e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 001-15063
Endocare, Inc.
(Exact name of Registrant as Specified in Its Charter)
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DELAWARE
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33-0618093 |
(State of Incorporation)
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(I.R.S. Employer I.D. No.) |
201 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA 92618
(Address of Principal Executive Office, Including Zip Code)
(949) 450-5400
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. (1) Yes þ No o; (2) Yes
þ No o
Indicate by check mark whether the registrant is 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
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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 o No þ
The number of shares of the Registrants common stock, par value $.001 per share, outstanding
at June 30, 2008 was 11,806,029.
Endocare, Inc. and Subsidiary
INDEX
2
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ENDOCARE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Total revenues |
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$ |
7,930 |
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$ |
7,901 |
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$ |
16,073 |
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$ |
15,447 |
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Costs and expenses: |
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Cost of revenues |
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2,347 |
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2,713 |
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4,852 |
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5,335 |
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Research and development |
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570 |
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621 |
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1,138 |
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1,236 |
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Selling and marketing |
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3,869 |
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4,099 |
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7,697 |
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7,862 |
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General and administrative |
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3,243 |
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2,845 |
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6,283 |
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6,674 |
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Total costs and expenses |
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10,029 |
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10,278 |
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19,970 |
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21,107 |
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Loss from operations |
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(2,099 |
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(2,377 |
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(3,897 |
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(5,660 |
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Interest income, net |
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67 |
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113 |
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176 |
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139 |
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Net loss |
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$ |
(2,032 |
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$ |
(2,264 |
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$ |
(3,721 |
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$ |
(5,521 |
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Net loss per share basic and diluted |
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$ |
(0.17 |
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$ |
(0.21 |
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$ |
(0.32 |
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$ |
(0.52 |
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Weighted average shares of common
stock outstanding |
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11,802 |
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10,916 |
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11,794 |
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10,618 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
ENDOCARE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share data)
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June 30, |
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December 31, |
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2008 |
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2007 |
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ASSETS
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Current assets: |
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Cash and cash equivalents |
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$ |
4,804 |
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$ |
7,712 |
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Accounts receivable, net |
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4,494 |
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3,530 |
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Inventories, net |
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3,286 |
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3,022 |
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Prepaid expenses and other current assets |
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520 |
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2,081 |
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Total current assets |
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13,104 |
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16,345 |
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Property and equipment, net |
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839 |
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850 |
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Intangibles, net |
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2,827 |
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3,077 |
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Investments and other assets |
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1,034 |
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989 |
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Total assets |
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$ |
17,804 |
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$ |
21,261 |
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities: |
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Accounts payable |
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$ |
3,028 |
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$ |
2,194 |
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Accrued compensation |
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2,090 |
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3,895 |
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Other accrued liabilities |
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3,039 |
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3,034 |
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Loan payable |
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880 |
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880 |
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Obligations under capital lease current portion |
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25 |
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28 |
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Total current liabilities |
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9,062 |
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10,031 |
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Deferred compensation |
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234 |
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227 |
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Obligations under capital lease less current portion |
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75 |
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84 |
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Stockholders equity: |
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Preferred stock, $0.001 par value; 1,000 shares
authorized; none issued and outstanding |
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Common stock, $0.001 par value; 50,000 shares
authorized; 11,806 and 11,762 issued and
outstanding as of June 30, 2008 and December 31,
2007, respectively |
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12 |
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12 |
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Additional paid-in capital |
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201,898 |
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200,663 |
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Accumulated deficit |
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(193,477 |
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(189,756 |
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Total stockholders equity |
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8,433 |
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10,919 |
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Total liabilities and stockholders equity |
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$ |
17,804 |
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$ |
21,261 |
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The
accompanying notes are an integral part of these condensed consolidated financial statements.
4
ENDOCARE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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Six Months Ended June 30, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(3,721 |
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$ |
(5,521 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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503 |
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613 |
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Loss on sale of placement units and other fixed assets |
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52 |
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Extinguishment of payroll tax liabilities |
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(121 |
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Stock-based compensation |
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1,426 |
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1,576 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(964 |
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(918 |
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Inventories |
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(459 |
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(407 |
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Prepaid expenses and other assets |
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(44 |
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516 |
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Accounts payable |
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832 |
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(7 |
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Accrued compensation |
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(1,797 |
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79 |
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Other liabilities |
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(9 |
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(95 |
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Net cash used in operating activities |
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(4,233 |
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(4,233 |
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Cash flows from investing activities: |
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Collection of note receivable |
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1,560 |
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Purchases of property and equipment |
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(48 |
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(56 |
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Net cash provided by (used in) investing activities |
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1,512 |
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(56 |
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Cash flows from financing activities: |
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Payments under capital lease obligation |
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(12 |
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Net borrowings on line of credit |
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1,123 |
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Payroll tax on issuance of restricted stock |
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(175 |
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Proceeds from sale of common stock |
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8,600 |
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Net cash (used in) provided by financing activities |
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(187 |
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9,723 |
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Net (decrease) increase in cash and cash equivalents |
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(2,908 |
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5,434 |
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Cash and cash equivalents, beginning of period |
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7,712 |
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1,811 |
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Cash and cash equivalents, end of period |
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$ |
4,804 |
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$ |
7,245 |
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Non-cash activities: |
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Transfer of inventory to property and equipment for placement at customer sites |
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$ |
248 |
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$ |
174 |
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Transfer of Cryocare Surgical Systems from property and equipment to inventory
for sale |
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$ |
54 |
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$ |
105 |
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Adoption of
FSP 00-19-2: |
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Reduction of retained earnings |
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$ |
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$ |
4,373 |
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Increase in additional paid-in capital |
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5,680 |
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Reduction of common stock warrant liability |
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1,307 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular numbers in thousands, except per share data)
(Unaudited)
1. Organization and Operations
We are a medical device company focused on developing, manufacturing and selling cryoablation
products which have the potential to assist physicians in improving and extending life by use in
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.
2. Basis of Presentation
Following the rules and regulations of the Securities and Exchange Commission (SEC), we have
omitted footnote disclosures in this report that would substantially duplicate the disclosures
contained in our annual audited financial statements. The accompanying condensed consolidated
financial statements should be read together with the consolidated financial statements and the
notes thereto included in our Annual Report on Form 10-K, filed with the SEC on March 17, 2008.
The accompanying condensed consolidated financial statements reflect all adjustments,
consisting solely of normal recurring accruals, needed to present fairly the financial results for
these interim periods. The condensed consolidated results of operations presented for the interim
periods are not necessarily indicative of the results for a full year. All intercompany
transactions and accounts have been eliminated in consolidation.
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 condensed 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.
3. Recent Operating Results and Liquidity
Since inception, we have incurred losses from operations and have reported negative cash
flows. As of June 30, 2008, we had an accumulated deficit of $193.5 million and cash and cash
equivalents of $4.8 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 SEC and the Department of Justice
(DOJ) of our historical accounting and financial reporting (see Note 9 Commitments and
Contingencies), we still have obligations to indemnify and advance the legal fees of our former
officers in connection with the ongoing legal proceedings related to them. 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 six months ended June 30, 2008, we incurred expenses
of $1.2 million relating to legal fees of former officers and former directors, and recorded
insurance recoveries of $0.1 million. As of March 31, 2008, we had exhausted the remaining
reimbursement 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 June 30, 2008. We are in the process of negotiating resolutions of
the past due state and local tax obligations with the
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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.
Our sources of funding include a $4.0 million credit facility with Silicon Valley Bank that
expires in February 2009 and a $16.0 million common stock purchase agreement with Fusion Capital
under which an additional $1.4 million in funding may be available prior to its expiration on
November 6, 2008 as discussed in Note 4 Private Placement of Common Stock and Warrants. 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.
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.
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 does not allow us to sell shares to Fusion Capital on any date on which the
purchase price would be less than $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
June 30, 2008, 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. In light of the
investments required to fund the growth initiatives described below in Part I, Item 2,
Managements Discussion and Analysis, as well as the ongoing legal proceedings referred to below
in Part II, Item 1A, Risk Factors, we continue to assess the adequacy of our capital resources
and may use both existing and new sources of capital to finance the growth of the business. Should
the financing be unavailable or prohibitively expensive when we require it, the consequences would
have a material adverse effect on our business, financial condition, results of operations and cash
flows.
4. 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
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
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to keep the registration statement effective until May 25, 2010. We filed this registration
statement on March 20, 2008 and the SEC declared the registration statement effective on April 18,
2008.
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 3 Recent Operating Results and Liquidity. Under this agreement we
have the right to sell to 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. Our agreement with Fusion Capital does not allow us to sell shares to Fusion
Capital on any date on which the purchase price would be less than $3.00. 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 two
post-effective amendments to the registration statement, which were declared effective on March 30,
2007 and April 18, 2008, respectively. 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.
We have authorized 2,666,666 shares for sale under the stock purchase agreement. Through June
30, 2008, 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. The most recent sale occurred in
May 2007. If we recommenced sales to Fusion Capital in mid-August 2008 and our stock price were above $3.00 per share but less than $4.50 per share, the maximum proceeds available under
the Fusion Capital agreement if we sell $100,000 in shares every fourth business day through the
expiration date of the agreement on November 6, 2008, would be approximately $1.4 million.
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 through June 30, 2008, 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.
8
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 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 relating to the March 2005
financing, 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 Form 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, a post-effective amendment on Form S-1, which was declared
effective March 30, 2007 and a post-effective amendment on Form S-3, which was declared effective
April 18, 2008.
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.
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 a portion of the March 2005 offering
proceeds to the warrants based on their fair value at issuance. 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. 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
carrying value of the warrant liability as of December 31, 2006 ($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.
5. Bank Line of Credit
9
As described above in Note 3 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. On February 8, 2008 the agreement was further extended to expire on February 26,
2009, as described below.
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 accounts 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. As of June 30, 2008 and 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 June 30, 2008) 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.
As of December 31, 2007 and June 30, 2008, we were in compliance with all covenants. During
February through May 2007, the 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. The
daily borrowings and repayments have been presented on a net basis in the condensed consolidated
statements of cash flows. In June 2007, 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.
6. Capital Stock and Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted average number of
common shares outstanding for the respective periods. Diluted loss per share, calculated using the
treasury stock method, gives effect to the potential dilution that could occur upon the exercise of
certain stock options, warrants, deferred stock units and restricted stock units that were
outstanding during the respective periods presented. For periods when we reported a net loss, these
potentially dilutive common shares were excluded from the diluted loss per share calculation
because they were anti-dilutive.
10
7. Stock-Based Compensation
Our equity incentive programs include stock options, restricted stock units and deferred stock
units. Some awards vest based on continuous service while others vest or vest on an accelerated
basis based on performance conditions, such as profitability and sales goals. We account for equity
awards in accordance with Statement of Financial Accounting Standards (SFAS) No. 123 (revised),
Share-Based Payment (SFAS No. 123R), which requires measurement and recognition of compensation
expense for all share-based awards made to employees and directors.
Under SFAS No. 123R, the fair value of share-based awards is estimated at grant date using an
option pricing model, and the portion that is ultimately expected to vest is recognized as
compensation cost over the requisite service period. For awards that vest based on continuous
service, we record compensation expense ratably over the service period from the date of grant. For
performance-based awards, we begin recording compensation expense over the remaining service period
when we determine that achievement is probable. Change in estimates as to the probability of
vesting is recorded through cumulative catch-up adjustments when the assessment is made. Change in
the estimated implicit service period is recorded prospectively over the adjusted vesting period.
Since share-based compensation under SFAS No. 123R is recognized only for those awards that are
ultimately expected to vest, we have applied an estimated forfeiture rate to unvested awards for
the purpose of calculating compensation cost. These estimates will be revised, if necessary, in
future periods if actual forfeitures differ from the estimates. Changes in forfeiture estimates
impact compensation cost in the period in which the change in estimate occurs. We use the
Black-Scholes option-pricing model to estimate the fair value of share-based awards. The
determination of fair value using the Black-Scholes option-pricing model 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 projected employee
stock option exercise behaviors.
During the third quarter of 2007, we determined that it is probable the profitability goals
will be met by the first quarter of 2009 and that the related performance-based awards will vest.
In conjunction with this change in assessment, we recorded $0.5 million of compensation expense in
the third quarter of 2007, including a cumulative adjustment for expenses relating to the second
quarter of 2007 as if the probable assessment had been determined at the original grant date.
Total stock-based compensation expense recorded in the three and six months ended June 30,
2008 is $0.7 million and $1.4 million, respectively. Total stock-based compensation expense
recorded in the three and six months ended June 30, 2007 is $0.8 million and $1.6 million,
respectively. These amounts are primarily included in selling and marketing and general and
administrative expenses.
8. 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 inventories:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Raw materials |
|
$ |
1,927 |
|
|
$ |
2,331 |
|
Work in process |
|
|
428 |
|
|
|
227 |
|
Finished goods |
|
|
1,210 |
|
|
|
958 |
|
|
|
|
|
|
|
|
Total inventories |
|
|
3,565 |
|
|
|
3,516 |
|
Less: inventory reserve |
|
|
(279 |
) |
|
|
(494 |
) |
|
|
|
|
|
|
|
Inventories, net |
|
$ |
3,286 |
|
|
$ |
3,022 |
|
|
|
|
|
|
|
|
9. Commitments and Contingencies
Governmental Investigations and Legal Proceedings
11
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 resolve 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 $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 our
outside counsel, pursuant to which we placed the $750,000 anticipated settlement in escrow with our
outside counsel 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 legal proceedings related to two former officers 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 two former officers. On August 9, 2006, the SEC filed civil fraud
charges in federal district court against these two former officers. On April 9, 2007, these two
former officers were indicted by a federal grand jury in Orange County, California. Our directors
and officers liability insurance has funded certain losses, including defense costs, related to
these matters. As of March 31, 2008, we had exhausted all remaining available coverage under the
applicable excess directors and officers liability policy. This policy reimbursed 75 percent of
the first $2.25 million in eligible costs to a maximum of approximately $1.7 million, zero percent
of the next $500,000 and 57.5 percent of the next $1 million to a maximum of $0.6 million. For
further information regarding this coverage, please refer to the Form 8-K that we filed on February
25, 2005.
Other Litigation
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.
10. Income Taxes
We reported no income tax expense during the six months ended June 30, 2008 and 2007 due to
our operating losses. Due to our history of operating losses, management has determined that it is
more likely than not that our deferred tax assets will not be realized through future earnings.
Accordingly, valuation allowances were recorded to fully reserve the deferred tax assets as of June
30, 2008 and December 31, 2007.
On January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No.
48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, Accounting for
Income Taxes (FIN 48). As of the adoption date and at June 30, 2008, we had no unrecognized tax
benefits and do not expect a material change in the next 12 months.
We recognize interest and penalties related to uncertain tax positions, if any, in income tax
expense. The tax years 2004 through 2007 remain open to examination by the major taxing
jurisdictions to which we are subject.
11. Fair Value Measurement
We adopted the provisions of Statement of Financial Accounting Standards No. 157, Fair Value
Measurements (SFAS No. 157), effective January 1, 2008, for our financial assets and liabilities.
The FASB delayed the effective date of SFAS No. 157 until January 1, 2009, with respect to the fair
value measurement requirements for non-financial assets and liabilities that are not remeasured on
a recurring basis. Under this standard, fair value is defined as the price that would be received
to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction
between market participants at the measurement date.
12
SFAS No. 157 establishes a hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by requiring that
observable inputs be used when available. Observable inputs are inputs that market participants
would use in pricing the asset or liability based on market data obtained from sources independent
of the Company. Unobservable inputs are inputs that reflect the Companys assumptions about the
inputs that market participants would use in pricing the asset or liability and are developed based
on the best information available in the circumstances.
The fair value hierarchy is broken down into three levels based on the source of inputs. In
general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active
markets for identical assets or liabilities that we have the ability to access. We classify our
money market funds as Level 1 assets. As of June 30, 2008, we had $4.8 million in money market
securities included in cash and cash equivalents. Fair values determined by Level 2 inputs are
based on quoted prices for similar assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not active and models for which all
significant inputs are observable, either directly or indirectly. We do not hold any Level 2
instruments. Level 3 inputs are unobservable inputs for the asset or liability, and include
situations where there is little, if any, market activity for the asset or liability. We do not
hold any Level 3 instruments.
During the three and six months ended June 30, 2008, there were no re-measurements to fair
value of financial assets and liabilities that are not measured at fair value on a recurring basis.
The adoption of SFAS No.157 did not have a material impact on our consolidated financial position,
results of operations or cash flows.
On January 1, 2008, we also adopted the provision of 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. We have chosen not to elect the fair value option for any items that
are not already required to be measured at fair value in accordance with generally accepted
accounting principles (GAAP).
12. Results of Operations
Revenues and cost of revenues related to the following products and services for the periods
ended June 30, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products |
|
$ |
5,593 |
|
|
$ |
5,417 |
|
|
$ |
11,510 |
|
|
$ |
10,620 |
|
Cryocare Surgical Systems |
|
|
465 |
|
|
|
521 |
|
|
|
897 |
|
|
|
998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,058 |
|
|
|
5,938 |
|
|
|
12,407 |
|
|
|
11,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation procedure fees |
|
|
1,746 |
|
|
|
1,746 |
|
|
|
3,436 |
|
|
|
3,488 |
|
Cardiac royalties |
|
|
124 |
|
|
|
102 |
|
|
|
237 |
|
|
|
192 |
|
Other |
|
|
2 |
|
|
|
115 |
|
|
|
(7 |
) |
|
|
149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,930 |
|
|
$ |
7,901 |
|
|
$ |
16,073 |
|
|
$ |
15,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products and procedure fees |
|
$ |
2,226 |
|
|
$ |
2,353 |
|
|
$ |
4,585 |
|
|
$ |
4,746 |
|
Cryocare Surgical Systems |
|
|
121 |
|
|
|
360 |
|
|
|
267 |
|
|
|
589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,347 |
|
|
$ |
2,713 |
|
|
$ |
4,852 |
|
|
$ |
5,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues for cryoablation disposable product sales and procedure fees are combined for
reporting purposes. Sales of cryoablation disposable products and procedure fees both incorporate
similar inventory when sold and we do not separately track the cost of disposals sold directly to
customers and those consumed in cryoablation procedures. Cryoablation procedure services are
provided to medical facilities upon request to facilitate the overall delivery of our technology
into the marketplace.
13. Recent Accounting Pronouncements
13
In December 2007, the FASB ratified EITF Issue No. 07-1, Accounting for Collaborative
Arrangements. EITF No. 07-1 provides guidance regarding financial statement presentation and
disclosure of collaborative arrangements to jointly develop, manufacture, distribute and market a
product whereby the collaborators will share, based on contractually defined calculations, the
profits or losses from the associated activities. The consensus requires collaborators in such an
arrangement 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) other collaborators based on other applicable
GAAP or, in the absence of other applicable GAAP, based on analogy to authoritative accounting
literature or a reasonable, rational and consistently applied accounting policy election. EITF
Issue No. 07-1 is effective for fiscal years beginning after December 31, 2008, which will be our
fiscal year 2009, and will be applied as a change in accounting principle retrospectively for all
collaborative agreements existing as of the effective date. We have not yet evaluated the potential
impact of adopting EITF No. 07-1 on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations and SFAS No. 160,
Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements an
amendment of ARB No. 51. These standards will significantly change the accounting and reporting for
business combination transactions and noncontrolling (minority) interests in consolidated financial
statements. SFAS No. 141(R) requires companies to recognize all the assets acquired and liabilities
assumed in a business combination and establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed, including capitalizing at
the acquisition date the fair value of acquired in-process research and development, and
re-measuring and writing down these assets, if necessary, in subsequent periods during their
development. SFAS No. 141(R) will also impact the determination of acquisition-date fair value of
consideration paid in a business combination (including contingent consideration), exclude
transaction costs from acquisition accounting, and change accounting practices for acquired
contingencies, acquisition-related restructuring costs, indemnification assets, and tax benefits.
SFAS No. 141(R) and SFAS No. 160 will be applied prospectively for business combinations that occur
on or after January 1, 2009, except that presentation and disclosure requirements of SFAS No. 160
regarding noncontrolling interests shall be applied retrospectively. We are evaluating the future
impacts and disclosures of these standards.
In April 2008, the FASB issued FSP FAS No. 142-3, which amends the factors that must be
considered in developing renewal or extension assumptions used to determine the useful life over
which the cost of a recognized intangible asset is amortized under SFAS No. 142, Goodwill and Other
Intangible Assets. The FSP requires an entity to consider its own assumptions about renewal or
extension of the term of the arrangement, consistent with its expected use of the asset, and is an
attempt to improve consistency between the useful life of a recognized intangible asset under SFAS
No. 142 and the period of expected cash flows used to measure the fair value of the asset under
SFAS No. 141, Business Combinations. The FSP is effective for fiscal years beginning after
December 15, 2008, and the guidance for determining the useful life of a recognized intangible
asset must be applied prospectively to intangible assets acquired after the effective date. We are
evaluating the impact of the FSP on our results of operations, financial condition or liquidity.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task
Force), the American Institute of Certified Public Accountants and the SEC did not, or are not
believed by management to, have a material impact on our present or future consolidated financial
statements.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included in Part I Item 1 of this
report, and the audited consolidated financial statements and notes thereto, and Managements
Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual
Report on Form 10-K for the fiscal year ended December 31, 2007.
This discussion contains forward-looking statements based on our current expectations. There
are various factors many beyond our control that could cause our actual results or the
occurrence or timing of expected events to differ materially from those anticipated in these
forward-looking statements. Some of these factors are described below and other factors are
described elsewhere in this Quarterly Report on Form 10-Q or under Risk Factors in our Annual
Report on Form 10-K referred to above. In addition, there are factors not described in this
Quarterly Report on Form 10-Q or in our Annual Report on Form 10-K that could cause our actual
results or the occurrence or timing of expected events to differ materially from those anticipated
in these forward-looking statements. All
14
forward-looking statements included in this Quarterly Report on Form 10-Q are based on
information available to us as of the date hereof, and we assume no obligation to update any such
forward-looking statements.
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 lethal ice to
destroy tissue, such as tumors, for therapeutic purposes. We develop and manufacture devices for
the treatment of prostate and renal cancers 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 additional to selling our cryoablation disposable
products to hospitals and mobile service companies, we contract directly with hospitals for the use
of our Cryocare 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.
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 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.
15
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 former metric (procedure
growth) we reported to the new metric (revenue growth measured by the number of probes sold) we
will report going forward.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Estimated domestic cryoablation procedures |
|
|
2,292 |
|
|
|
2,435 |
|
|
|
4,860 |
|
|
|
4,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of cryoprobes sold: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Straight probes |
|
|
9,074 |
|
|
|
10,131 |
|
|
|
19,357 |
|
|
|
19,895 |
|
Right-angle probes |
|
|
2,054 |
|
|
|
1,626 |
|
|
|
3,974 |
|
|
|
3,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
11,128 |
|
|
|
11,757 |
|
|
|
23,331 |
|
|
|
22,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
We
recently conducted a thorough review of our year-to-date 2008
performance, including the number and types of cases performed by
each of our physician customers. This review suggested that urology
prostate cancer cases were impacted primarily by the emergence of
robotic prostatectomy and intensity modulated radiation therapy
(IMRT). In the financial results press release that we issued on
August 6, 2008, we announced a number of initiatives to help us regain
the growth that we have demonstrated in the past. The initiatives
include programs intended to impact the number of new physicians
trained, increase revenues from our existing customers and
communicate directly and more broadly with patients to educate them
about the significant benefits of cryoablation. The programs include
additional new urology sales personnel, significantly enhanced
patient outreach and advertising and programs that assist our
existing physician customers in reaching more patients through
community-based marketing. An important element of these programs is
an increased emphasis on focal cryoablation, since we believe that
this is an area where we have a potentially substantial competitive advantage.
Results of Operations
Revenues and costs of revenues related to the following products and services for the three
and six months ended June 30, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products |
|
$ |
5,593 |
|
|
$ |
5,417 |
|
|
$ |
11,510 |
|
|
$ |
10,620 |
|
Cryocare Surgical Systems |
|
|
465 |
|
|
|
521 |
|
|
|
897 |
|
|
|
998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,058 |
|
|
|
5,938 |
|
|
|
12,407 |
|
|
|
11,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation procedure fees |
|
|
1,746 |
|
|
|
1,746 |
|
|
|
3,436 |
|
|
|
3,488 |
|
Cardiac royalties |
|
|
124 |
|
|
|
102 |
|
|
|
237 |
|
|
|
192 |
|
Other |
|
|
2 |
|
|
|
115 |
|
|
|
(7 |
) |
|
|
149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,930 |
|
|
$ |
7,901 |
|
|
$ |
16,073 |
|
|
$ |
15,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products and procedure fees |
|
$ |
2,226 |
|
|
$ |
2,353 |
|
|
$ |
4,585 |
|
|
$ |
4,746 |
|
Cryocare Surgical Systems |
|
|
121 |
|
|
|
360 |
|
|
|
267 |
|
|
|
589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,347 |
|
|
$ |
2,713 |
|
|
$ |
4,852 |
|
|
$ |
5,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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. Per-procedure fees are recorded when the
service has been rendered.
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
16
our sales and service personnel. We incur an
additional cost of revenues in the form of a fee for equipment usage and other services when a
procedure is performed on a system owned by an unrelated third-party 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 physician 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.
We account for equity awards to employees and non-employee directors under Statement of
Financial Accounting Standards No. 123 (revised 2004), Share Based Payment (SFAS No. 123R). As of
June 30, 2008, there was $1.3 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 year less any stock options forfeited prior to vesting. Unrecognized
compensation for restricted stock units was $1.8 million as of June 30, 2008 (assuming that all
service and performance milestones will be met) and will be recognized over a weighted average
period of 1.4 years. Compensation costs related to restricted stock units is recorded over the
service period (2007 through 2009) if it is probable the performance conditions (profitability and
sales goals) will be satisfied. Stock-based compensation expense recorded in the three months ended
June 30, 2008 and 2007 was $0.7 million and $0.8 million, respectively. Stock-based compensation
expense recorded in the six months ended June 30, 2008 and 2007 was $1.4 million and $1.6 million,
respectively.
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Cryoablation disposable products |
|
$ |
5,593 |
|
|
$ |
5,417 |
|
|
$ |
176 |
|
|
|
3.2 |
% |
Cryocare Surgical Systems |
|
|
465 |
|
|
|
521 |
|
|
|
(56 |
) |
|
|
(10.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,058 |
|
|
|
5,938 |
|
|
|
120 |
|
|
|
2.0 |
% |
Cryoablation procedure fees |
|
|
1,746 |
|
|
|
1,746 |
|
|
|
|
|
|
|
0.0 |
% |
Cardiac royalties |
|
|
124 |
|
|
|
102 |
|
|
|
22 |
|
|
|
21.6 |
% |
Other |
|
|
2 |
|
|
|
115 |
|
|
|
(113 |
) |
|
|
(98.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,930 |
|
|
$ |
7,901 |
|
|
$ |
29 |
|
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of cryoprobes sold during the three months ended June 30, 2008 decreased by
approximately 5.4 percent to 11,128 compared to 11,757 probes sold during this same period in 2007.
The reduction in revenue was offset by higher average sales price of probes sold and used in
procedures, which increased 7.7% during the three months ended June 30, 2008 compared to this same
period in 2007. This is largely caused by annual price increases implemented in the second quarter
as well as migration to higher priced probes. Sales of straight probes, which are typically,
although not always, used in prostate cancer procedures decreased 10.4 percent and right-angle
probes, which are typically used in procedures other than prostate cancer procedures, increased
26.3 percent.
17
Revenues from sales of Cryocare Surgical Systems decreased as a result of fewer sales of such
systems in domestic markets. Cardiac royalty revenues increased for the three months ended June
30, 2008 over the same period in 2007 due to increased sales by the licensee. Other revenues
decreased due to a one-time non-refundable payment received under a term sheet with a collaboration
partner in 2007. The term sheet was subsequently terminated without the parties reaching a
definitive agreement.
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
June 30, |
|
|
(dollars in thousands) |
|
2008 |
|
2007 |
|
$ Change |
Cost of revenues |
|
$ |
2,347 |
|
|
$ |
2,713 |
|
|
$ |
(366 |
) |
Percent of revenues |
|
|
29.6 |
% |
|
|
34.3 |
% |
|
|
|
|
Costs of revenues declined due to decreases in materials, labor and overhead costs, as well as
reduced sales of Cryocare Surgical Systems domestically.
Gross Profit and Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
$ Change |
|
Cryoablation disposable products and procedure fees |
|
$ |
5,113 |
|
|
$ |
4,810 |
|
|
$ |
303 |
|
Cryocare surgical systems |
|
|
344 |
|
|
|
161 |
|
|
|
183 |
|
Cardiac royalties and other |
|
|
126 |
|
|
|
217 |
|
|
|
(91 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,583 |
|
|
$ |
5,188 |
|
|
$ |
395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Percentage |
|
|
|
June 30, |
|
|
Point |
|
(percent of revenues) |
|
2008 |
|
|
2007 |
|
|
Change |
|
Cryoablation disposable products and procedure fees |
|
|
64.5 |
% |
|
|
60.9 |
% |
|
|
3.6 |
% |
Cryocare Surgical Systems |
|
|
4.3 |
% |
|
|
2.0 |
% |
|
|
2.3 |
% |
Cardiac royalties |
|
|
1.6 |
% |
|
|
2.8 |
% |
|
|
(1.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
70.4 |
% |
|
|
65.7 |
% |
|
|
4.7 |
% |
|
|
|
|
|
|
|
|
|
|
The positive trend in gross margins (gross profit as a percentage of revenues) was related to
continued reductions in manufacturing costs for our cryoablation disposable products and surgical
systems, while increasing efficiencies in production. In addition, gross margins were negatively
affected during the three months ended June 30, 2007 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 $0.1 million.
Research and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
(dollars in thousands) |
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
Research and development expenses |
|
$ |
570 |
|
|
$ |
621 |
|
|
$ |
(51 |
) |
|
|
(8.2 |
)% |
Percent of total revenues |
|
|
7.2 |
% |
|
|
7.9 |
% |
|
|
|
|
|
|
|
|
18
This decrease is primarily attributable to a concerted effort to maintain operating expenses
at minimum levels and yet support our growth goals to the greatest extent. Expenses related to
clinical studies for the three months ended June 30, 2008 have remained consistent with the same
period last year. In both 2007 and 2008, we have focused a significant portion of our research
dollars on those areas in which cryoablation research is required to substantiate reimbursement
codes and coverage.
Selling and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
(dollars in thousands) |
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
Selling and marketing expenses |
|
$ |
3,869 |
|
|
$ |
4,099 |
|
|
$ |
(230 |
) |
|
|
(5.6 |
)% |
Percent of total revenues |
|
|
48.8 |
% |
|
|
51.9 |
% |
|
|
|
|
|
|
|
|
This decrease is mainly due to reductions in compensation related costs, as well as an overall
effort to maintain operating expenses at minimum levels and yet support our growth goals to the
greatest extent. Included in selling and marketing expenses for the three months ended June 30,
2008 and 2007 were $0.2 million and $0.1 million in non-cash stock-based compensation expenses
related to stock options, deferred stock units and restricted stock units.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
(dollars in thousands) |
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
General and administrative expenses |
|
$ |
3,243 |
|
|
$ |
2,845 |
|
|
$ |
398 |
|
|
|
14.0 |
% |
Percent of total revenues |
|
|
40.9 |
% |
|
|
36.0 |
% |
|
|
|
|
|
|
|
|
This increase is mainly due to higher legal fees during the three months ended June 30, 2008
in the amount of $0.8 million. Legal fees, mostly related to the legal proceedings of our former
CEO and former CFO, have risen from approximately $0.2 million to $1.0 million, net of insurance
recoveries. Included in this increase was the impact in 2008 of a reduction of our directors and
officers insurance recoveries in the amount of $0.3 million, which has the impact of increasing
our net legal expenses. As of March 31, 2008 we have exhausted all remaining available coverage
related to these matters. We now fund the cost of our obligation to indemnify and to advance legal
fees to our former CEO and former CFO from our cash reserves. This increase was partially offset by
reductions in compensation related costs in the amount of $0.3 million. Total stock-based
compensation expense included in general and administrative expenses related to stock options,
deferred stock units and restricted stock units for each of the three months ended June 30, 2008
and June 30, 2007 was $0.5 million and $0.6 million, respectively.
Interest Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
(dollars in thousands) |
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
Interest income, net |
|
$ |
67 |
|
|
$ |
113 |
|
|
$ |
(46 |
) |
|
|
(40.7 |
)% |
Percent of total revenues |
|
|
0.8 |
% |
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
Interest income, net in the 2008 and 2007 periods includes interest income earned from the
investment of our cash balances, as well as interest expense related to our line of credit.
Interest income decreased in 2008 due to higher cash balances in the second quarter of 2007
resulting from our May 2007 private placement.
19
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
(dollars in thousands) |
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
Net loss |
|
$ |
(2,032 |
) |
|
$ |
(2,264 |
) |
|
$ |
(232 |
) |
|
|
(10.2 |
)% |
Percent of total revenues |
|
|
(25.6 |
)% |
|
|
(28.7 |
)% |
|
|
|
|
|
|
|
|
Net loss for the three months ended June 30, 2008 was $0.17 per basic and diluted share on
11.8 million weighted average shares outstanding, compared to a net loss of $0.21 per basic and
diluted share on 10.9 million weighted average shares outstanding during the same period in 2007.
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Cryoablation disposable products |
|
$ |
11,510 |
|
|
$ |
10,620 |
|
|
$ |
890 |
|
|
|
8.4 |
% |
Cryocare Surgical Systems |
|
|
897 |
|
|
|
998 |
|
|
|
(101 |
) |
|
|
(10.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,407 |
|
|
|
11,618 |
|
|
|
789 |
|
|
|
6.8 |
% |
Cryoablation procedure fees |
|
|
3,436 |
|
|
|
3,488 |
|
|
|
(52 |
) |
|
|
(1.5 |
)% |
Cardiac royalties |
|
|
237 |
|
|
|
192 |
|
|
|
45 |
|
|
|
23.4 |
% |
Other |
|
|
(7 |
) |
|
|
149 |
|
|
|
(156 |
) |
|
|
(104.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
16,073 |
|
|
$ |
15,447 |
|
|
$ |
626 |
|
|
|
4.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of cryoprobes sold during the six months ended June 30, 2008 increased by
approximately 1.6 percent to 23,331 compared to 22,968 probes sold during this same period in 2007.
The reduction in revenue was offset by higher average sales price of probes sold and used in
procedures, which increased 4.8% during the six months ended June 30, 2008 compared to this same
period in 2007. This is largely caused by annual price increases implemented in the second quarter
as well as migration to higher priced probes. Sales of straight probes, which are typically,
although not always, used in prostate cancer procedures decreased 2.7 percent and right-angle
probes, which are typically used in procedures other than prostate cancer procedures, increased
29.3 percent.
Revenues from sales of Cryocare Surgical Systems decreased as a result of fewer sales of such
systems in domestic markets. Cardiac royalty revenues increased for the six months ended June 30,
2008 over the same period in 2007 due to increased sales by the licensee. Other revenues decreased
due to a one-time non-refundable payment received under a term sheet with a collaboration partner
in 2007. The term sheet was subsequently terminated without the parties reaching a definitive
agreement.
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
June 30, |
|
|
(dollars in thousands) |
|
2008 |
|
2007 |
|
$ Change |
Cost of revenues |
|
$ |
4,852 |
|
|
$ |
5,335 |
|
|
$ |
(483 |
) |
Percent of revenues |
|
|
30.2 |
% |
|
|
34.5 |
% |
|
|
|
|
Costs of revenues declined due to decreases in materials, labor and overhead costs, as well as
reduced sales of Cryocare Surgical Systems domestically. In addition, this decrease is attributed
to a slight change in the mix of our revenues from those where we are responsible for providing
cryoablation 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.
20
Gross Profit and Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
$ Change |
|
Cryoablation disposable products and procedure fees |
|
$ |
10,361 |
|
|
$ |
9,362 |
|
|
$ |
999 |
|
Cryocare surgical systems |
|
|
630 |
|
|
|
409 |
|
|
|
221 |
|
Cardiac royalties and other |
|
|
230 |
|
|
|
341 |
|
|
|
(111 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,221 |
|
|
$ |
10,112 |
|
|
$ |
1,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Percentage |
|
|
|
June 30, |
|
|
Point |
|
(percent of revenues) |
|
2008 |
|
|
2007 |
|
|
Change |
|
Cryoablation disposable products and procedure fees |
|
|
64.5 |
% |
|
|
60.6 |
% |
|
|
3.9 |
% |
Cryocare Surgical Systems |
|
|
3.9 |
% |
|
|
2.7 |
% |
|
|
1.2 |
% |
Cardiac royalties |
|
|
1.4 |
% |
|
|
2.2 |
% |
|
|
(0.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
69.8 |
% |
|
|
65.5 |
% |
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
The positive trend in gross margins (gross profit as a percentage of revenues) was partially
related to our continual 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 and surgical systems, while increasing efficiencies in production. In
addition, gross margins were negatively affected during the six months ended June 30, 2007 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 $0.2 million.
Research and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
(dollars in thousands) |
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
Research and development expenses |
|
$ |
1,138 |
|
|
$ |
1,236 |
|
|
$ |
(98 |
) |
|
|
(7.9 |
)% |
Percent of total revenues |
|
|
7.1 |
% |
|
|
8.0 |
% |
|
|
|
|
|
|
|
|
This slight decrease is primarily attributable to a concerted effort to maintain operating
expenses at minimum levels and yet support our growth goals to the greatest extent. Expenses
related to clinical studies for the six months ended June 30, 2008 have remained consistent with
the same period last year. In both 2007 and 2008, we have focused a significant portion of our
research dollars on those areas in which cryoablation research is required to substantiate
reimbursement codes and coverage.
Selling and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
(dollars in thousands) |
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
Selling and marketing expenses |
|
$ |
7,697 |
|
|
$ |
7,862 |
|
|
$ |
(165 |
) |
|
|
(2.1 |
)% |
Percent of total revenues |
|
|
47.9 |
% |
|
|
50.9 |
% |
|
|
|
|
|
|
|
|
21
This slight decrease is mainly due to reductions in compensation related costs in the amount
of $0.1 million. In addition, this decrease is attributed to an overall effort to maintain
operating expenses at minimum levels and yet support our growth goals to the greatest extent.
Slightly offsetting general expense reductions is increased participation in trade shows during the
six months ended June 30, 2008 compared to the same period last year, which resulted in an expense
increase of approximately $0.1 million. Included in selling and marketing expenses for the six
months ended June 30, 2008 and 2007 were $0.4 million and $0.3 million in non-cash stock-based
compensation expenses related to stock options, deferred stock units and restricted stock units.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
(dollars in thousands) |
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
General and administrative expenses |
|
$ |
6,283 |
|
|
$ |
6,674 |
|
|
$ |
(391 |
) |
|
|
(5.9 |
)% |
Percent of total revenues |
|
|
39.1 |
% |
|
|
43.2 |
% |
|
|
|
|
|
|
|
|
This decrease is mainly due to reductions in compensation related costs in the amount of $0.5
million. In addition, accounting fees have decreased by $0.4 million during the six months ended
June 30, 2008. Offsetting these decreases is an increase in legal fees, mostly related to the legal
proceedings of our former CEO and former CFO, from approximately $1.0 million to $1.4 million, net
of insurance recoveries. While gross legal fees decreased $0.2 million from the 2007 period,
directors and officers insurance recoveries in the 2008 period also decreased $0.6 million, which
has the impact of increasing our net legal expenses. As of March 31, 2008 we have exhausted all
remaining available coverage related to these matters. We now fund the cost of our obligation to
indemnify and to advance legal fees to our former CEO and former CFO from our cash reserves. Also,
during 2007, we recovered previously unbilled sales and use taxes from liable customers in the
amount of $0.2 million, which did not recur in 2008. Total stock-based compensation expense
included in general and administrative expenses related to stock options, deferred stock units and
restricted stock units for each of the six months ended June 30, 2008 and June 30, 2007 was $0.9
million and $1.2 million, respectively.
Interest Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
(dollars in thousands) |
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
Interest income, net |
|
$ |
176 |
|
|
$ |
139 |
|
|
$ |
37 |
|
|
|
26.6 |
% |
Percent of total revenues |
|
|
1.1 |
% |
|
|
0.9 |
% |
|
|
|
|
|
|
|
|
Interest income, net in the 2008 and 2007 periods includes interest income earned from the
investment of our cash balances, as well as interest expense related to our line of credit.
Interest expense paid on our line of credit decreased due to reduced borrowings for the six months
ended June 30, 2008 compared to the same period in 2007. Interest income also increased due to
higher cash balances resulting from our May 2007 private placement.
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
(dollars in thousands) |
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
Net loss |
|
$ |
(3,721 |
) |
|
$ |
(5,521 |
) |
|
$ |
(1,800 |
) |
|
|
(32.6 |
)% |
Percent of total revenues |
|
|
(23.2 |
)% |
|
|
(35.7 |
)% |
|
|
|
|
|
|
|
|
Net loss for the six months ended June 30, 2008 was $0.32 per basic and diluted share on 11.8
million weighted average shares outstanding, compared to a net loss of $0.52 per basic and diluted
share on 10.6 million weighted average shares outstanding during the same period in 2007.
22
Liquidity and Capital Resources
Since inception, we have incurred losses from operations and have reported negative cash
flows. As of June 30, 2008, we had an accumulated deficit of $193.5 million and cash and cash
equivalents of $4.8 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 9 Commitments and Contingencies in the footnotes to the
condensed consolidated financial statements). However, we still have obligations to indemnify and
advance the legal fees of our former officers in connection with the ongoing legal proceedings
related to them. 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 six months ended
June 30, 2008, we incurred expenses of $1.2 million relating to legal fees of former officers and
former directors, and recorded insurance recoveries of $0.1 million. As of March 31, 2008, we had
exhausted the remaining reimbursement 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 June 30, 2008. 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 4 Private Placement of Common Stock and Warrants in the notes to the
condensed 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. As long as our share price exceeds $3.00,
we can sell common stock to Fusion Capital in $100,000 increments every fourth business day, with
additional increments available if the market price per share of our common stock is $4.50 or
higher. We have authorized 2,666,666 shares for sale under the stock purchase agreement. Through
June 30, 2008 we have sold 293,397 shares of stock to Fusion Capital for total gross proceeds of
$1.6 million. The most recent sale occurred in May 2007. Our agreement with Fusion Capital expires
on November 6, 2008. If we recommenced sales to Fusion Capital
in mid-August 2008 and our
stock price were above $3.00 per share but less than $4.50 per share, the maximum funding
available under the Fusion Capital agreement if we sell $100,000 in shares every fourth business
day through the expiration date, would be approximately $1.4 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 also received $1.1 million in proceeds
from the exercise of options by a former officer for 166,667 shares of common stock 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. The line of
credit, as amended, expires on February 26, 2009. As of June 30, 2008, we were in compliance with
all covenants and 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.
23
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. In light of the investments required to fund the growth
initiatives described above, as well as the ongoing legal proceedings referred to below in Part II,
Item 1A, Risk Factors, we continue to assess the adequacy of our capital resources and may use
both existing and new sources of capital to finance the growth of the business. Should the
financing be unavailable or prohibitively expensive when we require it, the consequences would have
a material adverse effect on our business, financial condition, results of operations and cash
flows.
Item 3. 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 risk
of loss. Our financial instruments include cash, cash equivalents, accounts and notes receivable,
minority investments, accounts payable, accrued liabilities and bank debt. As of June 30, 2008, the
carrying values of our financial instruments approximated their fair values. Our practice 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 June 30, 2008, $4.8 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 June 30, 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 $1.00, 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 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed in our reports
pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the 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
24
end of the quarter covered by this report. Based on the foregoing, our chief executive officer
and chief financial officer concluded that our disclosure controls and procedures were effective at
the reasonable assurance level.
(b) Changes in Internal Controls. There was no change in our internal control over financial
reporting during our second fiscal quarter for 2008 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
25
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Please refer to the legal proceedings described in Part I, Item 3, in the Form 10-K that we
filed on March 17, 2008 and in Part II, Item 1 of the Form 10-Q that we filed on May 7, 2008.
There have been no new reportable legal proceedings or material developments since the prior
quarter.
Item 1A. Risk Factors
Please see our 2007 Annual Report on Form 10-K filed with the SEC on March 17, 2008, which
includes a detailed discussion of our risk factors. There have been no material changes in our risk
factors from those disclosed in the Form 10-K, except for updating the two risk factors set forth
below.
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. We have an operating cash flow deficit of $4.2
million for the six months ended June 30, 2008. As of June 30, 2008, we had cash and cash
equivalents of $4.8 million.
On May 25, 2007, we sold $7.0 million in stock to Frazier Healthcare V, L.P. (Frazier). In
addition, as of June 30, 2008, 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 most recent sale
occurred in May 2007.
The availability of funds under our common stock purchase agreement with Fusion Capital and
our 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. Our agreement with Fusion
Capital does not allow us to sell shares to Fusion Capital on any date on which the purchase price
would be less than $3.00.
Our agreement with Fusion Capital expires on November 6, 2008. If we recommenced sales to
Fusion Capital in mid-August 2008 and our stock price were above $3.00 per share but less
than $4.50 per share, the maximum funding available under the Fusion Capital agreement if we sell
$100,000 in common shares every fourth business day through the expiration date would be
approximately $1.4 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 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. In
light of the investments required to fund the growth initiatives described above in Part I, Item 2,
Managements Discussion and Analysis, as well as the ongoing legal proceedings referred to below
in the following risk factor, we continue to assess the adequacy of our capital resources and may
use both existing and new sources of capital to finance the growth of the business. Should the
26
financing be unavailable or prohibitively expensive when we require it, the consequences would have
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.
As described under Part I, Item 3, Legal Proceedings, in the Form 10-K that we filed on
March 17, 2008, two former officers have been indicted on multiple felony counts and the SEC also
has filed civil fraud charges against them. The criminal trial for these former officers is
currently scheduled to begin on September 30, 2008. We are contractually obligated to pay legal
fees for and otherwise indemnify these former officers. 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
We held our Annual Meeting of Stockholders on Thursday, May 15, 2008. Our stockholders
approved the following matters at the Annual Meeting by the votes indicated:
1. The stockholders elected the following six directors to our Board of Directors to serve
until the 2009 Annual Meeting of Stockholders or until their successors are duly elected and
qualified:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
For |
|
Abstain |
John R. Daniels, M.D. |
|
|
10,360,215 |
|
|
|
99,021 |
|
Craig T. Davenport |
|
|
10,368,316 |
|
|
|
90,920 |
|
David L. Goldsmith |
|
|
10,343,483 |
|
|
|
115,753 |
|
Eric S. Kentor |
|
|
10,360,381 |
|
|
|
98,855 |
|
Terrence A. Noonan |
|
|
10,368,250 |
|
|
|
90,986 |
|
Thomas R. Testman |
|
|
10,368,515 |
|
|
|
90,721 |
|
2. The stockholders ratified the selection of Ernst & Young LLP as our independent auditor for
the fiscal year ending December 31, 2008:
|
|
|
|
|
|
|
Number of Shares |
For |
|
|
10,422,382 |
|
Against |
|
|
36,621 |
|
Abstain |
|
|
233 |
|
Item 5. Other Information
None.
Item 6. Exhibits
A list of exhibits to this Form 10-Q is found in the Exhibit Index immediately following the
Signature Page of this Form 10-Q, which is hereby incorporated by reference herein.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
ENDOCARE, INC.
|
|
|
By: |
/s/ CRAIG T. DAVENPORT
|
|
|
|
Craig T. Davenport |
|
|
|
Chief Executive Officer, President and
Chairman of the Board
(Duly Authorized Officer) |
|
|
|
|
|
|
By: |
/s/ MICHAEL R. RODRIGUEZ
|
|
|
|
Michael R. Rodriguez |
|
|
|
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer) |
|
|
Date:
August 7, 2008
28
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
No. |
|
Description |
2.1(1)
|
|
Stock Purchase Agreement, dated January 13, 2006, by and among the Company, Plethora
Solutions Holdings plc 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 February 10, 2006, from Plethora
Solutions Holdings plc to the Company. |
|
|
|
3.1(3)
|
|
Restated Certificate of Incorporation. |
|
|
|
3.2(3)
|
|
Certificate of Designation of Series A Junior Participating Preferred Stock of the Company. |
|
|
|
3.3(3)
|
|
Certificate of Amendment of Restated Certificate of Incorporation, as filed with the
Delaware Secretary of State on September 25, 2000. |
|
|
|
3.4(4)
|
|
Certificate of Amendment of Restated Certificate of Incorporation, as filed with the
Delaware Secretary of State on August 17, 2007. |
|
|
|
3.5(5)
|
|
Amended and Restated Bylaws of the Company. |
|
|
|
3.6(6)
|
|
Amendment No. 1 to Amended and Restated Bylaws of the Company. |
|
|
|
4.1(7)
|
|
Form of Stock Certificate. |
|
|
|
4.2(8)
|
|
Form of Series A Warrant. |
|
|
|
4.3(8)
|
|
Form of Series B Warrant. |
|
|
|
4.4(9)
|
|
Rights Agreement, dated 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(10)
|
|
Amendment No. 1 to Rights Agreement, dated June 24, 2005, between the Company and U.S.
Stock Transfer Corporation. |
|
|
|
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. |
|
(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. |
29
|
|
|
(4) |
|
Previously filed as an exhibit to our Form 8-K filed on August 21, 2007. |
|
(5) |
|
Previously filed as an exhibit to our Form 10-K filed on March 15, 2004. |
|
(6) |
|
Previously filed as an exhibit to our Form 8-K filed on March 5, 2008. |
|
(7) |
|
Previously filed as an exhibit to our Form 10-K for the year ended December 31, 1995. |
|
(8) |
|
Previously filed as an exhibit to our Form 8-K filed on March 16, 2005. |
|
(9) |
|
Previously filed as an exhibit to our Form 8-K filed on June 3, 1999. |
|
(10) |
|
Previously filed as an exhibit to our Form 8-K filed on June 28, 2005. |
30