802 for the year ended
December 31, 2006, the growth in revenues is not reflective
of this increase because of the change in revenue mix from
procedure fees to direct sale of disposable products without the
service component. Generally, we earn less revenue per case for
sales of cryoablation disposable products than for procedure
fees; however the related gross margin as a percent of revenues
for sales of cryoablation disposable products is greater. Of the
total estimated procedures performed during the year ended
December 31, 2007, 14 percent were those for which we
provided cryoablation services and 86 percent were from the
sale of cryoablation disposable products. This compares to
32 percent for cryoablation services and 68 percent
for sales of cryoablation disposable products during the year
ended December 31, 2006.
Also contributing to growth in sales of cryoablation products
was an increase in sales to a market served by interventional
radiologists, who are physicians who treat tumors in the kidney,
lung and liver and perform palliative intervention. Direct sales
of disposable products and interventional radiology procedures
generally have a lower average selling price than procedures
performed by urologists on prostate and renal treatments
although costs of revenues are also lower.
The decrease in royalty revenues for the year ended
December 31, 2007 is related to a decrease in the
contractual rate of royalties that we are paid from
5.0 percent in 2006 to 3.0 percent in 2007.
Revenues from sales of Cryocare Surgical Systems increased as a
result of a greater number of systems sold.
27
Cost
of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 30,
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
|
(Dollars in thousands)
|
|
Cost of Revenues
|
|
$
|
9,780
|
|
|
$
|
12,343
|
|
|
$
|
(2,563
|
)
|
Percent of revenues
|
|
|
32.9
|
%
|
|
|
44.1
|
%
|
|
|
|
|
The decrease in cost of revenues resulted primarily from the
change in the mix of our revenues from those where we are
responsible for providing cryoablation procedure services to
solely selling cryoablation disposable products. This mix shift
led to a decrease in the number of cases for which we paid fees
to third party service providers. Fees to service providers were
$2.5 million in 2007 and $4.7 million in 2006. In
addition, costs of revenues declined due to decreases in
materials, labor and overhead costs. During the years ended
December 31, 2007 and 2006, substantially all of our
cryoablation procedures for which we were responsible for the
service element were performed by third party service providers
at an additional cost to us.
Gross
Profit and Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cryoablation disposable products and procedure fees
|
|
$
|
18,569
|
|
|
$
|
14,705
|
|
|
$
|
3,864
|
|
Cryocare surgical systems
|
|
|
799
|
|
|
|
294
|
|
|
|
505
|
|
Cardiac royalties and other
|
|
|
539
|
|
|
|
648
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,907
|
|
|
$
|
15,647
|
|
|
$
|
4,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Percentage Point
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(Percent of revenues)
|
|
|
Cryoablation disposable products and procedure fees
|
|
|
62.6
|
%
|
|
|
52.5
|
%
|
|
|
10.1
|
%
|
Cryocare surgical systems
|
|
|
2.7
|
%
|
|
|
1.1
|
%
|
|
|
1.6
|
%
|
Cardiac royalties and other
|
|
|
1.8
|
%
|
|
|
2.3
|
%
|
|
|
(0.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67.1
|
%
|
|
|
55.9
|
%
|
|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The positive trend in gross margins (gross profit as a
percentage of revenues) was primarily related to our shift from
procedures where we bear responsibility for the service element
of the procedure to those where we solely sell our cryoablation
disposable products. Sales of cryoablation disposable products
yield a higher gross margin than procedures performed by third
party subcontractors. We also have continued to reduce
manufacturing costs for our cryoablation disposable products,
while increasing efficiencies in production.
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Research and development expenses
|
|
$
|
2,555
|
|
|
$
|
2,781
|
|
|
$
|
(226
|
)
|
|
|
(8.1
|
)%
|
Percent of total revenues
|
|
|
8.6
|
%
|
|
|
9.9
|
%
|
|
|
|
|
|
|
|
|
This decrease is primarily attributable to a $0.2 million
reduction in educational grants and clinical studies expenses.
In 2007, we focused our research dollars on those areas in which
cryoablation research is required to substantiate reimbursement
codes and coverage. In addition, these expenses are generally
recognized in conjunction with milestones inherent in the
studies and are not always predictable in amount and timing
28
Selling
and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Selling and marketing expenses
|
|
$
|
14,855
|
|
|
$
|
15,195
|
|
|
$
|
(340
|
)
|
|
|
(2.2
|
)%
|
Percent of total revenues
|
|
|
50.0
|
%
|
|
|
54.3
|
%
|
|
|
|
|
|
|
|
|
The decrease is due mainly to reductions in travel and
entertainment costs, consulting costs, depreciation and
amortization, and advertising, trade shows and related expenses
totaling $1.4 million for the year ended December 31,
2007. These reductions were offset by increases in compensation
and related costs in the amount of $1.1 million. Included
in selling and marketing expenses for the year ended
December 31, 2007 and 2006 were $0.7 million and
$0.6 million, respectively, in non-cash stock-based
compensation expense related to stock options, deferred stock
units and restricted stock units.
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
General and administrative expenses
|
|
$
|
12,506
|
|
|
$
|
13,107
|
|
|
$
|
(601
|
)
|
|
|
(4.6
|
)%
|
Percent of total revenues
|
|
|
42.1
|
%
|
|
|
46.8
|
%
|
|
|
|
|
|
|
|
|
As a result of our concerted effort to reduce costs, our audit,
accounting, insurance, professional and consulting fees
decreased by over $1.3 million for the year ended
December 31, 2007 as compared to the same period in 2006.
In 2006, we wrote off a $0.3 million note receivable from a
related party that was deemed uncollectible, which was a one
time event. In addition, we reduced the carrying value of the
$1.4 million note receivable from Plethora relating to the
sale of Timm Medical to $1.1 million in the fourth quarter
of 2006 in anticipation of the acceptance of a discount in
exchange for early repayment. No agreement was ultimately
reached and we reinstated the note receivable to its face value
in the third quarter of 2007. The note was collected in February
2008 upon scheduled maturity.
These decreases were partially offset by increased legal fees of
$0.2 million generated by law firms representing the former
officers and former directors in connection with ongoing SEC and
DOJ investigations and legal proceedings. Also, in 2007, we
recorded a $0.1 million benefit for payroll tax liabilities
that were no longer statutorily due, compared to a similar
benefit in the amount of $0.9 million in 2006. Included in
general and administrative expenses for the year ended
December 31, 2007 and December 31, 2006 were
$3.0 million and $2.0 million, respectively, of
non-cash stock-based compensation expense related to stock
options, deferred stock units and restricted stock units.
Gain
on Legal Settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Gain on legal settlement
|
|
$
|
(677
|
)
|
|
$
|
|
|
|
$
|
(677
|
)
|
|
|
100.0
|
%
|
Percent of total revenues
|
|
|
(2.2
|
)%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
In the third quarter of 2007, we recorded a gain of
$0.7 million for litigation settlement, net of related
legal expenses. This amount relates to the settlement with KPMG
LLP, our former independent auditor, for claims of professional
negligence and breach of contract in the amount of
$1.0 million for damages and $0.2 million for recovery
of audit fees paid. We were required to pay one-third of the
settlement amount and one-third of the returned fees to our
outside litigation counsel.
29
Interest
Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Interest income, net
|
|
$
|
391
|
|
|
$
|
452
|
|
|
$
|
(61
|
)
|
|
|
(13.5
|
)%
|
Percent of total revenues
|
|
|
1.3
|
%
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
Interest income, net in the 2007 and 2006 periods includes
interest income on a note receivable from the 2003 sale of our
urinary incontinence product line and income earned on the
investment of our cash balances. The 2007 amount also includes
$0.1 million in interest income on the note receivable from
Plethora related to the 2006 sale of Timm Medical. We suspended
interest accrual on the note in 2006 and resumed accrual in
2007. The note and related interest receivable was collected in
February 2008. The increase in interest income in 2007 was
offset by $0.1 million of interest expense on the credit
line.
Interest
Expense Related to Common Stock Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Interest expense related to common stock warrants
|
|
$
|
|
|
|
$
|
(3,716
|
)
|
|
$
|
3,716
|
|
|
|
(100
|
)%
|
Percent of total revenues
|
|
|
|
|
|
|
(13.3
|
)%
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2006, the negative interest
expense on common stock warrants resulted from a decrease in the
fair value of common stock warrants related to our March 2005
private placement. As a result of a provision for liquidated
damages under a related registration rights agreement, these
warrants were accounted for as derivatives through
December 31, 2006 and were carried at fair value with
changes in fair value recorded through interest expense.
Effective January 1, 2007, we adopted FASB Staff Position
(FSP) EITF
No. 00-19-02,
Accounting for Registration Payment Arrangements, which
no longer requires the warrants to be recorded as a liability
and no interest expense was recorded for these warrants during
the year ended December 31, 2007. See
Note 6 Private Placement of Common
Stock and Warrants in the notes to our consolidated
financial statements for further discussion.
Loss
from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Loss from continuing operations
|
|
$
|
(8,941
|
)
|
|
$
|
(11,076
|
)
|
|
$
|
(2,135
|
)
|
|
|
(19.3
|
)%
|
Percent of total revenues
|
|
|
(30.1
|
)%
|
|
|
(39.6
|
)%
|
|
|
|
|
|
|
|
|
Loss from continuing operations for the year ended
December 31, 2007 was $0.80 per basic and diluted share on
11.1 million weighted average shares outstanding compared
to a loss from continuing operations of $1.10 per basic and
diluted share on 10.1 million weighted average shares
outstanding for 2006. Losses decreased in 2007 due to a
$4.3 million increase in gross profit over 2006, lower
spending across all major expense categories and a
$0.7 million gain on a litigation settlement. This was
partially offset by non-cash expenses including
$3.9 million of stock-based compensation expense in 2007,
compared to $2.8 million in 2006, and a negative interest
expense of $3.7 million in 2006 from the change in the fair
value of common stock warrants which did not occur in 2007.
30
Income
from Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Income from discontinued operations
|
|
$
|
|
|
|
$
|
311
|
|
|
$
|
(311
|
)
|
|
|
(100.0
|
)%
|
Percent of total revenues
|
|
|
|
|
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
Income from discontinued operations for the year ended
December 31, 2006 represents the operating results of Timm
Medical through the date of sale on February 10, 2006.
Income for the 2006 period was 0.03 per basic and diluted share
on 10.1 million weighted average shares outstanding. The
2006 income included a $0.5 million gain on the sale of
Timm Medical and a tax provision of $0.2 million.
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Net loss
|
|
$
|
(8,941
|
)
|
|
$
|
(10,765
|
)
|
|
$
|
(1,824
|
)
|
|
|
(16.9
|
)%
|
Percent of total revenues
|
|
|
(30.1
|
)%
|
|
|
(38.5
|
)%
|
|
|
|
|
|
|
|
|
Net loss for the year ended December 31, 2007 was $0.80 per
basic and diluted share on 11.1 million weighted average
shares outstanding, compared to a net loss of $1.07 per basic
and diluted share on 10.1 million weighted average shares
outstanding during the same period in 2006.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cryoablation disposable products
|
|
$
|
13,948
|
|
|
$
|
6,790
|
|
|
$
|
7,158
|
|
|
|
105.4
|
%
|
Cryocare Surgical Systems
|
|
|
1,096
|
|
|
|
743
|
|
|
|
353
|
|
|
|
47.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,044
|
|
|
|
7,533
|
|
|
|
7,511
|
|
|
|
99.7
|
%
|
Cryoablation procedure fees
|
|
|
12,298
|
|
|
|
19,780
|
|
|
|
(7,482
|
)
|
|
|
(37.8
|
)%
|
Cardiac royalties
|
|
|
604
|
|
|
|
889
|
|
|
|
(285
|
)
|
|
|
(32.1
|
)%
|
Other
|
|
|
44
|
|
|
|
72
|
|
|
|
(28
|
)
|
|
|
(38.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,990
|
|
|
$
|
28,274
|
|
|
$
|
(284
|
)
|
|
|
(1.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The revenue decrease resulted from a rapid shift in mix from
procedures for which we are responsible for providing the
service element to those for which we solely sell our
cryoablation disposable products. Total procedures increased
22 percent to 7,802 for the year ended December 31,
2006 from 6,407 in the comparable period of 2005, while the
related revenues decreased by 1.2 percent. Of the total
procedures performed during the year ended December 31,
2006, 32 percent were those for which we provided
cryoablation services and 68 percent were from the sale of
cryoablation disposable products. This compares to
63 percent for cryoablation services and 37 percent
for sales of cryoablation disposable products during the year
ended December 31, 2005. While our total procedures
increased significantly, the lower average sales price from
selling direct disposable products as compared to our average
service price from providing the service element had the effect
of slightly decreasing our revenues year over year. However,
direct product sales also have lower cost of revenues and
produce much higher gross margins as discussed above. The shift
in our revenue mix was faster than expected but in line with our
overall strategy to shift our business to become a more
traditional medical device manufacturer.
31
Cardiac royalty revenue decreased mainly because the contractual
rate CryoCath was obligated to pay us as percentage of related
revenues decreased from 9.0 percent to 5.0 percent in
2006. Revenue from the sale of Cryocare Surgical Systems
increased for the year ended December 31, 2006 from the
comparable period in 2005 to $1.1 million from
$0.7 million primarily due to increased sales of our
systems internationally.
Cost
of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2006
|
|
2005
|
|
$ Change
|
|
|
(Dollars in thousands)
|
|
Cost of Revenues
|
|
$
|
12,343
|
|
|
$
|
15,738
|
|
|
$
|
(3,395
|
)
|
Percent of revenues
|
|
|
44.1
|
%
|
|
|
55.7
|
%
|
|
|
|
|
The decrease was driven mainly by the rapid shift in revenue mix
resulting in a decrease in the number of cryoablation procedures
for which we bear responsibility for providing the service
element of the procedure as opposed to solely selling our
cryoablation disposable products. This mix shift led to a
decrease in fees we paid to third party service providers. Costs
for materials, labor and overhead per cryoablation case also
decreased as we achieve manufacturing efficiencies and improve
product design. Fees to service providers were $8.0 million
in 2005 and $4.7 million in 2006. This decrease was offset
slightly by a $0.3 million increase in cost related to
Cryocare Surgical Systems.
Gross
Profit and Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cryoablation disposable products and procedure fees
|
|
$
|
14,705
|
|
|
$
|
11,292
|
|
|
$
|
3,413
|
|
Cryocare surgical systems
|
|
|
294
|
|
|
|
283
|
|
|
|
11
|
|
Cardiac royalties and other
|
|
|
648
|
|
|
|
961
|
|
|
|
(313
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,647
|
|
|
$
|
12,536
|
|
|
$
|
3,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Percentage Point
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
(Percent of revenues)
|
|
|
Cryoablation disposable products and procedure fees
|
|
|
52.5
|
%
|
|
|
39.9
|
%
|
|
|
12.6
|
%
|
Cryocare surgical systems
|
|
|
1.1
|
%
|
|
|
1.0
|
%
|
|
|
0.1
|
%
|
Cardiac royalties and other
|
|
|
2.3
|
%
|
|
|
3.4
|
%
|
|
|
(1.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55.9
|
%
|
|
|
44.3
|
%
|
|
|
11.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The positive trend in our gross margin (gross profit as a
percentage of revenues) relates primarily to the shift in our
business model to a much larger percentage of total procedures
from the sale of our cryoablation disposable products as opposed
to procedures where we are responsible for providing the service
element of the procedure, which generates a lower gross margin
as a percent of revenues. Also contributing to the increase in
gross margin were continued reductions in manufacturing costs
for our cryoablation disposable products. Gross margins were
negatively affected during the year ended December 31, 2006
by transactions where we allowed certain customers to upgrade to
our Cryocare CS System from a previous generation of our
Cryocare Surgical System with nominal additional payment,
resulting in a net loss of $0.5 million.
32
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Research and development expenses
|
|
$
|
2,781
|
|
|
$
|
2,283
|
|
|
$
|
498
|
|
|
|
21.8
|
%
|
Percent of total revenues
|
|
|
9.9
|
%
|
|
|
8.1
|
%
|
|
|
|
|
|
|
|
|
The increase was primarily attributable to increased
compensation costs of $0.1 million and costs associated
with several new development projects we have undertaken to
reduce the manufacturing costs of Cryocare disposables and
broaden the application of cryoablation outside of our current
markets in urology and interventional radiology. Included in
research and development expenses for the year ended
December 31, 2006 is $0.1 million in non-cash
stock-based compensation expense.
Selling
and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Selling and marketing expenses
|
|
$
|
15,195
|
|
|
$
|
13,001
|
|
|
$
|
2,194
|
|
|
|
16.9
|
%
|
Percent of total revenues
|
|
|
54.3
|
%
|
|
|
46.0
|
%
|
|
|
|
|
|
|
|
|
Driving the increases were proctor fees and related cost
increases of $0.4 million, increased travel costs of
$0.2 million, non-cash stock-based compensation expenses
related to stock options and deferred stock units in the amount
of $0.6 million and increased compensation related expenses
in our sales organization of $0.8 million.
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
General and administrative expenses
|
|
$
|
13,107
|
|
|
$
|
13,858
|
|
|
$
|
(751
|
)
|
|
|
(5.4
|
)%
|
Percent of total revenues
|
|
|
46.8
|
%
|
|
|
49.0
|
%
|
|
|
|
|
|
|
|
|
General and administrative expenses decreased in several areas
including legal and accounting costs of $1.7 million as a
result of establishing in house legal counsel and marked efforts
to reduce accounting and consulting fees, specifically those
related to compliance with section 404 of the
Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley). We had
$0.5 million in reductions in insurance premiums due to
concerted efforts to reduce premiums without compromising
coverage. During the second quarter of 2006 the statute of
limitations expired on $0.9 million of potential payroll
tax liability pertaining to employee loans forgiven and stock
option exercises that occurred in 2002 and prior, compared to
$0.2 million of similar reductions in 2005. In 2005 we paid
$0.6 million in liquidated damages related to our March
2005 private placement financing, which did not recur in 2006.
These reductions were partially offset by $2.2 million in
additional compensation expense including $2.0 million of
non-cash stock-based compensation expenses related to stock
options and deferred stock units. Additionally in the fourth
quarter of 2006, we reserved a total of $0.7 million on
notes receivable. Of this amount $0.4 million relates to a
reserve recorded on a note with a related party. The
$0.3 million remaining amount is related to a possible
arrangement with the purchaser of Timm Medical which we may
offer a payment discount in exchange for acceleration of payment
of the remaining balance of the purchase note.
33
Interest
Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Interest income, net
|
|
$
|
452
|
|
|
$
|
308
|
|
|
$
|
144
|
|
|
|
46.8
|
%
|
Percent of total revenues
|
|
|
1.6
|
%
|
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
Interest income increased due to interest income on a note
receivable for the 2003 sale of our urinary incontinence product
line and interest income earned from the investment of our cash
balances.
Interest
Expense Related to Common Stock Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Interest expense related to common stock warrants
|
|
$
|
(3,716
|
)
|
|
$
|
(657
|
)
|
|
$
|
(3,059
|
)
|
|
|
(465.6
|
)%
|
Percent of total revenues
|
|
|
(13.3
|
)%
|
|
|
(2.3
|
)%
|
|
|
|
|
|
|
|
|
The negative interest expense for the years ended
December 31, 2006 and 2005 was due to the decreases in the
fair value of common stock warrants issued in connection with
our private placement in March 2005.
Loss
from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Loss from continuing operations
|
|
$
|
(11,076
|
)
|
|
$
|
(14,838
|
)
|
|
$
|
(3,762
|
)
|
|
|
(25.4
|
)%
|
Percent of total revenues
|
|
|
(39.6
|
)%
|
|
|
(52.5
|
)%
|
|
|
|
|
|
|
|
|
Loss from continuing operations for the year ended
December 31, 2006 was $1.10 per basic and diluted share on
10.1 million weighted average shares outstanding compared
to a loss from continuing operations of $1.54 per basic and
diluted share on 9.7 million weighted average shares
outstanding for the same period in 2005. Included in the loss
from continuing operations during the year ended
December 31, 2006 is an aggregate of $2.8 million of
non-cash stock-based compensation expense related to stock
options and deferred stock units, a reduction in accrued payroll
taxes of $0.9 million which were no longer statutorily due
and the reduction in interest expense of $3.7 million from
the change in the fair value of common stock warrants.
Income
from Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Income from discontinued operations
|
|
$
|
311
|
|
|
$
|
1,159
|
|
|
$
|
(848
|
)
|
|
|
(73.1
|
)%
|
Percent of total revenues
|
|
|
1.1
|
%
|
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
Income from discontinued operations for the year ended
December 31, 2006 represents the operating results of Timm
Medical through the date of sale on February 10, 2006.
Income for the 2006 period was $0.03 per basic and diluted share
on 10.1 million weighted average shares outstanding. The
2006 income included $0.5 million gain on sale of Timm
Medical and a tax provision of $0.2 million. Income from
discontinued operations for the year ended December 31,
2005 was $0.12 per basic and diluted share on 9.7 million
weighted average shares outstanding. The 2005 period includes
income of $0.6 million as a result of the elimination of
the estimated costs to sell, which was previously reported as a
component of a 2004 impairment charge when Timm Medical was
initially marketed for sale.
34
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Net loss
|
|
$
|
(10,765
|
)
|
|
$
|
(13,679
|
)
|
|
$
|
(2,914
|
)
|
|
|
(21.3
|
)%
|
Percent of total revenues
|
|
|
(38.5
|
)%
|
|
|
(48.4
|
)%
|
|
|
|
|
|
|
|
|
Net loss for the year ended December 31, 2006 was
$10.8 million or $1.07 per basic and diluted share on
10.1 million weighted average shares outstanding, compared
to a net loss of $13.7 million, or $1.42 per basic and
diluted share on 9.7 million weighted average shares
outstanding for the same period in 2005.
Off
Balance Sheet Financing
Other than lease commitments, legal contingencies incurred in
the normal course of business, obligations under royalty and
joint technology development arrangements and employment
contracts, we do not have any off-balance sheet financing
arrangements or liabilities. In addition, our policy is not to
enter into derivative instruments, futures or forward contracts.
Our business is transacted solely in U.S. dollars and,
while future fluctuations of the U.S. dollar may affect the
price competitiveness of our products, there is no known
significant direct foreign currency exchange rate risk. Finally,
we do not have any majority-owned subsidiaries or any interests
in, or relationships with, any material special-purpose entities
that are not included in the consolidated financial statements.
Liquidity
and Capital Resources
Since inception, we have incurred losses from operations and
have reported negative cash flows. As of December 31, 2007,
we had an accumulated deficit of $189.8 million and cash
and cash equivalents of $7.7 million. We do not expect to
reach cash flow positive operations for the 2008 year, and
we expect to continue to generate losses from operations for the
foreseeable future.
In July 2006, we resolved the investigations by the SEC and DOJ
of our historical accounting and financial reporting (see
Note 12 Commitments and
Contingencies in the footnotes to the consolidated
financial statements). However, we still have obligations to
indemnify and advance the legal fees of our former officers and
former directors in connection with the ongoing investigations
and legal proceedings related to those individuals. The amounts
we pay under these obligations could have a material adverse
effect on our business, financial condition, results of
operations and liquidity. For the year ended December 31,
2007, we incurred expenses of $1.7 million relating to
legal fees of former officers and former directors, and recorded
insurance recoveries of $0.9 million. As of
December 31, 2007, we have $0.1 million available
under this insurance coverage.
We also face large cash expenditures in the future related to
past due state and local taxes, primarily sales and use tax
obligations, which we estimate to be approximately
$2.2 million. The amount was fully accrued as of
December 31, 2007. We are in the process of negotiating
resolutions of the past due state and local tax obligations with
the applicable tax authorities. However, there is no assurance
that these obligations will be reduced as a result of the
negotiations or that we will be allowed to pay the amounts due
over an extended period of time.
As discussed in Note 6 Private
Placement of Common Stock and Warrants in the
footnotes to the consolidated financial statements, on
October 25, 2006, we entered into an agreement with Fusion
Capital Fund II, LLC (Fusion Capital), which gives us the
right to sell to Fusion Capital up to $16.0 million of
common stock over a two year period at prices determined based
upon the market price of our common stock at the time of each
sale without any fixed discount (in $100,000 increments every
fourth business day, with additional $150,000 increments
available every third business day if the market price per share
of our common stock is $4.50 or higher), subject to our ability
to comply with certain ongoing requirements. These requirements
include, among others, maintaining effectiveness of the
registration statement covering the resale of the shares
purchased by Fusion Capital, and maintenance of per share
trading prices at or above $3.00. The $150,000 increment can be
increased if the market price of our common stock increases. The
SEC declared the registration statement effective on
December 1, 2006. The agreement with Fusion Capital expires
on November 6, 2008.
35
Through December 31, 2007 we have sold 293,397 shares
of stock to Fusion Capital for total gross proceeds of
$1.6 million. The most recent sale of stock to Fusion
Capital occurred in May 2007. Since we have authorized
2,666,666 shares for sale under the stock purchase
agreement, the selling price of our common stock to Fusion
Capital would have had to average at least $6.00 per share for
us to receive the maximum proceeds of $16.0 million. We are
obligated to pay a transaction fee equal to 6.0 percent of
the stock proceeds to an investment advisory firm under a
pre-existing capital advisory agreement
On May 24, 2007 we sold 1,085,271 shares of our common
stock to Frazier Healthcare V, L.P. (Frazier) at a price
per share of $6.45, for aggregate proceeds of $7.0 million.
During the three months ended December 31, 2007 we received
an aggregate of $1.1 million in proceeds from the exercise
of stock options held by one of our former officers. An
aggregate of 166,667 shares were issued upon exercise of
the stock options at $6.75 per share.
We expect to use existing cash reserves, working capital through
the sale of our products, as well as future proceeds from sales,
if any, of common stock to Fusion Capital, to finance our
projected operating and cash flow needs, along with continued
expense management efforts. In addition, we may borrow funds
under our line of credit with our bank as long as we remain in
compliance with the representations, warranties, covenants and
borrowing conditions set forth in the agreements governing the
line of credit. The funds we can borrow are based on eligible
trade receivables and inventory as defined. The credit facility
includes a subjective acceleration clause and a requirement to
maintain a lock box with the lender, the proceeds from which
will be applied to reduce the outstanding borrowings upon our
default or if other conditions are met. We were not in
compliance with the minimum tangible net worth covenant under
our bank line of credit for the months of September to November
2006. On December 22, 2006, we signed an amendment to the
Loan and Security Agreement. Among other things, the amendment
(i) modified the borrowing base to increase the eligible
accounts receivable from 80 percent to 85 percent and
modified the definition of accounts that are ineligible under
the borrowing base calculation; (ii) modified the loan
margin as defined to 1.50 percent; and (iii) waived
non-compliance with the minimum tangible net worth requirement
as of September 30, 2006, October 31, 2006 and
November 30, 2006, as well as modified the terms of the
covenant. On February 23, 2007, the credit agreement was
amended to further modify the minimum tangible net worth
provision and to extend the maturity date to February 27,
2008. On February 8, 2008, the maturity date was further
extended to February 26, 2009. As of December 31, 2006
and 2007, we were in compliance with all covenants. As of
December 31, 2007 we had $0.9 million outstanding on
the line of credit. During February through May 2007,
outstanding advances on the line of credit exceeded
50 percent of the accounts receivable borrowing base
referred to above. As required by the agreement, our lock-box
proceeds were applied daily to reduce the outstanding advances
and we re-borrowed the amount subject to the lenders
approval. In June 2007, the outstanding advances were reduced to
less than 50 percent of the receivable borrowing base, and
we were no longer required to repay and re-borrow funds on a
daily basis as of July 13, 2007.
We believe that the Fusion Capital financing and bank line of
credit, together with the $7.0 million that we received
from Frazier, should provide us with the capital resources that
we need to reach the point where our operations will generate
positive cash flows on a consistent basis. However, our cash
needs are not entirely predictable and the future availability
of funds from Fusion Capital and our bank is subject to many
conditions, including certain subjective acceleration clauses
and other provisions, some of which are predicated on events
that are not within our control. Accordingly, we cannot
guarantee the availability of these capital resources or that
they will be sufficient to fund our ongoing operations to the
point where our operations will generate positive cash flows on
a consistent basis.
Contractual
Obligations
In the table below, we set forth our contractual obligations as
of December 31, 2007. Some of the figures we include in
this table are based on managements estimates and
assumptions about these obligations, including their duration,
the possibility of renewal, anticipated actions by third parties
and other factors. Because these estimates and assumptions are
necessarily subjective, the contractual obligations we will
actually pay in future periods may vary from those reflected in
the table.
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
2008
|
|
|
2009-2010
|
|
|
2011-2012
|
|
|
|
(In thousands)
|
|
|
Non-cancelable operating leases(1)
|
|
$
|
1,261
|
|
|
$
|
549
|
|
|
$
|
704
|
|
|
$
|
8
|
|
Non-cancelable capital lease(2)
|
|
|
136
|
|
|
|
34
|
|
|
|
68
|
|
|
|
34
|
|
Purchase commitments(3)
|
|
|
624
|
|
|
|
624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,021
|
|
|
$
|
1,207
|
|
|
$
|
772
|
|
|
$
|
42
|
|
|
|
|
(1) |
|
We enter into operating leases in the normal course of business.
We lease office space as well as other property and equipment
under operating leases. Some lease agreements provide us with
the option to renew the lease at the end of the original term.
Our future operating lease obligations would change if we
exercise these renewal options and if we enter into additional
operating lease agreements. For more information, see
Note 12 Commitments and Contingencies to
our Consolidated Financial Statements. |
|
(2) |
|
During 2007, we leased certain office equipment under a capital
lease agreement. We recorded the equipment at fair market value
and recorded a corresponding lease obligation. For more
information, see Note 12 Commitments and
Contingencies to our Consolidated Financial Statements. |
|
(3) |
|
These purchase commitments relate to agreements to purchase
goods or services. These obligations are not recorded in our
consolidated financial statements until contract payment terms
take effect. We expect to fund these commitments with operating
cash flows and from cash balances on hand. The obligations shown
in the above table are subject to change based on, among other
things, our manufacturing operations not operating in the normal
course of business, the demand for our products, and the ability
of our suppliers to deliver the products or services as promised. |
Additionally, under a commercialization agreement, we are
obligated to make monthly advances of $42,500 to our
collaboration partner beginning the fourth quarter of 2005. This
obligation continues until either we or our partner enter into a
licensing agreement sufficient to reimburse us for all prior
payments and fund the partner going forward.
We are also obligated to indemnify certain former officers and
former directors and advance legal fees to them in connection
with continuing investigations and legal proceedings involving
these individuals by the SEC and DOJ. We are unable to predict
the timing and amount of these legal fees.
Critical
Accounting Policies
The foregoing discussion and analysis of our financial condition
and results of operations are based on our consolidated
financial statements, which have been prepared in accordance
with U.S. generally accepted accounting principles. The
preparation of the financial statements requires management to
make estimates and assumptions in applying certain critical
accounting policies. Certain accounting estimates are
particularly sensitive because of their significance to our
consolidated financial statements and because of the possibility
that future events affecting the estimates could differ
significantly from current expectations. Factors that could
possibly cause actual amounts to differ from current estimates
relate to various risks and uncertainties inherent in our
business, including those set forth under Risk
Factors in Item 1A of this Annual Report on
Form 10-K.
Management believes that the following are some of the more
critical judgment areas in the application of accounting
policies that affect our financial statements.
Revenue Recognition. We follow the provisions
of Staff Accounting Bulletin 104, Revenue
Recognition in Financial Statements
(SAB 104) and Emerging Issues Task Force (EITF)
Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables
for revenue recognition. Under SAB 104, four conditions
must be met before revenue can be recognized: (i) there is
persuasive evidence that an arrangement exists,
(ii) delivery has occurred or service has been rendered,
(iii) the price is fixed or determinable and
(iv) collection is reasonably assured.
We reduce our revenues for customer concessions, and defer
revenue recognition for minimum procedure guarantees, contingent
payment arrangements and when we have continuing performance
obligations until a future date when the contingencies are
resolved and obligations met.
37
Where we own the equipment used in the procedure, we bill the
medical facility and retain the entire procedure fee. In many
instances, however, the equipment is owned by a third-party who
contracts with us to perform the service component of the
procedure. Third-party service providers are at times entities
owned or controlled by urologists who perform cryoablation
procedures. In the latter case, we still invoice the medical
facility but we pay a fee to the third-party service provider.
The procedure fee is recorded as revenue in the period when the
procedure is performed and, where applicable, the fee paid to a
third-party service provider is included in cost of revenues for
the same period.
From time to time we provide loaner equipment to customers as
part of a strategy aimed at promoting broader acceptance of our
technology and driving sales of disposable products faster than
would be possible if we restricted use of the device only to
customers willing to make a significant capital investment to
purchase a Cryocare Surgical System. In these situations, we
either loan a mobile Cryocare Surgical System to a hospital or
consign a stationary Cryocare Surgical System with the hospital
under our placement program and charge a fee for each procedure
in which the equipment is used. Cost of revenues includes
depreciation on the Cryocare Surgical Systems we own over an
estimated useful life of three years. We have also reduced the
selling price of our Cryocare Surgical System to at or near cost
to promote sales of our cryoablation disposable products.
Under certain circumstances, we will upgrade our older model
Cryocare Surgical Systems for our new model with select
customers. The terms of the upgrade can include the trade-in of
an older system for a refurbished system at no additional cost
to the customer, or a trade-in of an older system plus cash for
a refurbished or new Cryocare Surgical System. These upgrades
are not part of a bundled arrangement conditioned upon past or
future purchases of our products. They are offered at our
election as a means to introduce our latest technology to the
market place. The older systems received in the trade are then
redeployed for interventional radiology procedures or sold in
secondary markets. When these upgrades take place, we invoice
the customer for the upgraded Cryocare Surgical System and
expense the cost of the system upon shipment. If we determine
that there will be a loss on the trade, we may record the loss
at the time the commitment is made. We recognize revenue to the
extent of the cash consideration upon shipment. We do not assign
a value to the older trade-in system since they generally have
exceeded our estimated useful life of three years
We routinely assess the financial strength of our customers and,
as a consequence, believe that our accounts receivable credit
risk exposure is limited. Accounts receivable are carried at
original invoice amount less all discounts and allowances, and
less an estimate for doubtful accounts and sales returns based
on a periodic review of outstanding receivables. Allowances are
provided for known and anticipated credit losses as determined
by management in the course of regularly evaluating individual
customer receivables. This evaluation takes into consideration a
customers financial condition and credit history as well
as current economic conditions. Accounts receivable are written
off when deemed uncollectible. Recoveries of accounts receivable
previously written off are recorded when received.
Impairment of Long-Lived Assets. We have a
significant amount of property, equipment and amortizable
intangible assets primarily consisting of purchased patents and
acquired technology. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long Lived Assets, we review our
long-lived assets and identifiable intangibles for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset or asset group may not be
recoverable. Recoverability of long-lived and amortizable
intangible assets to be held and used is measured by a
comparison of the carrying amount of an asset to the
undiscounted future net operating cash flows expected to be
generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured as the
amount by which the carrying value of the assets exceeds their
fair value.
Legal and Other Loss Contingencies. In the
normal course of business, we are subject to contingencies, such
as legal proceedings and claims arising out of our business that
cover a wide range of matters, including tax matters, product
liability and workers compensation. In accordance with
SFAS No. 5, Accounting for Contingencies, we
record accruals for such contingencies when it is probable that
a liability will be incurred and the amount of loss can be
reasonably estimated. A significant amount of management
estimation is required in determining when, or if, an accrual
should be recorded for a contingent matter and the amount of
such accrual, if any. Due to the uncertainty of determining the
likelihood of a future event occurring and the potential
financial statement impact of such an event,
38
it is possible that upon further development or resolution of a
contingent matter, a charge could be recorded in a future period
that would be material to our consolidated results of
operations, financial position or cash flows.
Other Investments. We review our equity
investments for impairment based on our determination of whether
a decline in the market value of the investment below our
carrying value is other than temporary. In making this
determination, we consider Accounting Principles Board Opinion
(APB) No. 18, The Equity Method of Accounting of
Investments in Common Stock, and
EITF 00-31,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, which set forth factors
to be evaluated in determining whether a loss in value should be
recognized. Factors include the investees operational
performance, indicators of continued viability, financing
status, liquidity prospects and cash flow forecasts. We also
consider our ability to hold the investment until we recover our
cost, the market price and market price fluctuations of the
investees publicly traded shares and the ability of the
investee to sustain an earnings capacity which would justify the
carrying amount of the investment. In addition, we assess if
these equity investees constitute variable interest entities and
are required to be consolidated under FASB Interpretation
No. 46 (revised December 2003), Consolidation of
Variable Interest Entities, an interpretation of ARB
No. 51.
Income Taxes. In the preparation of our
consolidated financial statements, we are required to estimate
income taxes in each of the jurisdictions in which we operate,
including estimating both actual current tax exposure and
assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. Assessment
of actual current tax exposure includes assessing tax
strategies, the status of tax audits and open audit periods with
the taxing authorities. To the extent that we have deferred tax
assets, we must assess the likelihood that our deferred tax
assets will be recovered from taxable temporary differences, tax
strategies or future taxable income and to the extent that we
believe that recovery is not likely, we must establish a
valuation allowance. As of December 31, 2007 we have
established a valuation allowance of $5.6 million against
our deferred tax assets. In the future, we may adjust our
estimates of the amount of valuation allowance needed and such
adjustment would impact our provision for income taxes in the
period of such change. Effective January 1, 2007, we
adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of
SFAS No. 109 (FIN 48). FIN 48 prescribes
a minimum recognition threshold a tax position is required to
meet before being recognized in the financial statements.
Stock based compensation. As a normal
practice, we compensate employees and non-employee directors
through stock-based compensation. Effective January 1,
2006, we account for our stock-based compensation under the
provisions of SFAS No. 123R, Share-Based Payments.
SFAS No. 123R eliminates the use of the intrinsic
value method of accounting under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25) and requires companies to recognize in
the financial statements the cost of employee services received
in exchange for awards of equity instruments based on the grant
date fair value of those awards that are expected to vest. The
estimation of stock-based compensation requires the use of
complex option pricing models and application of judgment in
selecting the appropriate valuation assumptions, as such
volatility, forfeiture rates and expected term. We value our
stock-based compensation using the Black-Scholes option pricing
model and the single option award approach, in accordance with
the requirements of SFAS No. 123R and Staff Accounting
Bulletin (SAB) No. 107, Share-Based Payment. We
reduce our compensation expense for estimated forfeitures based
on historical forfeiture behavior, excluding unusual events or
behavior that is not indicative of future expectations. In
addition, certain equity awards vest based on performance
conditions, such as sales and profitability goals. Compensation
expense is recorded only if it is probable that the award will
vest. Assessing whether the milestones will be met and the
implicit service period requires significant judgment. We
re-assess the appropriateness of the milestone and valuation
assumptions, including our calculated forfeiture rate, on a
quarterly basis or when events or changes in circumstances
warrant a re-evaluation. In addition, we monitor equity
instruments with non-standard provisions, such as
performance-based vesting conditions, accelerated vesting based
on achievement of performance milestones and features that
require instruments to be accounted for as liabilities.
Inflation
The impact of inflation on our business has not been significant
to date.
39
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
The primary objective of our investment activities is to
preserve principal while at the same time maximizing the income
we receive from our invested cash without significantly
increasing the risk of loss. Our financial instruments include
cash, cash equivalents, accounts and notes receivable, minority
investments, accounts payable, accrued liabilities, a line of
credit and common stock warrants. Our policy is not to enter
into derivative financial instruments. 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.
At December 31, 2007, $7.1 million of our cash is
invested in a money market mutual fund (the Citi Institutional
Liquid Reserves) which includes in its investment portfolio
commercial paper, time deposits, certificates of deposits, bank
notes, corporate bonds and notes and U.S. government agency
securities. The fund is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
Although the fund seeks to preserve the value of the investment
at $1.00 per share, it is possible to lose our principal if the
underlying securities suffer losses. At January 31, 2008,
the fund reported that certain securities within the portfolio
are illiquid, in default, under restructuring or have been
subject to a ratings downgrade. However, the fund continues to
report a per share net asset value (NAV) of $1, which represents
the price at which investors buy (bid price) and
sell (redemption price) fund shares from and to the
fund company. The NAV is computed once at the end of each
trading day based on the closing market prices of the
portfolios securities. We believe that our investment has
not been impaired and that we can withdraw our finds at any time
without restriction. We will monitor the value of the fund
periodically for impairment.
Although we transact our business in U.S. dollars, future
fluctuations in the value of the U.S. dollar may affect the
price competitiveness of our products. However, we do not
believe that we currently have any significant direct foreign
currency exchange rate risk and have not hedged exposures
denominated in foreign currencies or any other derivative
financial instruments.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Our financial statements and schedule, as listed under
Item 15, appear in a separate section of this Annual Report
on
Form 10-K
beginning on
page F-1.
|
|
Item 9.
|
Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure
|
Not applicable.
Item 9A. 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
SECs 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 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 period 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 a reasonable assurance level.
(b) Managements Annual Report on Internal Control
Over Financial Reporting. Management of the
company is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934. Our internal control
over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and
40
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Our
internal control over financial reporting includes those
policies and procedures that:
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of
management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of the Companys assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2007. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control Integrated Framework.
Based on our assessment and those criteria, management believes
that the Company maintained effective internal control over
financial reporting as of December 31, 2007.
The Companys independent registered public accounting firm
has issued an attestation report on the Companys internal
control over financial reporting. That report appears below in
this Item 9A.
(c) Changes in Internal Controls. There
was no change in our internal control over financial reporting
during our fourth fiscal quarter for 2007 that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
41
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Endocare, Inc.
We have audited Endocare Inc.s (the Company) internal
control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
Endocare, Inc.s management is responsible for maintaining
effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Endocare, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Endocare, Inc. as of
December 31, 2007 and 2006, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2007 and our report dated March 7, 2008
expressed an unqualified opinion thereon.
Los Angeles, California
March 7, 2008
42
Item 9B.
Other Information
Not applicable.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this Item 10 is incorporated by
reference to the Definitive Proxy Statement relating to our 2008
Annual Meeting of Stockholders, which we expect to file within
120 days after the end of our fiscal year ended
December 31, 2007.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this Item 11 is incorporated by
reference to the Definitive Proxy Statement relating to our 2008
Annual Meeting of Stockholders, which we expect to file within
120 days after the end of our fiscal year ended
December 31, 2007.
Item 12. Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this Item 12 is incorporated by
reference to the Definitive Proxy Statement relating to our 2008
Annual Meeting of Stockholders, which we expect to file within
120 days after the end of our fiscal year ended
December 31, 2007.
Item 13. Certain
Relationships and Related Transactions, and director
independence
The information required by this Item 13 is incorporated by
reference to the Definitive Proxy Statement relating to our 2008
Annual Meeting of Stockholders, which we expect to file within
120 days after the end of our fiscal year ended
December 31, 2007.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by this Item 14 is incorporated by
reference to the Definitive Proxy Statement relating to our 2008
Annual Meeting of Stockholders, which we expect to file within
120 days after the end of our fiscal year ended
December 31, 2007.
43
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a)(1) Financial Statements:
The Consolidated Financial Statements of the Company are
included in a separate section of this Annual Report on
Form 10-K
commencing on the pages referenced below:
|
|
|
|
|
|
|
Page
|
|
Consolidated Financial Statements of the Company:
|
|
|
|
|
|
|
|
F-1
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
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F-6 to F-38
|
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|
(2)
|
Financial
Statement Schedules:
|
Schedule II Valuation and Qualifying Accounts
for the years ended December 31, 2005, 2006 and 2007 is
included in the Consolidated Financial Statements at
page F-39.
All other schedules have been omitted because they are not
applicable, not required or the information is included in the
consolidated financial statements or the notes thereto.
A list of exhibits to this
Form 10-K
is found in the Exhibit Index immediately following the
Signature Page of this
Form 10-K,
which is hereby incorporated by reference herein.
Supplemental
Information
We have not sent an annual report or proxy materials to our
stockholders as of the date of this Annual Report on
Form 10-K.
We intend to provide our stockholders with an annual report and
proxy materials after the filing of this Annual Report on
Form 10-K,
and we will furnish the annual report to the SEC at that time.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Endocare, Inc.
Date: March 6, 2008
|
|
|
|
By:
|
/s/ Craig
T. Davenport
|
Craig T. Davenport
Chairman, Chief Executive Officer and President
POWER OF
ATTORNEY
Know all men by these presents, that each person whose signature
appears below constitutes and appoints Craig T. Davenport and
Michael R. Rodriguez, and each or any one of them, his true and
lawful attorney-in-fact and agent, with full power of
substitution, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments to this
Annual Report on
Form 10-K,
and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the SEC, granting unto
said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as
fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his
substitutes or substitute, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
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|
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|
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Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Craig
T. Davenport
Craig
T. Davenport
|
|
Chairman, Chief Executive Officer and
President (principal executive officer)
|
|
March 6, 2008
|
|
|
|
|
|
/s/ Michael
R. Rodriguez
Michael
R. Rodriguez
|
|
Senior Vice President, Finance and Chief
Financial Officer (principal financial and accounting officer)
|
|
March 7, 2008
|
|
|
|
|
|
/s/ John
R. Daniels, M.D.
John
R. Daniels, M.D.
|
|
Director
|
|
March 6, 2008
|
|
|
|
|
|
/s/ David
L. Goldsmith
David
L. Goldsmith
|
|
Director
|
|
March 6, 2008
|
|
|
|
|
|
/s/ Eric
S. Kentor
Eric
S. Kentor
|
|
Director
|
|
March 6, 2008
|
|
|
|
|
|
/s/ Terrence
A. Noonan
Terrence
A. Noonan
|
|
Director
|
|
March 7, 2008
|
|
|
|
|
|
/s/ Thomas
R. Testman
Thomas
R. Testman
|
|
Director
|
|
March 6, 2008
|
45
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Endocare, Inc.
We have audited the accompanying consolidated balance sheets of
Endocare, Inc. (the Company) and subsidiary as of
December 31, 2006 and 2007, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2007. Our audits also included the financial
statement schedule listed in the Index at Item 15(a)(2).
These financial statements and schedule are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these financial statements and schedule
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Endocare, Inc. and subsidiary at
December 31, 2006 and 2007, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2007, in conformity
with U.S. generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 3 to the consolidated financial
statements, Endocare, Inc. changed its method of accounting for
stock-based compensation in accordance with Statement of
Financial Accounting Standards No. 123 (revised
2004) on January 1, 2006. Also, as discussed in
Note 6 to the consolidated financial statements, Endocare,
Inc. changed its method of accounting for common stock warrants
in accordance with FASB Staff Position (FSP) EITF
No. 00-19-2,
Accounting for Registration Payment Arrangements, on
January 1, 2007.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Endocare, Inc.s internal control over financial reporting
as of December 31, 2007, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 7, 2008 expressed an unqualified
opinion thereon.
Los Angeles, California
March 7, 2008
F-1
ENDOCARE,
INC. AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Product sales
|
|
$
|
7,533
|
|
|
$
|
15,044
|
|
|
$
|
22,730
|
|
Service revenues
|
|
|
19,780
|
|
|
|
12,298
|
|
|
|
6,418
|
|
Other
|
|
|
961
|
|
|
|
648
|
|
|
|
539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,274
|
|
|
|
27,990
|
|
|
|
29,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
15,738
|
|
|
|
12,343
|
|
|
|
9,780
|
|
Research and development
|
|
|
2,283
|
|
|
|
2,781
|
|
|
|
2,555
|
|
Selling and marketing
|
|
|
13,001
|
|
|
|
15,195
|
|
|
|
14,855
|
|
General and administrative
|
|
|
13,858
|
|
|
|
13,107
|
|
|
|
12,506
|
|
Gain on legal settlement
|
|
|
|
|
|
|
|
|
|
|
(677
|
)
|
Goodwill impairment and other charges
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
44,906
|
|
|
|
43,426
|
|
|
|
39,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(16,632
|
)
|
|
|
(15,436
|
)
|
|
|
(9,332
|
)
|
Interest income, net
|
|
|
308
|
|
|
|
452
|
|
|
|
391
|
|
Interest expense related to common stock warrants
|
|
|
657
|
|
|
|
3,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before taxes
|
|
|
(15,667
|
)
|
|
|
(11,268
|
)
|
|
|
(8,941
|
)
|
Tax benefit on continuing operations
|
|
|
829
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(14,838
|
)
|
|
|
(11,076
|
)
|
|
|
(8,941
|
)
|
Income from discontinued operations, net of taxes
|
|
|
1,159
|
|
|
|
311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(13,679
|
)
|
|
$
|
(10,765
|
)
|
|
$
|
(8,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share of common stock basic
and diluted Continuing operations
|
|
$
|
(1.54
|
)
|
|
$
|
(1.10
|
)
|
|
$
|
(0.80
|
)
|
Discontinued operations
|
|
$
|
0.12
|
|
|
$
|
0.03
|
|
|
$
|
|
|
Weighted-average shares of common stock outstanding
|
|
|
9,659
|
|
|
|
10,084
|
|
|
|
11,122
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-2
ENDOCARE,
INC. AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands, except share and per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,811
|
|
|
$
|
7,712
|
|
Accounts receivable less allowances for doubtful accounts and
sales returns of $84 and $90 at December 31, 2006 and 2007,
respectively
|
|
|
4,161
|
|
|
|
3,530
|
|
Inventories
|
|
|
2,260
|
|
|
|
3,022
|
|
Prepaid expenses and other current assets
|
|
|
1,284
|
|
|
|
2,081
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
9,516
|
|
|
|
16,345
|
|
Property and equipment, net
|
|
|
1,040
|
|
|
|
850
|
|
Intangibles, net
|
|
|
3,613
|
|
|
|
3,077
|
|
Investments and other assets
|
|
|
2,077
|
|
|
|
989
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
16,246
|
|
|
$
|
21,261
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,393
|
|
|
$
|
2,194
|
|
Accrued compensation
|
|
|
3,000
|
|
|
|
3,895
|
|
Other accrued liabilities
|
|
|
3,594
|
|
|
|
3,034
|
|
Loan payable
|
|
|
|
|
|
|
880
|
|
Obligations under capital lease, current portion
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
9,987
|
|
|
|
10,031
|
|
Common stock warrants
|
|
|
1,307
|
|
|
|
|
|
Deferred compensation
|
|
|
74
|
|
|
|
227
|
|
Obligations under capital lease less current portion
|
|
|
|
|
|
|
84
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 1,000,000 shares
authorized; none issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 50,000,000 shares
authorized; 10,226,392 and 11,761,562 shares issued and
outstanding at December 31, 2006 and 2007, respectively
|
|
|
10
|
|
|
|
12
|
|
Additional paid-in capital
|
|
|
181,310
|
|
|
|
200,663
|
|
Accumulated deficit
|
|
|
(176,442
|
)
|
|
|
(189,756
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
4,878
|
|
|
|
10,919
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
16,246
|
|
|
$
|
21,261
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-3
ENDOCARE,
INC. AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-In Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balance as of December 31, 2004
|
|
|
8,114
|
|
|
$
|
8
|
|
|
$
|
169,416
|
|
|
$
|
(151,998
|
)
|
|
$
|
17,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,679
|
)
|
|
|
(13,679
|
)
|
Stock options exercised
|
|
|
37
|
|
|
|
|
|
|
|
116
|
|
|
|
|
|
|
|
116
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
51
|
|
Sale of common stock
|
|
|
1,878
|
|
|
|
2
|
|
|
|
8,914
|
|
|
|
|
|
|
|
8,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
|
10,029
|
|
|
$
|
10
|
|
|
$
|
178,497
|
|
|
$
|
(165,677
|
)
|
|
$
|
12,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,765
|
)
|
|
|
(10,765
|
)
|
Stock options exercised
|
|
|
29
|
|
|
|
|
|
|
|
108
|
|
|
|
|
|
|
|
108
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
2,797
|
|
|
|
|
|
|
|
2,797
|
|
Sale of common stock
|
|
|
168
|
|
|
|
|
|
|
|
(92
|
)
|
|
|
|
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
10,226
|
|
|
$
|
10
|
|
|
$
|
181,310
|
|
|
$
|
(176,442
|
)
|
|
$
|
4,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,941
|
)
|
|
|
(8,941
|
)
|
Stock options exercised
|
|
|
167
|
|
|
|
|
|
|
|
1,125
|
|
|
|
|
|
|
|
1,125
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
3,950
|
|
|
|
|
|
|
|
3,950
|
|
Sale of common stock
|
|
|
1,369
|
|
|
|
2
|
|
|
|
8,598
|
|
|
|
|
|
|
|
8,600
|
|
Reclassification of common stock warrants to equity
|
|
|
|
|
|
|
|
|
|
|
5,680
|
|
|
|
(4,373
|
)
|
|
|
1,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
11,762
|
|
|
$
|
12
|
|
|
$
|
200,663
|
|
|
$
|
(189,756
|
)
|
|
$
|
10,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-4
ENDOCARE,
INC. AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(13,679
|
)
|
|
$
|
(10,765
|
)
|
|
$
|
(8,941
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,054
|
|
|
|
1,576
|
|
|
|
1,126
|
|
Reserve for uncollectible notes
|
|
|
|
|
|
|
695
|
|
|
|
|
|
Gain on divestitures, net
|
|
|
(609
|
)
|
|
|
(524
|
)
|
|
|
|
|
Stock-based compensation
|
|
|
51
|
|
|
|
2,845
|
|
|
|
3,901
|
|
Goodwill impairment and other charges
|
|
|
26
|
|
|
|
|
|
|
|
|
|
Loss on sale of placement units and other fixed assets
|
|
|
107
|
|
|
|
47
|
|
|
|
52
|
|
Minority interests
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
Extinguishment of payroll tax liabilities
|
|
|
(182
|
)
|
|
|
(891
|
)
|
|
|
(121
|
)
|
Interest expense on common stock warrants
|
|
|
(657
|
)
|
|
|
(3,716
|
)
|
|
|
|
|
Changes in operating assets and liabilities, net of effects from
divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(354
|
)
|
|
|
(407
|
)
|
|
|
632
|
|
Inventories
|
|
|
(318
|
)
|
|
|
112
|
|
|
|
(993
|
)
|
Prepaid expenses and other current assets
|
|
|
(454
|
)
|
|
|
(83
|
)
|
|
|
291
|
|
Accounts payable
|
|
|
(337
|
)
|
|
|
(1,409
|
)
|
|
|
(1,199
|
)
|
Accrued compensation
|
|
|
429
|
|
|
|
281
|
|
|
|
1,217
|
|
Other accrued liabilities
|
|
|
(1,581
|
)
|
|
|
(1,364
|
)
|
|
|
(560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(14,718
|
)
|
|
|
(13,603
|
)
|
|
|
(4,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(423
|
)
|
|
|
(158
|
)
|
|
|
(109
|
)
|
Purchases of intangibles
|
|
|
(330
|
)
|
|
|
|
|
|
|
|
|
Proceeds from divestitures
|
|
|
850
|
|
|
|
7,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
97
|
|
|
|
7,322
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and warrants exercised
|
|
|
116
|
|
|
|
108
|
|
|
|
1,125
|
|
Borrowings on line of credit
|
|
|
|
|
|
|
250
|
|
|
|
13,450
|
|
Payments on line of credit
|
|
|
|
|
|
|
(250
|
)
|
|
|
(12,570
|
)
|
Proceeds from sale of stock and warrants, net
|
|
|
14,596
|
|
|
|
(92
|
)
|
|
|
8,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
14,712
|
|
|
|
16
|
|
|
|
10,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
91
|
|
|
|
(6,265
|
)
|
|
|
5,901
|
|
Cash and cash equivalents, beginning of year
|
|
|
7,985
|
|
|
|
8,108
|
|
|
|
1,811
|
|
Less: Cash of discontinued operations
|
|
|
32
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
8,108
|
|
|
$
|
1,811
|
|
|
$
|
7,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of inventory to property and equipment for placement at
customer sites
|
|
$
|
532
|
|
|
$
|
587
|
|
|
$
|
334
|
|
Transfer from property and equipment to inventory for sale of
Cryocare Surgical Systems
|
|
|
|
|
|
|
470
|
|
|
|
103
|
|
Capital lease obligation
|
|
|
|
|
|
|
|
|
|
|
112
|
|
Adoption of FSP EITF
No. 00-19-2
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in paid-in capital
|
|
|
|
|
|
|
|
|
|
|
5,680
|
|
Reduction of retained earnings
|
|
|
|
|
|
|
|
|
|
|
(4,373
|
)
|
Reduction in warrant liability
|
|
|
|
|
|
|
|
|
|
|
(1,307
|
)
|
Other supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
36
|
|
|
$
|
19
|
|
|
$
|
151
|
|
Income taxes paid
|
|
$
|
22
|
|
|
$
|
55
|
|
|
$
|
69
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-5
ENDOCARE,
INC. AND SUBSIDIARY
|
|
1.
|
Organization
and Operations of the Company
|
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.
We were 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 our incorporation under the laws of the state
of Delaware in 1994, we became an independent, publicly-owned
corporation upon Medstones distribution of our stock to
the existing stockholders on January 1, 1996.
Through February 10, 2006 we also offered vacuum therapy
systems for non-pharmaceutical treatment of erectile dysfunction
through our wholly-owned subsidiary Timm Medical Technologies,
Inc. (Timm Medical), which was sold to a third party effective
February 2006 (see Note 7 Dispositions
and Discontinued Operations). The operating results of
Timm Medical are included in discontinued operations.
Effective on August 20, 2007, we effected a
one-for-three
reverse split of our common stock. All share amounts and per
share amounts have been adjusted throughout the accompanying
consolidated financial statements and the related notes to
reflect this reverse stock split for all periods presented. The
reverse split did not affect the authorized shares and par value
per share. On October 10, 2007, our common stock commenced
trading on The NASDAQ Capital Market under the symbol ENDO.
|
|
2.
|
Recent
Operating Results and Liquidity
|
Since inception, we have incurred losses from operations and
have reported negative cash flows. As of December 31, 2007,
we had an accumulated deficit of $189.8 million and cash
and cash equivalents of $7.7 million. $0.9 million of
the cash balance is borrowed under our line of credit, which is
payable on a current basis. During 2007, we also received
$1.6 million and $7.0 million from the sale of our
common shares to Fusion Capital Fund II, LLC (Fusion
Capital) and Frazier Healthcare V, L.P. (Frazier),
respectively, as more fully described below. We do not expect to
reach cash flow positive operations on an annual basis in 2008,
and we expect to continue to generate losses from operations for
the foreseeable future. These losses have resulted in part from
our continued investment to gain acceptance of our technology
and investment in initiatives that we believe should ultimately
result in cost reductions.
Although in July 2006 we resolved the investigations by the
Securities and Exchange Commission (SEC) and the Department of
Justice (DOJ) of our historical accounting and financial
reporting (see Note 12 Commitments and
Contingencies), we still have obligations to indemnify
and advance the legal fees of our former officers and former
directors in connection with the ongoing investigations and
legal proceedings related to those individuals. The amounts we
pay under these obligations could have a material adverse effect
on our business, financial condition, results of operations and
liquidity. For the year ended December 31, 2007, we
incurred expenses of $1.7 million relating to legal fees of
former officers and former directors, and recorded insurance
recoveries of $0.9 million. As of December 31, 2007,
we have $0.1 million available under this insurance
coverage.
We also face large cash expenditures in the future related to
past due state and local taxes, primarily sales and use tax
obligations, which we estimate to be approximately
$2.2 million. The amount was fully accrued as of
December 31, 2007. We are in the process of negotiating
resolutions of the past due state and local tax obligations with
the applicable tax authorities. However, there is no assurance
that these obligations will be reduced as a result of the
negotiations or that we will be allowed to pay the amounts due
over an extended period of time.
We also 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 physicians usage of our
technology in the treatment of prostate and renal cancers, lung
and liver cancers and palliative intervention (treatment of pain
associated with metastases). Such costs will be reported as
current period charges under generally accepted accounting
principles.
F-6
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our sources of funding include a $4 million credit facility
with Silicon Valley Bank and a $16 million common stock
purchase agreement with Fusion Capital. As discussed in
Note 6 Private Placement of Common
Stock and Warrants, on October 25, 2006, we
entered into an agreement with Fusion Capital which gives us the
right to sell to Fusion Capital up to $16.0 million of
common stock, at our election, over a two year period at prices
determined based upon the market price of our common stock at
the time of each sale without any fixed discount. We can sell
our shares in $100,000 increments every fourth business day,
with additional $150,000 increments available every third
business day if the market price per share of our common stock
is $4.50 or higher, subject to our ability to comply with
certain ongoing requirements. These requirements include, among
others, maintaining effectiveness of the registration statement
covering the resale of the shares purchased by Fusion Capital
and maintenance of per share trading prices at or above $3.00.
The $150,000 increment can be increased if the market price of
our common stock increases. The SEC declared the registration
statement effective on December 1, 2006.
Through December 31, 2007, we have sold 293,397 shares
of stock to Fusion Capital for total gross proceeds of
$1.6 million. The most recent sale of stock to Fusion
Capital occurred in May 2007. Since we have authorized
2,666,666 shares for sale under the stock purchase
agreement, the selling price of our common stock to Fusion
Capital would have had to average at least $6.00 per share for
us to receive the maximum proceeds of $16.0 million. We are
obligated to pay a transaction fee equal to 6.0 percent of
the stock proceeds to an investment advisory firm under a
pre-existing capital advisory agreement.
On May 24, 2007 we sold 1,085,271 shares of our common
stock to Frazier at a price per share of $6.45, for aggregate
proceeds of $7.0 million.
During the three months ended December 31, 2007, we also
received $1.1 million in proceeds from the exercise of
options by a former officer for 166,667 common shares at $6.75
per share.
We expect to use existing cash reserves, working capital through
the sale of our products, as well as future proceeds from sales,
if any, of common stock to Fusion Capital, to finance our
projected operating and cash flow needs, along with continued
expense management efforts. In addition, we may borrow funds
under the line of credit with our bank through February 2009 as
long as we remain in compliance with the representations,
warranties, covenants and borrowing conditions therein. As more
fully described in Note 13 Line of
Credit, the funds we can borrow are based on eligible
trade receivables and inventory as defined. The credit facility
contains restrictive covenants, a subjective acceleration clause
and a requirement to maintain a lock box with the lender, the
proceeds from which will be applied to reduce the outstanding
borrowings upon our default or if other conditions are met. The
subjective acceleration clause permits the lender to accelerate
payment on all outstanding balances and cease to make further
advances to us in the event of default or if the lender
determines in its judgment that a material adverse change has
occurred or will occur.
We believe that the Fusion Capital financing agreement and the
line of credit, together with the $7.0 million that we
received from Frazier, should provide us with the capital
resources that we need to reach the point where our operations
will generate positive cash flows on a consistent basis.
However, our cash needs are not entirely predictable and the
future availability of funds from Fusion Capital and our bank is
subject to many conditions, including the subjective
acceleration clause and other provisions that are predicated on
events not within our control. We are limited to amount of stock
we can sell to Fusion Capital each time. Our agreement with
Fusion Capital contains default provisions and is automatically
suspended if the trading prices of our shares fall below $3.00.
The extent of funds available from Fusion Capital also depends
on the prevailing market price of our common shares. We cannot
access the bank credit line if we fail to comply with all
covenants and borrowing conditions. Although we are in
compliance with the conditions and covenants under the Fusion
Capital agreement and bank credit facility as of
December 31, 2007, there is no assurance that we will be
able to comply with all requirements in future periods, that we
can obtain a waiver if an event of default occurs or that the
lender will not exercise the subject acceleration clause.
Accordingly, we cannot guarantee the availability of these
capital resources or that they will be sufficient to fund our
ongoing operations to the point where our operations will
generate positive cash flows on a consistent basis.
F-7
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The consolidated financial statements include the accounts of
the parent and all majority owned and controlled subsidiaries.
All significant intercompany balances and transactions have been
eliminated in consolidation.
Comprehensive
Income
Statement of Financial Accounting Standard, or SFAS,
No. 130, Reporting Comprehensive Income, requires
reporting and displaying comprehensive income (loss) and its
components, which, for Endocare, is the same as the net loss
reflected in the consolidated statements of stockholders
equity.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date
of the financial statements. Estimates also affect the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates. Principal
areas requiring the use of estimates include: determination of
allowances for uncollectible accounts, notes receivable and
sales returns, warranty obligations, reserves for excess and
obsolete inventory, valuation allowances for investments and
deferred tax assets, impairment of long-lived and intangible
assets, determination of stock-based compensation to employees
and consultants, valuation of the warrants and reserves for
litigation and other legal and regulatory matters, among others.
Revenue
Recognition
Revenues from sales of Cryocare Surgical Systems and
cryoablation disposable products are recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the
fee is fixed and determinable and collectibility is reasonably
assured. For certain cryoablation treatments, we also contract
with medical facilities to provide cryoablation disposable
products and services for which we charge 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 of the equipment and include the necessary
disposable products and supplies. The medical facilities are
billed for procedures performed using Cryocare Surgical Systems
owned either by us or by third parties who perform the service
component of the procedure. We receive procedure fee revenue
from the medical facility and, where a third-party service
provider is involved, pay a fee to the service provider. The fee
billed to the medical facility is recorded as revenue in the
period when the procedure is performed. Cost of revenues
includes the cost of the necessary disposable products and
supplies and, if applicable, third party service provider fees
which are recorded at the time of the procedure. Cost of
revenues also includes depreciation related to Endocare-owned
Cryocare Surgical Systems over an estimated useful life of three
years.
We have continued to experience year over year growth in
cryoablation disposable product sales and procedure fee
revenues. In the past two years, we have placed increasing
emphasis on direct sale of our products rather than procedure
fee revenues. As a result of the shift in revenue mix from
cryoablation procedure fees to sales of cryoablation disposable
products (where we do not perform the service component and have
a lower average selling price as well as cost of sales per
procedure), we have experienced an increase in gross margins as
a percentage of revenues although the gross profit dollars per
case generally are the same. Our gross margin has also increased
due to reconfiguration of our products to reduce manufacturing
costs and sourcing products and components to lower cost
suppliers. We have also reduced operating expenses through
streamlining our corporate organization, elimination or deferral
of some longer-term research, development, clinical and
marketing activities, instituting
F-8
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
additional equity incentive programs to reduce cash compensation
outlays, and in general better control of our operating expenses.
Revenues and the related cost of revenues from continuing
operations consist of the following for the three years ended
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products
|
|
$
|
6,790
|
|
|
$
|
13,948
|
|
|
$
|
21,157
|
|
Cryocare Surgical Systems
|
|
|
743
|
|
|
|
1,096
|
|
|
|
1,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,533
|
|
|
|
15,044
|
|
|
|
22,730
|
|
Cryoablation procedure fees
|
|
|
19,780
|
|
|
|
12,298
|
|
|
|
6,418
|
|
Cardiac royalties
|
|
|
889
|
|
|
|
604
|
|
|
|
386
|
|
Other
|
|
|
72
|
|
|
|
44
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,274
|
|
|
|
27,990
|
|
|
|
29,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products and procedure fees
|
|
$
|
15,278
|
|
|
|
11,541
|
|
|
|
9,006
|
|
Cryocare Surgical Systems
|
|
|
460
|
|
|
|
802
|
|
|
|
774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,738
|
|
|
$
|
12,343
|
|
|
$
|
9,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues for cryoablation disposable products and
procedure fees are combined for reporting purposes. Sales of
cryoablation disposable products and procedure fees incorporate
similar inventory when sold and we do not separately track the
cost of disposable products sold directly to customers and those
consumed in cryoablation procedures. Procedure fees relate to
services which are provided to medical facilities upon request
to facilitate the overall delivery of our technology into the
marketplace.
We provide customary sales incentives to customers and
distributors in the ordinary course of business. These
arrangements include volume discounts, equipment upgrades and
rent-to-own
programs. These transactions are accounted for in accordance
with Emerging Issues Task Force (EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables, when
applicable. We defer the recognition of certain Cryocare
Surgical System revenues where we have continuing performance
obligations. Deferred revenues are adjusted in future periods
when remaining obligations have been met. Deferred revenue as of
December 31, 2005, 2006, and 2007 is not significant and
was included in other accrued liabilities. From time to time, we
may agree to provide equipment upgrades for free or at
significant discounts to select customers who purchased Cryocare
Surgical Systems in the prior years. These offers to upgrade are
at our discretion and intended to facilitate the delivery of our
latest cryoablation technology into the market place. The loss
on equipment provided for upgrades is expensed at the earlier of
the commitment or shipment date. We have reduced the selling
price of Cryocare Surgical Systems in select instances to at or
near cost to promote the use of cryoablation as a preferred
treatment option. These initiatives have decreased the gross
margin on sale of Cryocare Surgical Systems.
No customer accounted for more than 10 percent of total
revenues in 2005. In 2006 and 2007, one customer accounted for
28.8 percent and 42.1 percent of total revenues,
respectively. This customer accounted for 45.7 percent and
38.9 percent of our accounts receivable balance as of
December 31, 2006 and 2007, respectively. We derived
93.1 percent, 94.2 percent and 92.8 percent of
revenues from sales in the United States during this three-year
period.
F-9
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We routinely assess the financial strength of our customers and
believe that our accounts receivable credit risk exposure is
limited. Accounts receivable are carried at original invoice
amount less an estimate for doubtful accounts and sales returns
based on a periodic review of outstanding receivables.
International shipments are billed and collected by Endocare in
U.S. dollars. Allowances are provided for known and
anticipated credit losses as determined by management in the
course of regularly evaluating individual customer receivables.
This evaluation takes into consideration a customers
financial condition and credit history as well as current
economic conditions. Accounts receivable are written off when
deemed uncollectible. Recoveries of accounts receivable
previously written off are recorded when received.
Inventories
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 inventory
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Raw materials
|
|
$
|
1,750
|
|
|
$
|
2,331
|
|
Work in process
|
|
|
300
|
|
|
|
227
|
|
Finished goods
|
|
|
778
|
|
|
|
958
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
2,828
|
|
|
|
3,516
|
|
Less inventory reserve
|
|
|
(568
|
)
|
|
|
(494
|
)
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
2,260
|
|
|
$
|
3,022
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
Property and equipment are stated at cost and are depreciated on
a straight-line basis over the estimated useful lives of the
respective assets, which range from three to seven years.
Leasehold improvements are amortized over the shorter of the
estimated useful lives of the assets or the related lease term.
Cryoablation equipment placed at customer sites for use with our
disposable cryoprobes is depreciated into cost of revenues over
estimated useful lives of three years. Repair and maintenance
costs are expensed as incurred. Depreciation expense from
continuing operations was $1.7 million, $1.0 million
and $0.6 million in 2005, 2006 and 2007, respectively.
The following is a summary of property and equipment:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Equipment and computers
|
|
$
|
1,825
|
|
|
$
|
1,899
|
|
Cryoablation systems placed at customer sites
|
|
|
5,019
|
|
|
|
5,169
|
|
Furniture and fixtures
|
|
|
908
|
|
|
|
1,040
|
|
Leasehold improvements
|
|
|
321
|
|
|
|
321
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, at cost
|
|
|
8,073
|
|
|
|
8,429
|
|
Accumulated depreciation and amortization
|
|
|
(7,033
|
)
|
|
|
(7,579
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
1,040
|
|
|
$
|
850
|
|
|
|
|
|
|
|
|
|
|
F-10
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2007, we leased certain office equipment under a capital
lease agreement. Capital lease obligations are amortized over
the life of the lease and amortization for capitalized assets
under lease agreements are included in depreciation expense.
This office equipment included in property and equipment above
was $0.1 million at December 31, 2007 and related
depreciation expense was approximately $4,000 for the year ended
December 31, 2007
Long-Lived
Assets, Goodwill and Intangible Assets Subject to
Amortization
We acquire goodwill and amortizable intangible assets in
business combinations and asset purchases. The excess of the
purchase price over the fair value of net assets acquired are
allocated to goodwill and identifiable intangibles. We do not
amortize goodwill which is consistent with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and other Intangible Assets as more fully
described in Note 5 Impairment of Goodwill and
Other Intangible Assets. Goodwill and indefinite lived
assets are reviewed annually for impairment and on an interim
basis if events or changes in circumstances indicate that the
asset might be impaired.
Intangible assets that are deemed to have finite useful lives
are recorded at cost and amortized using the straight-line
method over their estimated useful lives, as follows:
|
|
|
Trade names (discontinued operations)
|
|
15 years
|
Domain names
|
|
5 years
|
Covenants not to compete
|
|
3 to 5 years
|
Developed technology (discontinued operations)
|
|
15 years
|
Patents
|
|
3 to 15 years
|
Patents comprise our largest intangible asset. We capitalize the
costs incurred to file patent applications when we believe there
is a high likelihood that the patent will be issued, the
patented technology has other specifically identified research
and development uses and there will be future economic benefit
associated with the patent. We expense all costs related to
abandoned patent applications. If we elect to abandon any of our
currently issued or unissued patents or determine that their
carrying value is impaired, we reduce the patent to fair value.
Costs associated with patents and licenses purchased from third
parties for products or technology prior to receipt of
regulatory approval to market are capitalized if the licenses
can be used in multiple research and development programs. Our
capitalized patent costs pertain to technology currently used in
our commercialized products and for which we expect to recover
their cost through product sales. Patent costs are amortized on
a straight-line basis over the useful life of the license, which
begin on the date of acquisition and continues through the end
of the estimated term during which the technology is expected to
generate substantial revenues. Patent maintenance costs are
expensed as incurred.
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, we review
long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of such assets
may not be recoverable. We consider assets to be impaired and
write them down to fair value if estimated undiscounted cash
flows associated with those assets are less than their carrying
amounts. Fair value is based upon the present value of the
associated cash flows. Changes in circumstances (for example,
changes in laws or regulations, technological advances or
changes in our strategies) may also reduce the useful lives from
initial estimates. Changes in the planned use of intangibles may
result from changes in customer base, contractual agreements, or
regulatory requirements. In such circumstances, we will revise
the useful life of the long-lived asset and amortize the
remaining net book value over the adjusted remaining useful
life. There were no changes in estimated useful lives during
2005, 2006 and 2007. No impairment charge was recorded in 2006
or 2007.
F-11
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amortization expense for each of the years ending December 31
will consist of the following amounts:
|
|
|
|
|
2008
|
|
$
|
501
|
|
2009
|
|
|
501
|
|
2010
|
|
|
501
|
|
2011
|
|
|
501
|
|
2012
|
|
|
501
|
|
Thereafter
|
|
|
572
|
|
|
|
|
|
|
|
|
$
|
3,077
|
|
|
|
|
|
|
Amortization expense from continuing operations totaled
$0.6 million, $0.6 million and $0.5 million in
2005, 2006 and 2007, respectively.
The following is a summary of intangible assets:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Domain name
|
|
$
|
435
|
|
|
$
|
435
|
|
Covenant not to compete
|
|
|
352
|
|
|
|
352
|
|
Patents
|
|
|
6,205
|
|
|
|
6,205
|
|
|
|
|
|
|
|
|
|
|
Total intangibles
|
|
|
6,992
|
|
|
|
6,992
|
|
Accumulated amortization
|
|
|
(3,379
|
)
|
|
|
(3,915
|
)
|
|
|
|
|
|
|
|
|
|
Intangibles, net
|
|
$
|
3,613
|
|
|
$
|
3,077
|
|
|
|
|
|
|
|
|
|
|
Investments
We hold minority investments of less than 20 percent in
certain private early stage technology companies acquired in
conjunction with various strategic alliances. We do not have the
ability to exercise significant influence over the financial or
operational policies or administration of these companies;
therefore, they are accounted for under the cost method.
Realized gains and losses are recorded when related investments
are sold. These investments are regularly assessed for
impairment through review of operations and indicators of
continued viability, including operating performance, financing
status, liquidity prospects and cash flow forecasts. Impairment
losses are recorded when events and circumstances indicate that
such assets might be impaired and the decline in value is
other-than-temporary.
These investments are included in investments and other assets.
Product
Warranties
Certain of our products are covered by warranties against
defects in material and workmanship for periods up to two years
after the sale date. The estimated warranty cost is recorded at
the time of sale and is adjusted periodically to reflect actual
experience. Factors that affect our warranty liability include
the number of units sold, historical and anticipated rates of
warranty claims, and cost per claim. Our warranty costs and
liability (included in other accrued liabilities) were not
significant for 2005, 2006 or 2007.
Research
and Development
Research and development activities are performed primarily
in-house. Expenditures primarily include personnel, clinical
studies, and material expenses incurred to design, create, and
test prototypes. These expenditures are charged to operations as
incurred until technological feasibility has been established.
Costs to maintain patents are included in general and
administrative expenses.
F-12
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Advertising
Advertising costs are included in selling and marketing expenses
as incurred and totaled $0.3 million, $0.3 million and
$0.2 million for 2005, 2006 and 2007, respectively.
Shipping
and Handling Costs
We incurred shipping and handling costs in the normal course of
business. All shipping and handling costs related to our
products are charged to cost of sales as incurred.
Cash and
Cash Equivalents
All highly liquid investments purchased with an original
maturity of three months or less are considered to be cash
equivalents. Cash and cash equivalents include money market
funds and various deposit accounts.
Concentrations
of Credit Risk
Financial instruments, which potentially subject us to
concentrations of credit risk, primarily consist of cash and
cash equivalents, accounts receivable and notes receivable. We
may be exposed from time to time to credit risk with our bank
deposits in excess of the FDIC insurance limits. We have not
experienced any losses in such accounts and believe we are not
exposed to any significant credit risk on cash and cash
equivalents, except as described below. Our receivables are
derived primarily from sales of Cryocare Surgical Systems and
cryoablation disposable products to medical facilities, medical
groups and urologists. Cryoablation procedure fees are generated
from medical facilities. One customer accounted for
28.8 percent and 42.1 percent of our revenues for the
year ended December 31, 2006 and 2007, respectively. This
same customer accounted for 43.3 percent of our fourth
quarter 2007 revenues. Our accounts receivable as of
December 31, 2006 and 2007 consisted of 45.7 percent
and 38.9 percent of receivables from this customer. We have
no history of past due receivables from this customer. We
perform ongoing credit evaluations of our customers and
generally do not require collateral. Reserves are maintained for
potential credit losses. There are no significant concentrations
of credit risk with respect to trade receivables except for the
customer referenced above.
$7.1 million of our cash is invested in a money market
mutual fund (the Citi Institutional Liquid Reserves) which
includes in its investment portfolio commercial paper, time
deposits, certificates of deposits, bank notes, corporate bonds
and notes and U.S. government agency securities. The fund
is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. Although the fund
seeks to preserve the value of the investment at $1.00 per
share, it is possible to lose our principal if the underlying
securities suffer losses as a result of current credit market
conditions. At January 31, 2008, the fund reported that
certain securities within the portfolio are illiquid, in
default, under restructuring or have been subject to a ratings
downgrade. However, the fund continues to report a per share net
asset value (NAV) of $1, which represents the price at which
investors buy (bid price) and sell (redemption
price) fund shares from and to the fund company. The NAV
is computed once at the end of each trading day based on the
closing market prices of the portfolios securities. We
believe that our investment has not been impaired and that we
can withdraw our finds at any time without restriction. We will
monitor the value of the fund periodically for impairment.
We also have a $2.7 million note receivable from the sale
of a Timm Medical product line in 2003 and a $1.4 million
note receivable from the divestiture of Timm Medical in 2006. We
also have a $0.3 million secured note receivable from a
shareholder consultant to Endocare. These are included in
investments and other assets. We evaluate the creditworthiness
of the debtors periodically and provide allowances for
uncollectible amounts. We collected the $1.4 million note
receivable from the sale of Timm Medical in February 2008 along
with related accrued interest. See Note 7
Dispositions and Discontinued Operations and
Note 14 Related Party
Transactions for further discussion.
F-13
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair
Value of Financial Instruments
The primary objective of our investment activities is to
preserve principal while at the same time maximize the income we
receive from our invested cash without significantly increasing
the risk of loss. Our consolidated balance sheets include the
following financial instruments: cash and cash equivalents,
accounts and notes receivable, minority investments, accounts
payable, accrued liabilities, a line of credit and common stock
warrants. The carrying amounts of current assets and liabilities
approximate their fair values because of the relatively short
period of time between the origination of these instruments and
their expected realization. The interest rates on the notes
receivable related to Timm Medical generally approximate market
rates for secured obligations of similar terms and maturity. The
fair value of minority investments cannot be estimated since the
investees are privately held, early stage companies. The common
stock warrants were recorded at fair value through
December 31, 2006, and was adjusted each quarter using a
modified Black-Scholes pricing model.
Risks and
Uncertainties
Our profitability depends in large part on increasing our
revenue base and effectively managing costs of sales, customer
acquisition costs and administrative overhead. We continually
review our pricing and cost structure in an effort to select the
optimal revenue and distribution models. Several factors could
adversely affect revenues and costs, such as changes in health
care practices, payer reimbursement, inflation, new
technologies, competition and product liability litigation,
which are beyond our control and could adversely affect our
ability to accurately predict revenues and effectively control
costs. Many purchasers of our products and services rely upon
reimbursement from third-party payers, including Medicare,
Medicaid and other government or private organizations. These
factors could have a material adverse effect on our business,
financial condition, results of operations or cash flows.
Reclassification
For the years ended December 31, 2005 and 2006,
$0.1 million and $44,000 previously reported as product
sales have been reclassified to other sales to conform to our
current presentation.
Off-Balance
Sheet Financings and Liabilities
Other than lease commitments, obligations under royalty and
joint technology development arrangements, legal contingencies
incurred in the normal course of business and employment
contracts, we do not have any off-balance sheet financing
arrangements or liabilities. In addition, our policy is not to
enter into derivative instruments, futures or forward contracts.
Our business is transacted solely in U.S. dollars and,
while future fluctuations of the U.S. dollar may affect the
price competitiveness of our products, there is no known
significant direct foreign currency exchange rate risk. Finally,
we do not have any majority-owned subsidiaries or any interests
in, or relationships with, any material special-purpose entities
that are not included in the consolidated financial statements.
Other
Accrued Liabilities
Other accrued liabilities as of December 31, 2006 and 2007
include $2.8 million and $2.2 million in state and
local taxes, primarily sales and use taxes in various
jurisdictions in the United States.
Capital
Stock and Earnings Per Share
Basic net income or loss per share is computed by dividing net
income or 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, warrants, and restricted and deferred stock units
that were outstanding during the respective periods presented.
For periods when we reported a net loss from continuing
operations, these potentially dilutive common shares were
excluded
F-14
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
from the diluted income or loss per share calculation because
they were anti-dilutive. As of December 31, 2007, 2006, and
2005, the company had 3.8 million, 3.3 million, and
3.2 million, respectively, in potentially dilutive common shares
outstanding (prior to the application of the treasury stock
method) in the form of stock options, restricted stock units,
deferred stock units, and warrants.
Taxes
We recognize deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax
basis of our assets and liabilities along with net operating
loss and credit carry forwards, if it is more likely than not
that the tax benefits will be realized. To the extent a deferred
tax asset cannot be recognized under the preceding criteria,
allowances must be established. The impact on deferred taxes of
changes in tax rates and laws, if any, are applied to the years
during which temporary differences are expected to be settled
and reflected in the financial statements in the period of
enactment.
On January 1, 2007, we adopted Financial Accounting
Standards Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of
SFAS No. 109, Accounting for Income Taxes (see
Note 10 Income Taxes). Taxes
that are not based on income (including sales and use, payroll,
capital and property taxes) continue to be accounted for under
SFAS No. 5, Accounting for Contingencies.
We collect and remit sales tax on a gross basis. Our sales tax
liability is classified as current.
Stock-Based
Compensation
As of December 31, 2007, we have four stock-based employee
compensation plans and two non-employee director stock-based
compensation plans as more fully described in Note 8
Stock-Based Compensation Plans.
Equity awards include stock options, deferred stock units
and restricted stock units. Stock options generally have a
maximum contractual term of 10 years and vest pro-rata over
four years, which is the requisite service period. Certain
options may accelerate vest if performance milestones are
achieved and otherwise cliff vest after five years. The fair
value of share-based awards is estimated at the grant date using
the Black Scholes option pricing model described below, and the
portion that is ultimately expected to vest is recognized as
compensation expense over the explicit or implict service
period. Deferred stock units and restricted stock units are
accounted for similar to restricted stock grants. As more fully
described in Note 9 Equity Incentive
Plans, beginning in 2006, deferred stock units are
issued in lieu of cash bonuses to employees and board fees to
members of the board of directors at the election of the
eligible participants. These units vest when services are
rendered each year in the case of employee bonuses and each
quarter in the case of board fees. Beginning in 2007, restricted
stock units are also granted to employees with a contractual
life of 10 years. Certain restricted stock units vest based on
service over a specified period (3 years) while others vest
contingently based on performance conditions such as sales and
profitability goals over 2 to 3 years. For awards that vest
based on continuous service, we record compensation expense
ratably over the service period from the date of grant. For
grants that vest based on performance conditions, we begin
recording compensation expense over the service period when we
determine that achievement is probable. Change in estimates as
to probability of vesting is recorded through a cumulative
catch-up
adjustment when the assessment is made. Change in the estimated
implicit service period is recorded prospectively over the
remaining vesting period. During 2007, the Company determined
that profitability goals will likely be met and recorded
compensation expense of $0.6 million related to the restricted
stock units for services through December 31, 2007. If the
goals are ultimately not met, no compensation will be recognized
and any recognized compensation costs will be reversed.
Prior to January 1, 2006, we accounted for stock-based
compensation for those plans under the recognition and
measurement provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees
(APB 25) as permitted by SFAS No. 123,
Accounting for Stock Based Compensation. Compensation
expense recorded under APB 25 was not been significant since we
generally grant options with an exercise price equal to the fair
value of our common stock on the date of grant.
F-15
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Effective January 1, 2006, we adopted
SFAS No. 123 (revised 2004), Share Based Payment
(SFAS No. 123R) using the modified prospective
transition method. Among other items, SFAS No. 123R
eliminates the use of the intrinsic value method of accounting
under APB 25 and requires companies to recognize in the
financial statements the cost of employee services received in
exchange for awards of equity instruments based on the grant
date fair value of those awards. Under the modified prospective
method, we recognize compensation cost in the financial
statements beginning with the effective date based on the
requirements of SFAS No. 123R for all share-based
payments granted, modified or settled after January 1,
2006, and based on the requirements of SFAS No. 123
for all unvested awards granted prior to the effective date.
We use the Black-Scholes standard option pricing model and the
single option award approach to measure the fair value of the
stock options granted to employees. The determination of fair
value is affected by our stock price as well as assumptions
regarding a number of complex and subjective variables,
including expected stock price volatility, risk-free interest
rate, expected dividends and the projected exercise and
post-vesting employment termination behavior of employees.
In conjunction with the adoption of SFAS No. 123R on
January 1, 2006, we modified certain assumptions and
estimation methodologies for inputs to the Black-Scholes
valuation calculations in accordance with the requirements of
SFAS No. 123R and Staff Accounting Bulletin (SAB)
No. 107, Share-Based Payment. These changes
primarily include the following:
a. We increased the expected term from five years to
6.25 years using the shortcut method permitted
for plain vanilla options under SAB 107 (an
expected term based on the mid point between the vesting date
and the end of the contractual term). The short cut method is
permitted through December 31, 2007. We converted to
company-specific experience on January 1, 2008.
b. While we continue to use historical volatility (based on
daily trading prices) to estimate the fair value of options
granted, we have increased the period over which volatility is
measured from three years to 6.25 years. We have excluded
the period from October 24, 2002 to January 16, 2003
(inclusive) during which our common stock experienced unusually
high volatility as a result of announcement of our failure to
file the September 30, 2002
Form 10-Q,
temporary suspension of trading, delisting of our shares from
NASDAQ, and an investigation commenced by the SEC. These changes
resulted in a net decrease in volatility from previous
estimates. Average volatility for options granted in 2005, 2006
and during the year ended December 31, 2007 was
approximately 90.3 percent, 69.5 percent and
66.6 percent, respectively. We did not incorporate implied
volatility since there are no actively traded option contracts
on our common stock and sufficient data for an accurate measure
of implied volatility were not available.
c. Share based compensation is recognized only for those
awards that are ultimately expected to vest. Prior to
January 1, 2006, we accounted for forfeitures as they
occurred. Compensation expense related to unvested forfeited
options was reversed in the period the employee was terminated.
Upon adoption of SFAS No. 123R, we have estimated an
average forfeiture rate of approximately 25.0 percent based
on historical experience from 2001 through December 31,
2007. Stock-based compensation expense recorded in the 2006 and
2007 period is net of expected forfeitures. We will periodically
assess the forfeiture rate. Changes in estimates will be
recorded in the period of adjustment.
Due to our continuing losses, we do not recognize deferred tax
assets related to our stock-based compensation and we have not
recorded benefits for tax deductions in excess of recognized
compensation costs (required to be recorded as financing cash
flows) due to the uncertainty of when we will generate taxable
income to realize such benefits.
Total stock-based compensation expense for options, deferred
stock units and restricted stock units were $0.1 million,
$2.8 million and $3.9 million in 2005, 2006 and 2007,
respectively. As a result of adopting SFAS No. 123R,
our loss from continuing operations and net loss for the years
ended December 31, 2006 and 2007 was $2.6 million
($0.26 per basic and diluted share) and $2.5 million ($0.22
per basic and diluted share)
F-16
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
greater, respectively, than if we had continued to account for
stock-based compensation under APB 25 and its related
interpretations. Stock-based compensation expense is included in
the following line items in the consolidated statements of
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cost of revenues
|
|
$
|
|
|
|
$
|
56
|
|
|
$
|
86
|
|
Research and development
|
|
|
|
|
|
|
107
|
|
|
|
94
|
|
Selling and marketing
|
|
|
|
|
|
|
630
|
|
|
|
702
|
|
General and administrative
|
|
|
51
|
|
|
|
2,052
|
|
|
|
3,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
51
|
|
|
$
|
2,845
|
|
|
$
|
3,901
|
|
As of December 31, 2007, there was $1.7 million (net
of estimated forfeitures) of total unrecognized compensation
costs related to unvested stock options. That cost is expected
to be amortized on a straight-line basis over a weighted average
period of 0.9 years. Unrecognized compensation for deferred
and restricted stock units was $2.1 million at
December 31, 2007 (assuming that all service and
performance milestones will be met) and will be recognized over
a weighted average period of 1.9 years. As of
December 31, 2006 and 2007, stock compensation cost
capitalized as inventory was insignificant.
Prior to January 1, 2006, we accounted for stock-based
employee compensation plans in accordance with APB 25 and
followed the pro forma disclosure requirements set forth in
SFAS No. 123. The following table illustrates the
effect on net loss and loss per share for the year ended
December 31, 2005 as if we had applied the fair value
recognition provisions of SFAS No. 123 to stock-based
employee compensation. The amounts in the table below include
stock-based compensation expense related to Timm Medical which
was not significant (dollars in thousands, except per share
amounts):
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Net loss, as reported(a)
|
|
$
|
(13,679
|
)
|
Add: Stock-based employee compensation expense included in
reported net loss for all awards(b)
|
|
|
43
|
|
Less: Total stock-based employee compensation expense determined
under fair value based method for all awards
|
|
|
(3,696
|
)
|
|
|
|
|
|
Net loss, as adjusted
|
|
$
|
(17,332
|
)
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
As reported
|
|
$
|
(1.42
|
)
|
As adjusted
|
|
$
|
(1.79
|
)
|
|
|
|
(a) |
|
In the past, we had issued stock options and warrants to
consultants for services performed. Compensation expense for the
fair value of these options was determined by the Black-Scholes
option-pricing model and was charged to operations over the
service period or as performance goals were achieved. Such
expense was included in net loss as reported. |
|
(b) |
|
Since we issue options with exercise prices equal to or
exceeding the fair values of the underlying common stock, no
compensation expense was recorded for options issued to
employees. The recorded expense generally related to
compensation charges upon modification of vesting terms,
cashless exercises, and other non-routine transactions. |
F-17
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Recent
Accounting Pronouncements
|
In February 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 155, Accounting for Certain
Hybrid Financial Instruments, an amendment of FASB Statements
No. 133 and 140 (SFAS No. 155). Among other
things, SFAS No. 155 permits fair value remeasurement
for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation.
SFAS No. 155 is effective for all financial
instruments beginning after September 15, 2006. The
adoption of SFAS No. 155 did not have an impact on the
Companys consolidated financial position, results of
operations or cash flows.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurements
(SFAS No. 157), which defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. Certain provisions of
SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007, which will be effective as of the
first quarter of 2008. We do not expect that the adoption of
SFAS No. 157 will have a material impact on our
consolidated financial statements except that financial
statement disclosures will be revised to conform to the new
guidance.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS No. 159), which allows an entity to
voluntarily choose to measure certain financial assets and
liabilities at fair value. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007, which
will be effective as of the first quarter of 2008. We have not
decided if we will choose to measure any eligible financial
assets and liabilities at fair value.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 160, Non controlling Interests
in Consolidated Financial Statements - An Amendment of
ARB No. 51. SFAS No. 160 establishes new
accounting and reporting standards for the non controlling
interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the
recognition of a non controlling interest (minority interest) as
equity in the consolidated financial statements and separate
from the parents equity. The amount of net income
attributable to the non controlling interest will be included in
consolidated net income on the face of the income statement.
SFAS No. 160 also includes expanded disclosure
requirements regarding the interests of the parent and its non
controlling interest. SFAS No. 160 is effective for
fiscal years, and interim periods beginning after
January 1, 2009.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (Revised 2007), Business
Combinations or SFAS No. 141(R), which will
significantly change the accounting for business combinations.
Under SFAS No. 141(R), an acquiring entity will be
required to recognize all the assets acquired and liabilities
assumed in a transaction at the acquisition-date fair value with
limited exceptions. It also amends the accounting treatment for
certain specific items including acquisition costs and non
controlling minority interests and includes a substantial number
of new disclosure requirements. SFAS No. 141(R) will
be applied prospectively to business combinations with
acquisition dates on or after January 1, 2009.
In December 2007, the FASB ratified the consensus in EITF Issue
No. 07-1,
Accounting for Collaborative Arrangements
(EITF 07-1).
EITF 07-1
defines collaborative arrangements and requires collaborators to
present the result of activities for which they act as the
principal on a gross basis and report any payments received from
(made to) the other collaborators based on other applicable
authoritative accounting literature, and in the absence of other
applicable authoritative literature, on a reasonable, rational
and consistent accounting policy that is to be elected.
EITF 07-1
also provides for disclosures regarding the nature and purpose
of the arrangement, the entitys rights and obligations,
the accounting policy for the arrangement and the income
statement classification and amounts arising from the agreement.
EITF 07-1
will be effective for fiscal years beginning after
December 15, 2008, which will be our fiscal year 2009, and
will be applied as a change in accounting principle
retrospectively for all collaborative arrangements existing as
of the effective date. We have not yet evaluated the potential
impact of adopting
EITF 07-1
on our consolidated financial statements.
F-18
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2007, the FASB ratified the consensus in EITF Issue
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities
(EITF 07-3),
which requires that nonrefundable advance payments for goods or
services that will be used or rendered for future research and
development (R&D) activities be deferred and amortized over
the period that the goods are delivered or the related services
are performed, subject to an assessment of recoverability.
EITF 07-3
will be effective for fiscal years beginning after
December 15, 2007, which will be our fiscal year 2008. We
do not expect that the adoption of
EITF 07-3
will have a material impact on our consolidated financial
statements.
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.
|
|
5.
|
Impairment
of Goodwill and Other Intangible Assets
|
Under SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill and indefinite-lived intangible assets are
not amortized but instead are reviewed annually for impairment
and on an interim basis if events or changes in circumstances
between annual tests indicate that an asset might be impaired.
Goodwill is tested for impairment by comparing its fair value to
its carrying value under a two-step process. The first step
requires us to compare the fair value of the reporting units to
the carrying value of the net assets of the respective reporting
units, including goodwill. Our management is primarily
responsible for estimating fair value for impairment purposes.
Management may consider a number of factors, including
valuations or appraisals, when estimating fair value. If the
fair value of the reporting unit is less than the carrying
value, goodwill of the reporting unit is potentially impaired
and we then complete step two to measure the impairment loss, if
any. The second step requires the calculation of the implied
fair value of goodwill by deducting the fair value of all
tangible and intangible net assets of the reporting unit from
the fair value of the reporting unit. If the implied fair value
of goodwill is less then the carrying amount of goodwill, an
impairment loss is recognized equal to the difference.
After Timm Medical was sold in February 2006, there was no
remaining goodwill or indefinite life intangibles.
|
|
6.
|
Private
Placement of Common Stock and Warrants
|
May 2007
Private Placement
On May 24, 2007 we entered into a common stock subscription
agreement with Frazier and on May 25, 2007 we entered into
a registration rights agreement with Frazier. Under the
subscription agreement, Frazier agreed to purchase
1,085,271 shares of our common stock at a price per share
of $6.45, for aggregate proceeds to us of $7.0 million.
In the subscription agreement, Frazier agreed to
lock-up
provisions restricting the transferability of the shares, for a
period of one year for 75 percent of the shares and a
period of 18 months for 25 percent of the shares. The
lock-up
provisions expire early if we undergo a change in control or if
we issue significant additional amounts of securities in certain
circumstances after May 25, 2007, as described in the
subscription agreement.
In the registration rights agreement, we agreed to file a
registration statement with the SEC on or before March 20,
2008 to register the shares for resale. We also agreed to use
commercially reasonable efforts to cause the registration
statement to become effective as promptly as possible
thereafter, with the intention that the registration statement
will be available for resale by Frazier once the
lock-up
restrictions expire. In addition, we agreed to use commercially
reasonable efforts to keep the registration statement effective
until May 25, 2010.
Fusion
Capital Equity Purchase Agreement
On October 25, 2006, we entered into a common stock
purchase agreement with Fusion Capital as described above under
Note 2 Recent Operating Results and
Liquidity. Under this agreement we have the right to
sell to
F-19
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fusion Capital up to $16.0 million worth of common stock,
at our election, over a two year period at prices determined
based upon the market price of our common stock at the time of
each sale, without any fixed discount. Common stock may be sold
in $100,000 increments every fourth business day, with
additional $150,000 increments available every third business
day if the market price per share of our common stock is $4.50
or higher, subject to our ability to comply with certain ongoing
requirements discussed below. This $150,000 increment can be
further increased at graduated levels up to $1.0 million if
the market price per share increases from $4.50 to $18.00. If
the price of the stock is below $3.00 per share, the obligation
for Fusion Capital to buy any shares of stock is automatically
suspended. Under the terms of the agreement, we issued
157,985 shares of common stock to Fusion Capital in 2006
for no consideration as a commitment fee.
Under a related registration rights agreement, before Fusion
Capital was obligated to purchase shares, we were required to
file a registration statement covering the sale of up to
2,824,652 common shares within 20 days of signing the
agreement. The registration statement was filed in November 2006
and declared effective by the SEC on December 1, 2006. We
subsequently filed a post-effective amendment to the
registration statement, which was declared effective
March 30, 2007. We are required to maintain effectiveness
of the registration statement until the earlier of the date that
Fusion Capital may sell the shares without restriction pursuant
to Rule 144(k) or the date that Fusion Capital has sold all
purchased shares and no available unpurchased shares remain
under the agreement. Upon occurrence of certain events of
default as defined in the stock purchase agreement, including
lapse of effectiveness of the registration statement for 10 or
more consecutive business days or for 30 or more business days
within a
365-day
period, suspension of trading for three business days, delisting
of the shares from the principal market on which they are
traded, failure by our stock transfer agent to issue shares
within five business days or other material breaches, Fusion
Capital may terminate the stock purchase agreement. We have the
right to terminate the agreement at any time.
Through December 31, 2007, we had sold 293,397 shares
to Fusion Capital for gross proceeds of $1.6 million. We
are obligated to pay a transaction fee equal to 6.0 percent
of the stock proceeds to an investment advisory firm under a
pre-existing capital advisory agreement. As of December 31,
2007, we have approximately $14.4 million in remaining
funding available with Fusion Capital based on our closing stock
price on that date.
March
2005 Private Placement
On March 11, 2005, we completed a private placement of
1,878,448 shares of our common stock and detachable
warrants to purchase 1,314,892 common shares at an offering
price of $8.31 per share, for aggregate gross proceeds of
$15.6 million. Transaction costs were $1.0 million,
resulting in net proceeds of $14.6 million. Of the total
warrants, 657,446 had an initial exercise price of $10.50
(Series A warrants) per share and 657,446 had an initial
exercise price of $12.00 (Series B warrants) per share. The
expiration date of the warrants is May 1, 2010. One current
member and one former member 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.
The warrants have an anti-dilution clause that is triggered upon
issuance of a certain number of shares of our common stock that
reduces the effective exercise price of the warrants to preserve
the ownership of the warrant holders. As a result of our May
2007 private placement and the issuance of shares to Fusion
Capital, the exercise price of the Series A Warrants
decreased to $10.02 to effectively provide holders the right to
purchase an additional 31,667 shares and the exercise price
of the Series B Warrants decreased to $11.37 to effectively
provide holders the right to purchase an additional
37,191 shares.
The warrants initially are exercisable at any time during their
term 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 us at a
price of $0.01 per share underlying such warrant if our stock
trades above certain dollar per share thresholds ($19.50 for the
Series A warrants and $22.50 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
F-20
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
6.0 percent of the warrant proceeds under a pre-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, covering the
resale of all of the common stock purchased and the common stock
originally underlying the issued warrants. The
S-2
registration statement was declared effective September 28,
2005. We subsequently filed a post-effective amendment on
Form S-3,
which was declared effective March 28, 2006 and a
post-effective amendment on
Form S-1,
which was declared effective March 30, 2007.
The registration rights agreement 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 damages, equal to one percent of the aggregate
purchase price paid by such holder per month. We incurred
$0.6 million of liquidated damages through
September 28, 2005, when the
S-2
registration statement was declared effective. This amount was
included in general and administrative expenses in 2005.
Under the registration rights agreement, we could incur similar
liquidated damages in the future (equal to one percent of the
aggregate purchase price paid by each affected holder per month)
if holders are unable to make sales under the registration
statement (for example, if we fail to keep the registration
statement current as required by SEC rules or if future
amendments to the registration statement are not declared
effective in a timely manner). The registration obligation
remains outstanding until the earlier of the date on which all
shares issuable upon exercise of the warrants have been issued
and resold by the holders of the warrants or the date on which
all such shares can be resold by the holders without
registration.
Since the liquidated damages under the registration rights
agreement could in some cases exceed a reasonable discount for
delivering unregistered shares, we accounted for the
registration payment arrangement and warrants as one instrument
classified as a derivative (a non-current liability) under EITF
No. 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own Stock. We
allocated $5.7 million of the March 2005 offering proceeds
to the warrants based on their fair value at issuance, which was
estimated using the Black Scholes model. Through
December 31, 2006, we revalued the warrants as a derivative
instrument quarterly in connection with changes in the
underlying stock price and other assumptions, with the change in
value recorded as interest expense. During 2005 and 2006, we
recorded non-cash negative interest expense of $0.7 million
and $3.7 million, respectively, which represents a
reduction in the fair value of the warrants, primarily due to a
decrease in our share price, lower overall stock price
volatility and the continual lapse of the warrants
remaining contractual term.
In December 2006, the Financial Accounting Standards Board
issued FASB Staff Position (FSP) EITF
No. 00-19-2,
Accounting for Registration Payment Arrangements, which
changed the way we account for the outstanding warrants. FSP
EITF
No. 00-19-2
specifies that the contingent obligation to make future payments
or otherwise transfer consideration under a registration payment
arrangement should be separately recognized and measured in
accordance with SFAS No. 5, Accounting for
Contingencies. For registration payment arrangements and
financial instruments subject to those arrangements that were
entered into prior to the issuance of this FSP and that continue
to be outstanding at the adoption date, this guidance is
effective for fiscal years beginning after December 15,
2006 and interim periods within those fiscal years. Upon
adoption of FSP EITF
No. 00-19-2
on January 1, 2007, the value of the warrants as of the
original issue date ($5.7 million) was reclassified to
equity without regard to the contingent obligation to transfer
consideration under the registration payment arrangement. The
difference between the $5.7 million and the fair value of
the warrant liability as of December 31, 2006
F-21
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
($1.3 million) was recorded as a cumulative-effect
adjustment to reduce opening retained earnings on
January 1, 2007. Hereafter, accruals for liquidated
damages, if any, will be recorded when they are probable and
reasonably estimable.
|
|
7.
|
Dispositions
and Discontinued Operations
|
Sale of
Timm Medical 2006
On January 13, 2006, we entered into a stock purchase
agreement to sell Timm Medical, our wholly-owned subsidiary, to
Plethora Solutions Holdings plc (Plethora), a British company
listed on the London Stock Exchange for $9.5 million. The
transaction closed on February 10, 2006 and resulted in a
gain on sale of $0.5 million in the first quarter of 2006.
After the sale, we did not receive significant direct cash flows
from Timm Medical and had no significant continuing involvement
in its operations since the sale. In accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the assets, liabilities,
revenues and expenses of Timm Medical were classified as
discontinued operations in the consolidated financial statements
for each year presented.
The $9.5 million consideration included cash of
$8.1 million and a two-year, five percent promissory note
secured by the assets of Timm Medical for $1.4 million. The
note was convertible into Plethoras ordinary shares at any
time at our option. Net cash proceeds on the date of the
divestiture were $7.5 million (after $0.6 million in
transaction costs and $40,000 in cash of Timm Medical as of the
disposition date). The note and unpaid accrued interest totaling
$1.6 million was paid in full on February 11, 2008.
The note receivable was included in investments and other assets
at December 31, 2006 and in prepaid expenses and other
current assets at December 31, 2007.
We retained certain assets and liabilities of Timm Medical in
the sale, including all tax liabilities totaling
$1.1 million, obligations and rights to a $2.7 million
note receivable from SRS Medical Corporation relating to the
sale of Timm Medicals urinary incontinence product line in
2003, certain litigation to which Timm Medical was a party and
ownership of Urohealth BV (Timm Medicals wholly-owned
subsidiary with insignificant operations). Assets and
liabilities we retained and their related revenues and expenses
were excluded from discontinued operations.
Assets and liabilities of discontinued operations as of
February 10, 2006 included the following:
|
|
|
|
|
Assets:
|
|
|
|
|
Cash, inventories and other current assets
|
|
$
|
1,041
|
|
Property and equipment, net
|
|
|
71
|
|
Goodwill, net
|
|
|
4,552
|
|
Intangibles, net
|
|
|
3,680
|
|
Other assets
|
|
|
65
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,409
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Accounts payable and other current liabilities
|
|
|
502
|
|
Other accrued liabilities
|
|
|
486
|
|
|
|
|
|
|
Total liabilities
|
|
|
988
|
|
|
|
|
|
|
Net assets
|
|
$
|
8,421
|
|
|
|
|
|
|
No assets or liabilities of Timm Medical were held as of
December 31, 2006. Revenues for Timm Medical were
$9.3 million in 2005 and $1.0 million for the period
from January 1 to February 10, 2006, respectively. The
operations of Timm Medical are classified as discontinued
operations as a result of the sale of Timm Medical in 2006.
Income from discontinued operations for the year ended
December 31, 2006 includes a $0.5 million gain on
disposal and is net of $0.2 million in taxes.
F-22
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cryoablation
Products for Cardiac Applications 2003
On April 14, 2003, we sold our cardiac-related product
manufacturing operations and licensed the related intellectual
property to CryoCath Technologies, Inc. (CryoCath) for
$10.0 million. CryoCath was the exclusive distributor for
cryoprobes and consoles in connection with the
SurgiFrosttm
system, a cryoablation system designed to treat cardiac
arrhythmias. We transferred all of our manufacturing assets and
inventory related to the cardiac product line to CryoCath,
including technical know-how, vendor lists, production equipment
and inventory. In addition, CryoCath received an exclusive
worldwide perpetual license for cardiac uses to our proprietary
argon gas based technology associated with the product and makes
payments to us under a nine-year descending royalty stream based
on net sales of products incorporating the licensed technology.
We also agreed to a
12-year
worldwide covenant not to compete in the cardiac field. Upon the
consummation of the sale, we terminated our pre-existing
distribution agreement with CryoCath. We are required to attend
quarterly and annual technical update meetings through 2014.
Since the technology was internally developed and the tangible
assets sold had minimal value, the sale resulted in a 2003
second quarter gain of $10.0 million. The royalty stream
decreases from 10 percent to 3 percent of net sales
from the
SurgiFrosttm
system during the period 2004 to 2012. The royalty payments are
recorded in the periods earned. Royalty income was
$0.9 million, $0.6 million and $0.4 million in
2005, 2006 and 2007, respectively.
On June 19, 2007, CryoCath and ATS Medical, Inc. (ATS)
entered into definitive agreement under which ATS acquired
CryoCaths surgical cryoablation business. In conjunction
with that transaction, we agreed to bifurcate our prior
agreement with CryoCath to give ATS the same rights with respect
to the cardiac surgical market as CryoCath had prior to
ATSs purchase.
Urinary
Incontinence and Urodynamics 2003
On October 15, 2003, Timm Medical agreed to sell the
manufacturing assets related to its urodynamics and urinary
incontinence product lines to SRS Medical Corp. (SRS) for a
$2.7 million note. These assets include certain patents and
trademarks related to the urodynamics and urinary incontinence
products, inventory, customer lists and technical know-how. The
note bears interest at 7.5 percent and is secured by the
assets sold. As amended in March 2004, the note requires
quarterly payments of $45,000 beginning March 31, 2004,
increasing to $60,000 for the quarter ended December 31,
2005. Amounts which remain outstanding at December 31, 2005
are payable at least $60,000 per quarter until the outstanding
principal and accrued interest are paid in full. The carrying
values of the urodynamics and urinary incontinence-related
assets were $1.3 million on the date of sale. Management
concluded that collection of the note from SRS was not
reasonably assured. As a result, a loss of $1.3 million was
recorded in the fourth quarter of 2003 equal to the carrying
value of the assets sold and collections on the note, if any,
will be reported as gain in the period received. Collections
during 2005, 2006 and 2007 were $0.3 million,
$0.2 million and $0.2 million respectively and have
been applied to accrued interest. As of December 31, 2005
the note was transferred from Timm Medical to Endocare prior to
the sale of Timm Medical.
|
|
8.
|
Stock-Based
Compensation Plans
|
As of December 31, 2007, we have four stock-based employee
compensation plans and two non-employee director stock-based
compensation plans.
F-23
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Options
The following tables summarize our option activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
|
Options
|
|
|
Per Option
|
|
|
Options
|
|
|
Per Option
|
|
|
Options
|
|
|
Per Option
|
|
|
Outstanding, beginning of year
|
|
|
1,787,051
|
|
|
$
|
14.16
|
|
|
|
1,873,748
|
|
|
$
|
12.77
|
|
|
|
1,969,734
|
|
|
$
|
12.31
|
|
Granted
|
|
|
516,421
|
|
|
|
9.57
|
|
|
|
372,087
|
|
|
|
8.51
|
|
|
|
69,056
|
|
|
|
5.46
|
|
Cancelled/forfeited
|
|
|
(364,647
|
)
|
|
|
16.24
|
|
|
|
(247,489
|
)
|
|
|
11.07
|
|
|
|
(114,161
|
)
|
|
|
9.42
|
|
Exercised
|
|
|
(65,077
|
)
|
|
|
6.29
|
|
|
|
(28,612
|
)
|
|
|
3.79
|
|
|
|
(166,667
|
)
|
|
|
6.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
1,873,748
|
|
|
|
12.77
|
|
|
|
1,969,734
|
|
|
|
12.31
|
|
|
|
1,757,962
|
|
|
|
12.75
|
|
Exercisable, end of year
|
|
|
870,315
|
|
|
|
16.25
|
|
|
|
1,139,632
|
|
|
|
14.53
|
|
|
|
1,305,882
|
|
|
|
14.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
Number
|
|
|
Weighted-Average
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
Outstanding at
|
|
|
Remaining
|
|
|
Weighted-
|
|
|
Exercisable at
|
|
|
Weighted-
|
|
Range Of
|
|
December 31,
|
|
|
Contractual Life
|
|
|
Average
|
|
|
December 31,
|
|
|
Average
|
|
Exercise Price
|
|
2007
|
|
|
(Number of Years)
|
|
|
Exercise Price
|
|
|
2007
|
|
|
Exercise Price
|
|
|
$ 4.95 - $ 6.45
|
|
|
207,088
|
|
|
|
7.02
|
|
|
$
|
6.01
|
|
|
|
108,660
|
|
|
$
|
6.33
|
|
$ 6.51 - $ 8.16
|
|
|
298,280
|
|
|
|
7.39
|
|
|
$
|
7.44
|
|
|
|
191,812
|
|
|
$
|
7.64
|
|
$ 8.20 - $ 9.00
|
|
|
231,816
|
|
|
|
7.11
|
|
|
$
|
8.60
|
|
|
|
144,364
|
|
|
$
|
8.64
|
|
$ 9.12 - $ 9.93
|
|
|
211,672
|
|
|
|
7.94
|
|
|
$
|
9.72
|
|
|
|
124,502
|
|
|
$
|
9.63
|
|
$10.05 - $12.45
|
|
|
199,875
|
|
|
|
6.71
|
|
|
$
|
11.44
|
|
|
|
163,563
|
|
|
$
|
11.58
|
|
$12.48 - $12.60
|
|
|
12,250
|
|
|
|
5.79
|
|
|
$
|
12.53
|
|
|
|
11,312
|
|
|
$
|
12.53
|
|
$12.81 - $12.81
|
|
|
333,333
|
|
|
|
5.96
|
|
|
$
|
12.81
|
|
|
|
300,000
|
|
|
$
|
12.81
|
|
$14.06 - $37.31
|
|
|
179,632
|
|
|
|
3.54
|
|
|
$
|
23.57
|
|
|
|
177,653
|
|
|
$
|
23.67
|
|
$37.32 - $56.52
|
|
|
83,683
|
|
|
|
3.84
|
|
|
$
|
47.02
|
|
|
|
83,683
|
|
|
$
|
47.02
|
|
$63.69 - $63.69
|
|
|
333
|
|
|
|
3.85
|
|
|
$
|
63.69
|
|
|
|
333
|
|
|
$
|
63.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 4.95 - $63.69
|
|
|
1,757,962
|
|
|
|
6.45
|
|
|
$
|
12.75
|
|
|
|
1,305,882
|
|
|
$
|
14.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining contractual term of options
outstanding and options exercisable at December 31, 2007 is
6.45 years and 5.94 years, respectively. The aggregate intrinsic
value of options outstanding and options exercisable at
December 31, 2007 is $0.5 million and $0.2 million,
respectively. The aggregate intrinsic value is calculated as the
difference between the exercise price of the underlying awards
and the quoted price of our common stock at December 31,
2007 for those awards that have an exercise price currently
below the quoted price. In each of the years ended
December 31, 2005, 2006 and 2007, the aggregate intrinsic
value of options exercised under the stock option plans was
$0.3 million, $0.1 million and $0.2 million,
respectively. Cash received from option exercises under all
stock-based payment arrangements for the years ended
December 31, 2005, 2006 and 2007 was $0.1 million,
$0.1 million and $1.1 million, respectively. The
weighted average fair value of our options granted at the grant
date was approximately $6.75 in 2005, $5.69 in 2006, and $3.53
in 2007.
F-24
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Stock volatility
|
|
|
0.90
|
|
|
|
0.70
|
|
|
|
0.67
|
|
Risk-free interest rate
|
|
|
4.0
|
%
|
|
|
4.6
|
%
|
|
|
4.7
|
%
|
Expected life in years
|
|
|
5 years
|
|
|
|
6.25 years
|
|
|
|
6.25 years
|
|
Stock dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
The total fair value of shares vested during 2007 is
approximately equal to the $2.5 million recorded as stock
compensation expense during 2007 related to employee stock
option vesting under SFAS no. 123R.
Stock
Units
During 2007, the Company issued 0.5 million restricted
stock units at a weighted average grant date fair value of
$5.76, all of which are non-vested and outstanding at
December 31, 2007. No restricted stock units were granted
or outstanding in 2005 and 2006. As of December 31, 2006
and 2007, the Company had 16,279 and 81,589 deferred stock units
outstanding with a weighted average grant date fair value of
$8.10 in 2006 and $6.66 in 2007, respectively, under the
employee deferred stock unit program. As of December 31,
2006 and 2007, the Company had 13,342 and 56,800 deferred stock
units outstanding with a weighted average grant date fair value
of $5.94 in 2006 and $6.78 in 2007, respectively, under the
non-employee director deferred stock unit program. All deferred
stock units have vested. The fair value of each stock unit is
based on the underlying stock price on the date of grant. The
aggregate intrinsic value of deferred and restricted stock units
at December 31, 2007 based on the difference between the
share price on the date of grant and at December 31, 2007
is approximately $1 million.
Employment related taxes payable associated with the exercise of
employee stock options and loan forgiveness as of
December 31, 2006 and 2007 were $0.1 million and zero,
respectively (included in accrued compensation).
|
|
9.
|
Equity
Incentive Plans
|
Share-based
payments
As of December 31, 2007, we had stock options, deferred
stock units and restricted stock units outstanding under four
employee and two non-employee director stock-based compensation
plans, as follows:
2004 Stock Incentive Plan. The 2004 Stock Incentive Plan
adopted in September 2004 authorizes the Board or one or more
committees designated by the Board (the Plan Administrator) to
grant options and rights to purchase common stock to employees,
directors and consultants. Options may be either incentive
stock options as defined in Section 422 of the
Internal Revenue Code of 1986, as amended, non-statutory stock
options or other equity instruments. The 2004 Stock Incentive
Plan replaced the 1995 Stock Plan and 1995 Director Plan
described below. The exercise price is equal to the fair market
value of our common stock on the date of grant (or
110 percent of such fair market value, in the case of
options granted to any participant who owns stock representing
more than 10 percent of our combined voting power). Options
generally vest 25 percent on the one-year anniversary date,
with the remaining 75 percent vesting monthly over the
following three years and are exercisable for 10 years. On
the first trading day of each calendar year beginning in 2005,
shares available for issuance will automatically increase by
three percent of the total number of outstanding common shares
at the end of the preceding calendar year, up to a maximum of
333,333 shares. In addition, the maximum aggregate number
of shares which may be issued under the 2004 Stock Incentive
Plan will be increased by any shares (up to a maximum of
933,333 shares) awarded under the 1995 Stock Plan and
1995 Director Plan that are forfeited, expire or are
cancelled. Options become fully vested if an employee is
terminated without cause within 12 months of a change in
control as defined. Upon a corporate transaction as defined,
options not assumed or replaced will vest immediately. Options
assumed or replaced will vest if the employee is terminated
without cause within 12 months. As of December 31,
2007, there were
F-25
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
outstanding under the 2004 Stock Incentive Plan options and
restricted stock units to purchase 1,435,500 shares of our
common stock and 197,732 options were available for grant.
1995 Stock Plan. The 1995 Stock Plan authorized the Board
or one or more committees designated by the Board (the
Committee) to grant options and rights to purchase common stock
to employees and certain consultants and distributors. Options
granted under the 1995 Stock Plan may be either incentive
stock options as defined in Section 422 of the
Internal Revenue Code of 1986, as amended, non-statutory stock
options or other equity instruments, as determined by the Board
or the Committee. The exercise price of options granted under
the 1995 Stock Plan was required to equal the fair market value
of our common stock on the date of grant. Options generally vest
25 percent on the one-year anniversary date, with the
remaining 75 percent vesting monthly over the following
three years. Options are exercisable for 10 years. The 1995
Stock Plan was replaced by the 2004 Stock Incentive Plan on
September 10, 2004. As of December 31, 2007, there
were outstanding under the 1995 Stock Plan options to purchase
450,239 shares of our common stock and no options were
available for grant.
1995 Director Option Plan. The 1995 Director
Option Plan (the Director Plan) provided automatic,
non-discretionary grants of options to our non-employee
directors (Outside Directors). Upon election, each director
received an initial option grant to purchase 6,666 shares
of common stock which vest over two years and an annual option
grant to purchase 1,666 common shares which becomes exercisable
after one year. The exercise price of options granted to Outside
Directors was required to be the fair market value of our common
stock on the date of grant. Options granted to Outside Directors
have 10-year
terms, subject to an Outside Directors continued service
as a director. The 1995 Director Option Plan was replaced
by the 2004 Stock Incentive Plan on September 10, 2004. As
of December 31, 2007 there were outstanding under the
1995 Director Option Plan options to purchase
21,668 shares of Endocares common stock and no
options were available for grant.
2002 Supplemental Stock Plan. We adopted the
2002 Supplemental Stock Plan (2002 Plan) effective June 25,
2002. Under the 2002 Plan, non-statutory options may be granted
to employees, consultants and outside directors with an exercise
price equal to at least 85 percent of the fair market value
per share of our common stock on the date of grant. The 2002
Plan expires June 24, 2012, unless earlier terminated in
accordance with plan provisions. The 2002 Plan also terminates
automatically upon certain extraordinary events, such as the
sale of substantially all or our assets, a merger in which we
are not the surviving entity or acquisition of 50 percent
or more of the beneficial ownership in our common stock by other
parties. Upon such an event, all options become fully
exercisable. Through December 31, 2007, there were options
to purchase 46,666 shares of our common stock outstanding
under the 2002 Plan. On February 22, 2007 our Board of
Directors terminated the 2002 Plan. As a result, no additional
options may be granted under the 2002 Plan. The termination of
the 2002 Plan does not affect the 46,666 outstanding options
referred to above.
Employee Deferred Stock Unit Program. On
May 18, 2006 we adopted the Employee Deferred Stock
Unit Program and the Non-employee Director Deferred
Stock Unit Program. Under the terms of the employee
program, certain eligible employees have the option to elect to
receive all or a portion of their annual incentive award (at a
minimum of 25 percent) in deferred stock units in lieu of
cash. In addition each participating employee will also receive
an additional premium in stock at a percentage determined by the
Compensation Committee of our Board. That percentage premium for
2006 and 2007 was 20 percent. Each unit entitles the holder
to receive one common share at a specified future date.
Irrevocable deferral elections are made during a designated
period no later than June 30 of each year. The units vest upon
the determination of the incentive award achieved and the number
of stock units earned. This determination is made in the first
quarter of the following fiscal year. The stock price to
determine the number of shares to be issued is the fair market
value of the stock on the date on which the deferred stock units
are granted. In 2006 and 2007, the date of grant was
June 23, 2006 and March 30, 2007, respectively, on
which dates the closing stock price was $8.10 and $6.66,
respectively. Compensation expense related to the bonus
incentive award program is recorded pro rata during the
performance year based on the estimated incentives achieved,
whether payable in cash or in stock units. The portion of
incentive award payable in stock units is recorded as additional
paid-in-capital.
The estimated value of the incentives is periodically adjusted
based on current
F-26
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expectations regarding the levels of achievement. In order to
satisfy certain regulatory requirements in preparation for the
planned listing of our common stock on The NASDAQ Capital
Market, on August 6, 2007 we amended the Employee Deferred
Stock Unit Program to impose a maximum
10-year term
for the program (from the original adoption date, which was
May 18, 2006) and establish a maximum number of shares
that may be issued under the program, which is
700,000 shares. As of December 31, 2007, 81,589
deferred stock units were outstanding under the program.
Non-employee Directors Deferred Stock Unit
Program. Under the directors plan, members of the
board of directors can choose to have all or a portion of their
director fees paid in fully vested deferred stock units (at a
minimum of 25 percent) commencing July 1, 2006. The
date of grant and share price used to determine the number of
deferred stock units is set on the fifth business day after the
end of the quarter in which the services are rendered.
Additionally, to cover taxes directors may choose to have up to
50 percent of their deferred stock units paid in cash at
the date the underlying common shares are to be issued based on
the share price at that time. During 2006, elections were made
in June. Subsequent annual deferred elections will be made in
December for the following year. Deferred stock units are
granted each quarter based on the director fees earned in the
prior quarter and the fair market value of the stock on the date
of grant. The first grant was made in October 2006 for the
September 30, 2006 quarter. Directors fees, whether
payable in cash or in stock units, are expensed in the quarter
the services are rendered. The maximum number of deferred stock
units that can be settled in cash at the option of the holder is
recorded as a liability (included in deferred compensation) and
adjusted each quarter to current fair value until settlement
occurs. The fair value of the portion of the deferred stock
units issuable in shares are fixed at the date of grant and are
included in additional paid-in capital. In order to satisfy
certain regulatory requirements in preparation for the planned
listing of our common stock on The NASDAQ Capital Market, on
August 6, 2007 we amended the Non-employee Director
Deferred Stock Unit Program to impose a maximum
10-year term
for the program (from the original adoption date, which was
May 18, 2006) and establish a maximum number of shares
that may be issued under the program, which is
400,000 shares. As of December 31, 2007, 56,800
deferred stock units were outstanding under the program.
Common shares underlying the vested stock units in the employee
and director plans are issued at the earlier of the payout date
specified by the participant (which is at least two years from
the applicable election deadline), a change in control event as
defined, or the month following the participants death.
Option Arrangements Outside of Plans. In
addition to the option plans described above, on March 3,
2003, we granted options to purchase 250,000 shares of
common stock to our then President and Chief Operating Officer.
The options were granted at $6.75 per share; 83,333 of the
options were available for accelerated vesting based on the
attainment of certain milestones and objectives or five years,
whichever came first. Twenty-five percent of the remaining
166,667 options vest on the first anniversary with the balance
ratably over three years. In September 2006, the former officer
forfeited 83,333 of unvested options upon separation from
Endocare. Pursuant to the original terms of the grant, the
former officer was entitled to continue vesting in 20,834
options for one year. The expense related to the unvested
options retained by the former officer (net of reversal of
expenses on the forfeited options) was included in the
$0.3 million severance charge recorded in the third quarter
of 2006.
On December 15, 2003, we granted 333,333 options to
purchase common stock to our Chief Executive Officer. The
options were granted at $12.81 per share; 33,333 of these
options are available for accelerated vesting based on the
attainment of certain milestones and objectives or five years,
whichever comes first. Twenty-five percent of the remaining
options vest immediately with the balance vesting ratably over
three years. These milestones were not met as of
December 31, 2007.
All options granted pursuant to our stock-based compensation
plans are subject to immediate vesting upon a change in control
as defined in the respective plan, except for special provisions
in the case of the 2004 Stock Incentive Plan as described above.
F-27
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stockholder
Rights Plan
In April 1999, we adopted a stockholder rights plan (the 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 us or to deprive our stockholders of
their interest in the long-term value of Endocare. The rights
will be exercisable only if a person or group acquires
15 percent or more of Endocares 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 percent or more of our 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 percent or more of our
common stock (subject to certain exceptions stated in the Plan),
the rights are redeemable for $0.01 per right at the option of
the Board of Directors. The rights will expire at the close of
business on April 15, 2009 (the Final Expiration Date),
unless the Final Expiration Date is extended or unless we redeem
or exchange the rights earlier.
On January 1, 2007, we adopted Financial Accounting
Standards Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of
SFAS No. 109, Accounting for Income Taxes
(FIN 48), which is effective for fiscal years beginning
after December 15, 2006. FIN 48 creates a single model
to address accounting for uncertainty in tax positions. It
clarifies the accounting for income taxes by prescribing a
minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. It also
provides guidance on de-recognition, measurement,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. The cumulative effect of
adoption is recorded as an adjustment to beginning retained
earnings. Because of our historical losses, FIN 48 did not
have a significant effect on our accounting and disclosure for
income taxes. As of the adoption date and at December 31,
2007, we had no unrecognized tax benefits and do not expect a
material change in the next 12 months.
The composition of the federal and state income tax provision
(benefit) from continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Federal
|
|
$
|
(705
|
)
|
|
$
|
(163
|
)
|
|
$
|
|
|
State
|
|
|
(124
|
)
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(829
|
)
|
|
$
|
(192
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2005 and 2006 tax benefit is the result of current year
pre-tax book losses being utilized against pre-tax book income
from discontinued operations. There is an offsetting tax
provision within discontinued operations. As such, we reported
no net income tax expense from continuing and discontinued
operations combined in each of the three years due to our
operating losses.
F-28
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the tax effects of temporary
differences, which give rise to significant portions of the
deferred tax assets as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
448
|
|
|
$
|
454
|
|
Nondeductible reserves and accruals
|
|
|
2,399
|
|
|
|
3,077
|
|
Research and experimentation tax credit carryforwards
|
|
|
1,153
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
45,430
|
|
|
|
|
|
Capital loss carryforwards
|
|
|
16,064
|
|
|
|
|
|
Stock-based compensation
|
|
|
724
|
|
|
|
1,999
|
|
Other
|
|
|
160
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,378
|
|
|
|
5,621
|
|
Valuation allowance
|
|
|
(66,378
|
)
|
|
|
(5,621
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Actual income tax expense differs from amounts computed by
applying the United States federal income tax rate of
34 percent to pretax loss as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Computed expected tax benefit
|
|
$
|
(5,327
|
)
|
|
$
|
(3,831
|
)
|
|
$
|
(3,042
|
)
|
Nondeductible expenses
|
|
|
89
|
|
|
|
342
|
|
|
|
71
|
|
Increase in valuation allowance
|
|
|
4,490
|
|
|
|
4,296
|
|
|
|
2,678
|
|
State taxes
|
|
|
(81
|
)
|
|
|
(19
|
)
|
|
|
1
|
|
Other
|
|
|
|
|
|
|
(980
|
)
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual tax expense (benefit)
|
|
$
|
(829
|
)
|
|
$
|
(192
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, we have federal and California net
operating loss carryforwards of $123.9 million and
$31.1 million, respectively. We also have approximately
$20.3 million in net operating loss carryforwards in
various other states. The federal net operating loss
carryforwards begin to expire in 2011 and the state net
operating loss carryforwards begin to expire in 2008. We also
have federal and state capital loss carryforwards in the amount
of $39.6 million and $30.0 million, that begin to
expire in 2009, respectively. In addition, we have federal and
state research and experimentation credit carryforwards of
$0.8 million and $0.2 million, respectively. The
federal research and experimentation credit carryforwards begin
to expire in 2017 and the state research and experimentation
credit carryforwards do not expire.
Under Internal Revenue Code (IRC) Sections 382 and 383 and
similar state provisions, ownership changes will limit the
annual utilization of net operating loss, capital loss and tax
credit carryforwards existing prior to a change in control that
are available to offset future taxable income and taxes due.
Based upon the equity transactions since our formation, some or
all of our existing net operating loss, capital loss and tax
credit carryforwards may be subject to annual limitations under
IRC Sections 382 and 383. We have not performed an analysis
to determine whether an ownership change or multiple ownership
changes have occurred for tax reporting purposes due to the
complexity and cost associated with such a study, and the fact
that there may be additional such ownership changes in the
future. If a study were to be performed, specific limitations on
the available net operating loss and tax credit carryforwards
may result. Until a study is completed and any limitation known,
no amounts are being considered as an uncertain
F-29
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
tax position or disclosed as unrecognized tax benefit under
FIN 48. Effective January 1, 2007, we have also
removed the deferred tax assets related to these losses and tax
credit carryforwards and the offsetting valuation allowances.
These amounts are no longer recognized until they can be
measured after a Section 382 analysis is completed. Since
any recognizable deferred tax assets would be fully reserved,
future changes in our unrecognized tax benefits will not impact
our effective tax rate. We have also established a full
valuation allowance for other deferred tax assets due to
uncertainties surrounding our ability to generate future taxable
income to realize these assets.
We recognize interest and penalties related to uncertain tax
positions, if any, in income tax expense. The tax years 2003
through 2006 remain open to examination by the major taxing
jurisdictions to which we are subject.
|
|
11.
|
Collaborative
and Other Agreements
|
Sanarus
Medical Inc.
In October 1999, we entered into a strategic alliance with
Sanarus Medical, Inc. (Sanarus), a privately held medical device
company. We received 200,041 Series A voting convertible
preferred shares for $0.3 million and a warrant to acquire
3,166,000 common shares for $0.01 per share in consideration for
entering into a manufacturing, supply and license agreement (the
1999 Agreement). The 1999 Agreement provided Sanarus an
exclusive, royalty-free, worldwide non-sublicenseable right to
develop, manufacture and sell products using cryoablation
technology developed by Endocare for use in the field of
gynecology and breast diseases. The warrant is exercisable at
any time through October 12, 2009. In June 2001, the 1999
Agreement was amended (the 2001 Agreement) to provide for
(i) the termination of Sanaruss exclusive,
royalty-free, worldwide non-sublicenseable right under the 1999
Agreement; (ii) Sanaruss grant to us of an exclusive
(even as to Sanarus), worldwide, irrevocable, fully
paid-up
right to develop, manufacture and sell products using certain
Sanarus technology for use in the diagnosis, prevention and
treatment of prostate, kidney and liver diseases, disorders and
conditions; and (iii) our grant to Sanarus of an exclusive
(even as to Endocare), worldwide, irrevocable, fully
paid-up
right to develop, manufacture and sell products using certain of
our technology for use in the diagnosis, prevention and
treatment of gynecological and breast diseases, disorders and
conditions.
In April 2003, we and other investors entered into a second
bridge loan financing in which Sanarus issued to us a
convertible promissory note in the aggregate amount of
$0.6 million and a warrant to purchase equity shares in
Sanarus with an aggregate exercise price of up to
$0.3 million. Upon completion of an equity financing by
Sanarus in October 2003, the bridge loan and warrant were
canceled in exchange for 908,025 shares of Series C
voting preferred stock and a warrant to purchase 308,823
Series C shares at $0.68 per share. As of December 31,
2006 and 2007, our voting interest in Sanarus was approximately
4.1 percent on an as-converted fully diluted basis.
The total investment in Sanarus of $0.9 million as of
December 31, 2006 and 2007 is included in investments and
other assets. The investment is recorded at cost since we do not
exercise significant influence over the operations of Sanarus.
CryoDynamics,
LLC Research & Development
Agreement
On November 8, 2005, we entered into a commercialization
agreement (the Agreement) with CryoDynamics, LLC to design and
develop a cryoablation system utilizing nitrogen gas. The
parties will jointly own all inventions made or conceived by
CryoDynamics in performing the Agreement (Development
Inventions). To assist CryoDynamics in its research and
development efforts, we advance CryoDynamics $42,500 per month,
effective October 1, 2005 until such time as either party
enters into a license agreement based upon the nitrogen system
with an independent third party that results in CryoDynamics
receiving an amount sufficient to repay the advances and
fund CryoDynamics monthly operating expenses of
$42,500.
Under the Agreement, CryoDynamics granted to us an exclusive,
worldwide license (with the right to sublicense) to the
Development Inventions and pre-existing technology in all
medical fields of use. We also have granted to CryoDynamics an
exclusive, worldwide license (with the right to sublicense) to
such Development
F-30
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventions in specified fields of use. Royalties and license
fees will be determined in accordance with the Agreement. The
Agreement also provides for a right of first refusal should
CryoDynamics intend to accept an offer from any potential buyer
for the sale of all or part of CryoDynamicss business.
The Agreement will continue until the later of
(a) December 31, 2015, or (b) expiration of the
parties obligations to pay royalties or until the
Agreement is terminated because of breach, insolvency or
bankruptcy.
Since repayment of amounts advanced under the agreement is
contingent upon the successful development, commercialization
and licensing of the technology and is not reasonably assured,
these advances are expensed as incurred. We recorded
$0.1 million, $0.5 million and $0.5 million of
research and development costs for 2005, 2006 and 2007,
respectively, in connection with the Agreement.
Patent,
Licensing, Royalty and Distribution Agreements
We have entered into other patent, licensing and royalty
agreements with third parties, some of whom also have consulting
agreements with us and are owners of or affiliated with entities
which have purchased products from us. These agreements
generally provide for purchase consideration in the form of
cash, common shares, warrants or options and royalties based on
a percentage of sales related to the licensed technology,
subject to minimum amounts per year. The patents and licensing
rights acquired were recorded based on the fair value of the
consideration paid. Options and warrants issued were valued
using the Black-Scholes option pricing model. These assets are
amortized over their respective estimated useful lives. Royalty
payments are expensed as incurred.
We have also entered into distribution agreements with third
parties. These agreements govern all terms of sale, including
shipping terms, pricing, discounts and minimum purchase quotas,
if applicable. Pricing is fixed and determinable and the
distributors contractual obligation to pay is not
contingent on other events, such as final sale to an end-user.
We generally do not grant a right of return except for defective
products in accordance with our warranty policy, and in some
cases for unsold inventory within a limited time period upon the
termination of the distribution agreement.
F-31
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
12.
|
Commitments
and Contingencies
|
Leases
We lease office space and equipment under operating leases,
which expire at various dates through 2012. Some of these leases
contain renewal options and rent escalation clauses. During
2007, we entered into a capital lease agreement for certain
office equipment valued at $0.1 million. The lease
agreement expires in 2011. Minimum lease payments due within the
next twelve months are classified as current liabilities on our
balance sheet. In calculating the capital lease obligation, we
used the incremental borrowing rate available through our credit
facility with Silicon Valley Bank. Future minimum lease payments
by year and in the aggregate under all non-cancelable capital
and operating leases are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
Lease
|
|
|
Leases
|
|
|
Year ending December 31, 2008
|
|
$
|
34
|
|
|
$
|
549
|
|
2009
|
|
|
34
|
|
|
|
566
|
|
2010
|
|
|
34
|
|
|
|
138
|
|
2011
|
|
|
34
|
|
|
|
6
|
|
2012
|
|
|
|
|
|
|
2
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
136
|
|
|
$
|
1,261
|
|
|
|
|
|
|
|
|
|
|
Amount representing interest
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
$
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental expense during 2005, 2006 and 2007 was $0.7 million,
$0.8 million and $0.7 million, respectively.
Employment
and Severance Agreements
We have entered into employment agreements with certain
executives which provide for annual base salaries and incentive
payments of up to 85 percent of base salary subject to
attainment of corporate goals and objectives pursuant to
incentive compensation programs approved by our board of
directors, stock options and restricted stock units. The
agreements provide for severance payments if the executive is
terminated other than for cause or terminates for good reason as
defined. The options vest over specified time periods with
accelerated vesting upon attainment of performance targets in
certain instances.
Former
Officers
As described in further detail below under Governmental
Legal Proceedings our former Chief Executive Officer
and Chairman of the Board (former CEO) and former Chief
Financial Officer and Chief Operating Officer (former CFO) both
of whom ceased to be employed by us in 2003, are defendants in a
criminal lawsuit involving multiple felony counts and a civil
lawsuit filed by the SEC relating to our historical financial
reporting issues and related matters. The former CEO and the
former CFO have each agreed to repay us severance and related
amounts $750,000 in the case of the former CEO and approximately
$666,000 in the case of the former CFO) upon either (i) his
conviction in a court of law, or entering into a plea of guilty
or no contest to, any crime directly relating to his activities
on behalf of Endocare during his employment, or
(ii) successful prosecution of an enforcement action by the
SEC against him. The criminal trial for these individuals is
scheduled to begin in September 2008.
On October 2, 2006, we executed a General Release of All
Claims with our then President and Chief Operating Officer (the
former President) upon his separation effective October 2,
2006. We agreed to pay the former President his base salary of
$0.3 million per year via semi-monthly salary continuation
payments for a period of 12 months
F-32
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and continuation of his health benefits pursuant to COBRA for
one year. The former President held 266,667 options from various
grants, of which 145,833 options had vested prior to the
separation date. He forfeited 100,000 unvested options upon
separation but was entitled to continue vesting in the remaining
20,834 unvested options for one year pursuant to the original
grant terms. These options became fully vested in March 2007.
The expense related to the unvested options retained by the
employee (net of reversal of stock-based compensation expense on
the forfeited options) was included in the $0.3 million
severance charge recorded in the third quarter of 2006. The
former President exercised the 166,667 options during the three
months ended December 31, 2007 for $1.1 million in
cash ($6.75 per share).
On August 27, 2004, we executed a General Release of All
Claims with our then Chief Financial Officer which was effective
as of August 10, 2004. Pursuant to the terms of the General
Release, we agreed to pay her current base salary of
$0.2 million per year via semi-monthly salary continuation
payments for a period of 12 months and continuation of her
health benefits pursuant to COBRA for one year. We also agreed
to permit our then Chief Financial Officer to continue to vest
in all stock options held at the separation date through
July 31, 2005. We recorded stock-based compensation expense
of $0.1 million. In 2004 and 2005, the former Chief
Financial Officer exercised options to purchase 5,208 and
43,402 shares, respectively. The remaining vested options
expired unexercised.
Employee
Benefit Plans
We have has a 401(k) savings plan covering substantially all
employees. The Plan currently provides for a discretionary match
of amounts contributed by each participant as approved by the
Compensation Committee of the Board of Directors. No matching
contributions were made in 2005, 2006 or 2007.
Legal
Matters
We are a party to lawsuits in the normal course of our business.
Litigation and governmental investigation can be expensive and
disruptive to normal business operations. Moreover, the results
of complex legal proceedings are difficult to predict.
Significant judgments or settlements in connection with the
legal proceedings described below may have a material adverse
effect on our business, financial condition, results of
operations and cash flows. Other than as described below, we are
not a party to any legal proceedings that we believe to be
material.
Governmental
Legal Proceedings
As reported in the
Form 8-K
that we filed on July 20, 2006, we executed a consent to
entry of judgment in favor of the SEC on July 14, 2006 and
entered into a non-prosecution agreement with the the DOJ on
July 18, 2006. These two agreements effectively resolved,
with respect to us, the investigations begun by the SEC and by
the DOJ in January 2003, regarding allegations that we and
certain of our former officers and former directors and one
current employee issued or caused to be issued, false and
misleading statements regarding our financial results for 2001
and 2002 and related matters. Under the terms of the consent
judgment with the SEC (i) we paid a total of the $750,000
in civil penalties and disgorgement; and (2) we agreed to a
stipulated judgment enjoining future violations of securities
laws. On April 7, 2006, we entered into an escrow agreement
with Morrison & Foerster LLP, our outside counsel,
pursuant to which we placed the $750,000 anticipated settlement
in escrow with Morrison & Foerster LLP at the request
of the SEC staff. The funds were released from the escrow to the
SEC in August 2006. A liability for the monetary penalty was
accrued in 2004.
The investigations and legal proceedings related to certain
former officers and former directors remain ongoing and are not
affected by our settlements with the SEC and DOJ. We remain
contractually obligated to pay legal fees for and otherwise
indemnify these former officers and former directors. On
August 9, 2006 the SEC filed civil fraud charges in federal
district court against two former officers, who were our former
Chief Executive Officer and Chairman of the Board and our former
Chief Financial Officer and Chief Operating Officer. On
April 9, 2007, these two former officers were indicted by a
federal grand jury in Orange County, California. The indictment
F-33
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
charges them with 18 counts of wire fraud, two counts of
securities fraud, one count of false certification of financial
reports, one count of false statements in reports filed with the
SEC, one count of lying to accountants and four counts of
honest services wire fraud. These former officers
were separated from Endocare in 2003. The criminal trial is
currently scheduled to begin on September 30, 2008. The
SECs civil case has been stayed pending the outcome of the
DOJs criminal case against these individuals. The SEC also
may decide to file civil charges against one or more former
directors. For the year ended December 31, 2007 we incurred
expenses of $1.7 million relating to legal fees of former
officers and former directors, and recorded insurance recoveries
of $0.9 million. As of December 31, 2007, we have
$0.1 million available under this insurance coverage.
Historical
Option Granting Practices
In July 2006 our Audit Committee requested that management
conduct an internal review of our historical stock option
practices, the timing of stock option grants and related
accounting and documentation. Based on this review, management
identified several stock option grants made between 1997 and
2002 for which the actual measurement dates appeared to differ
from the recorded grant dates. Management analyzed the potential
accounting impact, assuming that the measurement dates for these
option grants differ from the recorded grant dates, and
concluded that the financial impact did not necessitate
adjustment to or restatement of our previously-issued financial
reports. Management reported the results of its review to our
Audit Committee and Board of Directors at their regularly
scheduled meetings on July 26, 2006. Following these
meetings, we contacted the SEC and the DOJ and reported our
findings. On August 1, 2006, we met with the SEC staff to
discuss our findings and later received a subpoena from the SEC
requesting additional option-related information. We have
responded to this subpoena and will continue to fully cooperate
with the SEC and DOJ and with their ongoing investigations
related to certain of our former officers and former directors.
After receiving the subpoena from the SEC, management identified
certain stock option grants made in 2003 for which the actual
measurement dates may differ from the recorded grant dates.
However, similar to the grants between 1997 and 2002 previously
identified, management concluded that the financial impact of
the 2003 grants, individually and in the aggregate, did not
necessitate adjustment to or restatement of our
previously-issued financial reports.
Shareholder
Class Action and Derivative Lawsuits
In November 2002, we were named as a defendant, together with
certain former officers, in a
class-action
lawsuit filed in the United States District Court for the
Central District of California. This action, which was
consolidated with other similar complaints on October 31,
2003, alleged 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. On November 8, 2004, we
executed a settlement agreement with the lead plaintiffs and
their counsel. In exchange for a release of all claims, we and
certain individuals paid a total of $8.95 million in cash,
which was funded by our directors and officers
liability insurance carriers prior to December 31, 2004. On
February 7, 2005, the Court issued a final order approving
the agreement and dismissing the
class-action
lawsuit.
On December 6, 2002, Frederick Venables filed a purported
derivative action against us and certain former officers and a
former director in California 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 and the derivative lawsuit was
dismissed on December 8, 2004. 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. The agreement also required 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.
F-34
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The settlements referenced above, the related legal and defense
costs and costs under our ongoing indemnification obligations to
certain former officers and former directors were covered under
four directors and officers liability insurance
policies in effect at that time, with limits of $5 million
each and aggregate coverage of $20 million. The primary
carrier reimbursed our defense costs up to the limits of its
$5 million policy. The three excess carriers, representing
$15 million of the $20 million of coverage, filed
arbitration complaints seeking rescission of the policies. In
December 2004 and February 2005, we reached settlement with two
of the three excess carriers to reimburse us for current and
future legal defense and litigation settlement costs. On
December 1, 2005, we entered into a settlement agreement
with the remaining excess carrier pursuant to which we paid the
carrier $1.0 million in full settlement of any claims.
Under the settlement agreement, we also granted a mutual release
to the carrier. As of December 31, 2007, we have
$0.1 million in remaining available coverage through the
third excess carrier for legal costs under our continuing
indemnification obligations to our former officers and former
directors who remain under investigation and subject to legal
proceedings by the SEC and DOJ.
Lawsuit
with KPMG LLP
On October 26, 2006, we filed a lawsuit with the Superior
Court of the State of California for the County of Orange
against our former independent auditor, KPMG LLP, for
professional negligence and breach of contract, seeking damages
in an amount to be determined at trial. In response to our
claims against KPMG, KPMG filed a cross-complaint against us and
certain former officers.
On September 11, 2007, we entered into a binding memorandum
of understanding (MOU) with KPMG. The MOU resolves the
litigation with KPMG. Under the MOU the parties have granted
mutual releases and agreed to dismiss our respective claims in
the litigation. In addition, KPMG agreed that no later than
October 11, 2007 KPMG would pay to us a settlement amount
of $1.0 million and would return to us fees in the amount
of $0.2 million. KPMG made this payment and return of fees
on October 11, 2007. Under a preexisting contingency fee
agreement, we are required to pay one-third of the settlement
amount and one-third of the returned fees to our outside
litigation counsel. The net recovery of $0.7 million was
recorded as a litigation settlement recovery in the consolidated
statement of operations.
Other
Litigation
In January 2006, we entered into a settlement and release
agreement with certain parties against whom we had a claim from
a judgment awarded to us in prior years. We received
$0.2 million in the settlement of this claim, which was
recorded as a reduction of general and administrative expenses
in the first quarter of 2006.
In addition, in the normal course of business, we are 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 December 31,
2007, we have not established a liability for contingencies in
the consolidated balance sheets since the likelihood of loss and
potential liability cannot be reliably estimated at this time.
However, our evaluation of the likelihood of an unfavorable
outcome with respect to these actions could change in the future.
As described above in Note 2 Recent
Operating Results and Liquidity, on October 26,
2005, we entered into a one-year credit facility with Silicon
Valley Bank (the Lender), which provided up to $4.0 million
in borrowings for working capital purposes in the form of a
revolving line of credit and term loans (not to exceed
$500,000). The agreement was amended on various dates during
2006 and 2007. In February 2008, the agreement was further
extended to February 27, 2009, as described below.
F-35
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The credit facility permits the borrowings up to the lesser of
$4.0 million or amounts available under a borrowing base
formula based on eligible accounts receivable and inventory, but
availability of funds is ultimately subject to the good faith
business judgment of the Lender. As amended, the borrowing base
is (i) 85 percent of eligible accounts receivable,
plus (ii) the lesser of 30 percent of the value of
eligible inventory or $500,000. Borrowings are secured by all of
our assets, including all receivable collections which are held
in trust for the Lender. Interest is payable monthly at prime
rate plus 1.5 percent. The agreement requires a one-time
commitment fee of $40,000 paid on the effective date and an
annual facility fee equal to 0.5 percent of the unused
portion of the facility. A termination fee will also be assessed
if the credit facility is terminated prior to expiration. We had
no outstanding borrowings at December 31, 2006. As of
December 31, 2007 there was $0.9 million outstanding
on the line of credit.
As a condition to each advance under the credit facility, all
representations and warranties by us must be materially true and
no event of default must have occurred or be continuing. In
addition, the Lender, in its good faith business judgment, must
determine that no material adverse change has occurred. A
material adverse change occurs when there is a material
impairment in the priority of the Lenders lien in the
collateral or its value, a material adverse change in our
business, operations or condition, a material impairment of the
prospect of repayment or if the Lender determines, in its good
faith reasonable judgment, that there is a reasonable likelihood
that we will fail to comply with one or more financial covenant
in the next financial reporting period.
The agreement governing the credit facility contains various
financial and operating covenants that impose limitations on our
ability, among other things, to incur additional indebtedness,
merge or consolidate, sell assets except in the ordinary course
of business, make certain investments, enter into leases and pay
dividends without the consent of the Lender. The credit facility
also includes a subjective acceleration clause and a requirement
to maintain a lock box with the Lender to which all collections
are deposited. Under the subjective acceleration clause, the
Lender may declare default and terminate the credit facility if
it determines that a material adverse charge has occurred. If
the aggregate outstanding advances plus reserves placed by the
Lender against the loan availability exceeds 50 percent of
the receivable borrowing base component as defined, or if a
default occurs, all current and future lock box proceeds will be
applied against the outstanding borrowings. The credit facility
also contains cross-default provisions and a minimum tangible
net worth requirement measured on a monthly basis. Tangible net
worth must be equal to or greater than the sum of a base amount
($1,000 as of December 31, 2007) plus 25 percent
of all consideration received from issuing equity securities and
subordinated debt and 25 percent of positive consolidated
net income in each quarter.
We were not in compliance with the minimum tangible net worth
covenant for the months September 2006 to November 2006. On
December 22, 2006, we signed an amendment to the agreement
governing the credit facility. Among other things, the amendment
(i) modified the borrowing base to increase the eligible
accounts receivable from 80 percent to 85 percent and
modified the definition of accounts that are ineligible under
the borrowing base calculation; (ii) modified the loan
margin as defined to 1.50 percent; and (iii) waived
non-compliance with the minimum tangible net worth requirement
at September 30, 2006, October 31, 2006 and
November 30, 2006, and modified the terms of the covenant.
On February 23, 2007, the credit agreement was amended to
further modify the minimum tangible net worth provision and to
extend the maturity date to February 27, 2008. In February
2008, the maturity date was extended for one year.
From February through May 2007, our outstanding advances
exceeded 50 percent of the receivable borrowing base
referred to above. As required by the agreement, our lock-box
proceeds were applied daily to reduce the outstanding advances
and we re-borrowed the amount subject to the Lenders
approval. In June 2007, the outstanding advances were reduced to
less than 50 percent of the receivable borrowing base, and
we were no longer required to repay and re-borrow funds on a
daily basis as of July 13, 2007.
We were in compliance with all covenants at December 31,
2006 and 2007. However, there is no assurance that we will be
able to comply with all the requirements in the future periods,
that we can obtain a waiver if another default occurs or that
the Lender will not exercise the subjective acceleration clause
to terminate the agreement.
F-36
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
Related
Party Transactions
|
In February 2002, we purchased the patents to certain
cryoablation technologies and a covenant not to compete from a
cryosurgeon inventor for 33,333 shares of our common stock
valued at $1.4 million, of which $1.1 million
(25,000 shares) was allocated to the patent to be amortized
over 15 years and the remaining $0.3 million
(8,333 shares) was allocated to the covenant to be
amortized over five years.
The agreement also requires the seller to perform certain
consulting services over 15 years for the consideration
received. No consideration was allocated to the consulting
agreement since its value could not be accurately measured. In
January 2003, we extended a $344,000 loan to the seller to
assist with the payment of related federal income taxes arising
from the 2002 asset sale. The loan was secured by the shares
issued, bore interest at 1.8 percent and was originally due
in January 2005. In 2004 and 2006, we extended the maturity date
to January 2006 and January 2007, respectively. We are currently
in discussions with the borrower to extend the maturity date
further, in exchange for cancellation of shares sufficient to
pay accrued interest. The outstanding balance of the note has
been charged to bad debt in 2006, and was included in general
and administrative expenses. The accrued interest income in the
amount of $25,000 was reversed in the fourth quarter of 2006.
F-37
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
15.
|
Quarterly
Results of Operations (Unaudited)
|
The following is a summary of the quarterly results of
operations for the years ended December 31, 2007 and 2006
(in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Quarter Ended
|
|
|
Quarter Ended
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
Revenues from continuing operations
|
|
$
|
7,546
|
|
|
$
|
7,901
|
|
|
$
|
7,326
|
|
|
$
|
6,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues from continuing operations
|
|
$
|
2,622
|
|
|
$
|
2,713
|
|
|
$
|
2,171
|
|
|
$
|
2,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(3,259
|
)
|
|
$
|
(2,264
|
)
|
|
$
|
(984
|
)
|
|
$
|
(2,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,259
|
)
|
|
$
|
(2,264
|
)
|
|
$
|
(984
|
)
|
|
$
|
(2,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations per share of common
stock basic and diluted
|
|
$
|
(0.32
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.21
|
)
|
Net loss per share of common stock basic and diluted
|
|
$
|
(0.32
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.21
|
)
|
Weighted average shares of common stock outstanding
basic and diluted
|
|
|
10,313
|
|
|
|
10,916
|
|
|
|
11,595
|
|
|
|
11,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Quarter Ended
|
|
|
Quarter Ended
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
Revenues from continuing operations
|
|
$
|
7,262
|
|
|
$
|
6,908
|
|
|
$
|
6,700
|
|
|
$
|
7,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues from continuing operations
|
|
$
|
3,766
|
|
|
$
|
3,256
|
|
|
$
|
2,677
|
|
|
$
|
2,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(5,174
|
)
|
|
$
|
(708
|
)
|
|
$
|
(2,149
|
)
|
|
$
|
(3,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,929
|
)
|
|
$
|
(708
|
)
|
|
$
|
(2,149
|
)
|
|
$
|
(2,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations per share of common
stock basic and diluted
|
|
$
|
(0.51
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.30
|
)
|
Net loss per share of common stock basic and diluted
|
|
$
|
(0.49
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.29
|
)
|
Weighted average shares of common stock outstanding
basic and diluted
|
|
|
10,047
|
|
|
|
10,055
|
|
|
|
10,058
|
|
|
|
10,177
|
|
F-38
ENDOCARE,
INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the
|
|
|
Additions
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Charges to
|
|
|
|
|
|
|
|
|
the End of
|
|
|
|
the Period
|
|
|
Operations
|
|
|
Other
|
|
|
Deductions
|
|
|
the Period
|
|
|
|
(In thousands)
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts and Sales Returns
|
|
$
|
74
|
|
|
$
|
10
|
|
|
$
|
|
|
|
$
|
(14
|
)
|
|
$
|
70
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts and Sales Returns
|
|
$
|
70
|
|
|
$
|
36
|
|
|
$
|
|
|
|
$
|
(22
|
)
|
|
$
|
84
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts and Sales Returns
|
|
$
|
84
|
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
(2
|
)
|
|
$
|
90
|
|
Amounts exclude discontinued operations.
F-39
EXHIBIT INDEX
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
2
|
.1(1)
|
|
Stock Purchase Agreement, dated as of January 13, 2006, by
and among Plethora Solutions Holdings plc, Endocare, Inc. and
Timm Medical Technologies, Inc. The schedules and other
attachments to this exhibit were omitted. The Company agrees to
furnish a copy of any omitted schedules or attachments to the
Securities and Exchange Commission upon request.
|
|
2
|
.2(2)
|
|
$1,425,000 Secured Convertible Promissory Note, dated as of
February 10, 2006, from Plethora Solutions Holdings plc to
Endocare, Inc.
|
|
3
|
.1(3)
|
|
Certificate of Amendment of Restated Certificate of
Incorporation of the Company.
|
|
3
|
.2(3)
|
|
Certificate of Designation of Series A Junior Participating
Preferred Stock of the Company.
|
|
3
|
.3(3)
|
|
Restated Certificate of Incorporation.
|
|
3
|
.4(4)
|
|
Amended and Restated Bylaws of the Company.
|
|
4
|
.1(5)
|
|
Form of Stock Certificate.
|
|
4
|
.2(6)
|
|
Form of Series A Warrant.
|
|
4
|
.3(6)
|
|
Form of Series B Warrant.
|
|
4
|
.4(7)
|
|
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(8)
|
|
Amendment No. 1 to Rights Agreement, dated as of
September 24, 2005, between the Company and U.S. Stock
Transfer Corporation.
|
|
10
|
.1(9)
|
|
Lease Agreement, dated as of November 26, 2001, by and
between the Company and The Irvine Company.
|
|
10
|
.2(9)
|
|
Form of Indemnification Agreement by and between the Company and
its directors.
|
|
10
|
.3(9)
|
|
Form of Indemnification Agreement by and between the Company and
its executive officers.
|
|
10
|
.4(10)
|
|
1995 Director Option Plan (as amended and restated through
March 2, 1999).
|
|
10
|
.5(11)
|
|
1995 Stock Plan (as amended and restated through
December 30, 2003).
|
|
10
|
.6(13)
|
|
Employment Agreement, dated as of December 15, 2003, by and
between the Company and Craig T. Davenport.
|
|
10
|
.7(14)
|
|
Employment Agreement, dated as of August 11, 2004, by and
between the Company and Michael R. Rodriguez.
|
|
10
|
.8(15)
|
|
2004 Stock Incentive Plan.
|
|
10
|
.9(16)
|
|
2004 Non-Employee Director Option Program under 2004 Stock
Incentive Plan.
|
|
10
|
.10(16)
|
|
Form of Award Agreement Under 2004 Stock Incentive Plan.
|
|
10
|
.11(17)
|
|
Confidential Settlement Agreement and Release, dated as of
February 18, 2005, by and between the Company and Great
American E&S Insurance Company.
|
|
10
|
.12(6)
|
|
Purchase Agreement, dated as of March 10, 2005, by and
between the Company and the Investors (as defined therein).
|
|
10
|
.13(6)
|
|
Registration Rights Agreement, dated as of March 10, 2005,
by and between the Company and the Investors (as defined
therein).
|
|
10
|
.14(18)
|
|
First Amendment to Employment Agreement with Craig T. Davenport,
dated as of April 28, 2005.
|
|
10
|
.15(2)
|
|
Loan and Security Agreement, dated as of October 26, 2005,
by and among the Company, Timm Medical Technologies, Inc. and
Silicon Valley Bank.
|
|
10
|
.16(2)
|
|
Commercialization Agreement, dated as of November 8, 2005,
by and between the Company and CryoDynamics, LLC.
|
|
10
|
.17(19)
|
|
Employment Agreement, dated as of January 17, 2006, by and
between the Company and Clint B. Davis.
|
|
10
|
.18(20)
|
|
Amendment to Loan Documents, dated as of April 24, 2006, by
and between the Company and Silicon Valley Bank.
|
|
10
|
.19(21)
|
|
Amendment to Loan Documents, dated as of February 10, 2006,
between the Company, Timm Medical Technologies, Inc. and Silicon
Valley Bank.
|
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.20(22)
|
|
Employee Deferred Stock Unit Program, effective as of
May 18, 2006.
|
|
10
|
.21(22)
|
|
Non-Employee Director Deferred Stock Unit Program, effective as
of May 18, 2006.
|
|
10
|
.22(23)
|
|
First Amendment to Lease, dated as of May 19, 2006, between
the Company and The Irvine Company.
|
|
10
|
.23(23)*
|
|
Customer Quote, dated as of January 9, 2006, to Advanced
Medical Partners, Inc.
|
|
10
|
.24(23)*
|
|
Amended and Restated Endocare Service Agreement, dated as of
January 9, 2006, between the Company and Advanced Medical
Partners, Inc.
|
|
10
|
.25(24)
|
|
Common Stock Purchase Agreement, dated as of October 25,
2006, by and between the Company and Fusion Capital
Fund II, LLC.
|
|
10
|
.26(24)
|
|
Registration Rights Agreement, dated as of October 25,
2006, by and between the Company and Fusion Capital
Fund II, LLC.
|
|
10
|
.27(25)
|
|
Non-Prosecution Agreement, dated as of July 18, 2006, by
and between the Company and the Department of Justice.
|
|
10
|
.28(25)
|
|
Consent to Entry of Judgment, dated as of July 14, 2006, in
favor of the Securities and Exchange Commission.
|
|
10
|
.29(26)
|
|
Form of Retention Agreement.
|
|
10
|
.30(27)
|
|
Amendment to Loan Documents, dated as of December 22, 2006,
by and between Endocare, Inc. and Silicon Valley Bank.
|
|
10
|
.31(28)
|
|
Standard Form of RSU Agreement under 2004 Stock Incentive Plan.
|
|
10
|
.32(28)
|
|
Form of RSU Agreement used for Mr. Davenport under 2004
Stock Incentive Plan.
|
|
10
|
.33(28)
|
|
Summary Description of 2007 MICP.
|
|
10
|
.34(29)
|
|
Amendment to Loan Documents, dated as of February 23, 2007,
by and between the Company and Silicon Valley Bank.
|
|
10
|
.35(30)
|
|
Common Stock Subscription Agreement, dated as of May 24,
2007, by and between the Company and Frazier Healthcare V,
L.P.
|
|
10
|
.36(30)
|
|
Registration Rights Agreement, dated as of May 25, 2007, by
and between the Company and Frazier Healthcare V, L.P.
|
|
10
|
.37(31)
|
|
First Amendment to Employee Deferred Stock Unit Program, dated
August 6, 2007.
|
|
10
|
.38(31)
|
|
First Amendment to Non-Employee Director Deferred Stock Unit
Program, dated August 6, 2007.
|
|
10
|
.39(32)
|
|
Memorandum of Understanding, dated September 11, 2007,
between the Company and KPMG LLP.
|
|
10
|
.40
|
|
Description of Non-Employee Director Compensation, as amended on
December 20, 2007.
|
|
10
|
.41
|
|
Non-Employee Director RSU Program.
|
|
10
|
.42
|
|
Form of RSU Agreement under Non-Employee Director RSU Program.
|
|
21
|
.1(33)
|
|
Subsidiaries of the Company.
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
24
|
.1(34)
|
|
Power of Attorney.
|
|
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.
|
|
|
|
|
|
Management contract or compensatory plan or arrangement. |
|
* |
|
Certain confidential portions of this exhibit were omitted and
provided separately to the SEC pursuant to a request for
confidential treatment. |
|
|
|
(1) |
|
Previously filed as an exhibit to our
Form 8-K
filed on January 18, 2006. |
|
(2) |
|
Previously filed as an exhibit to our
Form 10-K
filed on March 16, 2006. |
|
(3) |
|
Previously filed as an exhibit to our Registration Statement on
Form S-3
filed on September 20, 2001. |
|
(4) |
|
Previously filed as an exhibit to our
Form 10-K
filed on March 16, 2004. |
|
(5) |
|
Previously filed as an exhibit to our
Form 10-K
for the year ended December 31, 1995. |
|
|
|
(6) |
|
Previously filed as an exhibit to our
Form 8-K
filed on March 16, 2005. |
|
(7) |
|
Previously filed as an exhibit to our
Form 8-K
filed on June 3, 1999. |
|
(8) |
|
Previously filed as an exhibit to our
Form 8-K
filed on June 28, 2005. |
|
(9) |
|
Previously filed as an exhibit to our
Form 10-K
filed on March 29, 2002. |
|
(10) |
|
Previously filed as an exhibit to our Registration Statement on
Form S-8
filed on June 2, 1999. |
|
(11) |
|
Previously filed as an appendix to our Definitive Proxy
Statement filed on December 3, 2003. |
|
(12) |
|
Previously filed as an exhibit to our
Form 10-K
filed on December 3, 2003. |
|
(13) |
|
Previously filed as an exhibit to our
Form 8-K
filed on December 16, 2003. |
|
(14) |
|
Previously filed as an exhibit to our
Form 8-K
filed on August 12, 2004. |
|
(15) |
|
Previously filed as an appendix to our Definitive Proxy
Statement filed on August 6, 2004. |
|
(16) |
|
Previously filed as an exhibit to our
Form 10-K
filed on March 16, 2005. |
|
(17) |
|
Previously filed as an exhibit to our
Form 10-Q
filed on May 10, 2005. |
|
(18) |
|
Previously filed as an exhibit to our
Form 8-K
filed on May 3, 2005. |
|
(19) |
|
Previously filed as an exhibit to our
Form 8-K
filed on January 12, 2006. |
|
(20) |
|
Previously filed as an exhibit to our
Form 8-K
filed on April 25, 2006. |
|
(21) |
|
Previously filed as an exhibit to our
Form 8-K
filed on May 10, 2006. |
|
(22) |
|
Previously filed as an exhibit to our
Form 8-K
filed on May 22, 2006. |
|
(23) |
|
Previously filed as an exhibit to our
Form 10-Q
filed on August 8, 2006. |
|
(24) |
|
Previously filed as an exhibit to our
Form 8-K
filed on October 30, 2006. |
|
(25) |
|
Previously filed as an exhibit to our
Form 10-Q
filed on November 9, 2006. |
|
(26) |
|
Previously filed as an exhibit to our
Form 8-K
filed on December 13, 2006. |
|
(27) |
|
Previously filed as an exhibit to our
Form 10-Q
filed on December 22, 2006. |
|
(28) |
|
Previously filed as an exhibit to our
Form 8-K
filed on February 27, 2007. |
|
(29) |
|
Previously filed as an exhibit to our
Form 8-K
filed on February 28, 2007. |
|
(30) |
|
Previously filed as an exhibit to our
Form 8-K
filed on May 29, 2007. |
|
(31) |
|
Previously filed as an exhibit to our
Form 8-K
filed on August 8, 2007. |
|
(32) |
|
Previously filed as an exhibit to our
Form 10-Q
filed on November 6, 2007. |
|
(33) |
|
Not applicable because the Company does not have any
subsidiaries that constitute significant
subsidiaries under
Rule 1-02(w)
of
Regulation S-X. |
|
(34) |
|
Included on the signature page of this
Form 10-K. |