UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
AMENDMENT NO.1
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 0-27212
ENDOCARE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0618093
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
7 STUDEBAKER, IRVINE, CALIFORNIA 92618
(Address of principal executive office) (Zip Code)
(949) 595-4770
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
The number of shares of the Registrant's Common Stock, par value $.001 per
share, outstanding on November 9, 1999 was 10,955,542.
<PAGE>
ENDOCARE, INC.
FORM 10-Q, QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I. Financial Information
Item 1 . . . . Financial Statements (unaudited)
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1999 and 1998 3
Condensed Consolidated Balance Sheets at September 30, 1999
and December 31, 1998 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 . . . . Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk None
Part II. Other Information
Item 1 Legal Proceedings 13
Item 2 Changes in Securities 13
Item 3 Defaults Upon Senior Securities 13
Item 4 Submission of Matters to a Vote of Security Holders 13
Item 5 Other Information 13
Item 6 Exhibits and Reports on Form 8-K 13
Signature Page 15
</TABLE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
ENDOCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Net product sales . . . . . . . . . . $ 639,157 $ 148,282 $ 1,329,150 $ 857,260
Procedures. . . . . . . . . . . . . . 390,063 100,384 963,701 394,130
Revenue from collaborative agreements -- 290,000 -- 641,672
-------------- ------------ ------------- -------------
Total revenues. . . . . . . . . . . . 1,029,220 538,666 2,292,851 1,893,062
-------------- ------------ ------------- -------------
Costs and expenses:
Cost of product sales. . . . . . . . 326,917 108,688 783,800 612,993
Cost of procedures. . . . . . . . . . 160,598 40,694 370,110 163,612
Research and development. . . . . . . 570,377 454,530 1,891,702 1,288,314
Selling, general and administrative . 2,233,705 1,234,643 5,988,552 3,517,702
-------------- ------------ ------------- -------------
Total costs and expenses. . . . . . . 3,291,597 1,838,555 9,034,164 5,582,621
-------------- ------------ ------------- -------------
Loss from operations. . . . . . . . . (2,262,377) (1,299,889) (6,741,313) (3,689,559)
Other income (expense), net . . . . . (248,252) 108,660 (190,029) 228,297
-------------- ------------ ------------- -------------
Net loss. . . . . . . . . . . . . . . $ (2,510,629) $(1,191,229) $ (6,931,342) $ (3,461,262)
============== ============ ============= =============
Net loss per share of common stock -
basic and diluted . . . . . . . . . . $ (0.23) $ (0.11) $ (0.65) $ (0.35)
============== ============ ============= =============
Weighted average shares outstanding . 10,781,000 10,683,000 10,746,000 9,845,000
============== ============ ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ENDOCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . $ 9,420,216 $ 6,285,799
Accounts receivable, net. . . . . . . . . 1,178,826 407,602
Inventories . . . . . . . . . . . . . . . 1,354,886 542,610
Other current assets. . . . . . . . . . . 111,748 87,397
--------------- --------------
Total current assets. . . . . . . . . . . 12,065,676 7,323,408
Property and equipment, net 894,392 498,240
Deferred financing costs and other assets 2,411,377 170,206
------------ -----------
Total assets $ 15,371,445 $ 7,991,854
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable. . . . . . . . . . . . . $ 1,989,665 $ 653,548
Accrued liabilities . . . . . . . . . . . 1,956,138 1,125,832
--------------- -------------
Total current liabilities . . . . . . . . 3,945,803 1,779,380
Long term liabilities
Convertible debentures. . . . . . . . . . 8,000,000 --
Note payable and other liabilities. . . . 2,154,631 201,274
Shareholders' equity
Common Stock, $.001 par value; 10,941,228 10,941 10,698
And 10,698,354 issued and outstanding at
September 30, 1999 and December 31, 1998,
respectively
Additional paid-in capital. . . . . . . . 18,700,863 16,509,952
Accumulated deficit . . . . . . . . . . . (17,440,793) (10,509,450)
--------------- --------------
Total shareholders' equity. . . . . . . . 1,271,011 6,011,200
--------------- --------------
Subsequent event
Total Shareholders' equity. . . . . . . . $ 15,371,445 $ 7,991,854
--------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ENDOCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . $ (6,931,342) $ (3,461,262)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization . . . . . . . . . . 423,496 157,403
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . (771,224) (92,501)
Inventories . . . . . . . . . . . . . . . . . . . (1,127,103) 37,843
Accounts payable. . . . . . . . . . . . . . . . . 1,336,116 8,693
Accrued liabilities . . . . . . . . . . . . . . . 830,307 542,150
Other . . . . . . . . . . . . . . . . . . . . . . (29,155) (204,997)
--------------------------------- ---------------------
Net cash used in operating activities . . . . . . (6,268,905) (3,012,671)
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . (229,053) (141,121)
--------------------------------- ---------------------
Net cash used in investing activities . . . . . . (229,053) (141,121)
Cash flows from financing activities:
Issuance of common stock. . . . . . . . . . . . . 486,279 6,848,023
Issuance of convertible debentures and other debt 10,000,000 --
Financing costs and other . . . . . . . . . . . . (853,905) 7,766
--------------------------------- ---------------------
Net cash provided by financing activities . . . . 9,632,374 6,855,789
--------------------------------- ---------------------
Net increase in cash and cash equivalents . . . . 3,134,417 3,701,997
Cash and cash equivalents, beginning of period. . 6,285,799 3,912,378
--------------------------------- ---------------------
Cash and cash equivalents, end of period. . . . . 9,420,216 7,614,375
================================= =====================
Non-cash activities:
Fair value of convertible debenture purchase
option credited to additional paid in capital . . $ 1,600,000 $ --
================================= =====================
Transfer of inventory to property and equipment . $ 314,827 $ --
================================= =====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ENDOCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Operations of the Company
Endocare, Inc. (the "Company" or "Endocare") designs, manufactures, and markets
an array of innovative, temperature-based surgical devices and technologies
primarily to treat prostate diseases, including prostate cancer and prostate
enlargement. The Company also operates a mobile cryosurgery business. Since
its formation in 1990, Endocare operated first as a research and development
department, then later as a division of Medstone International, Inc. Effective
January 1, 1996, Endocare became a totally independent, publicly-owned
corporation.
2. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary (consisting only of
normal recurring accruals) to present fairly the financial information contained
therein. These statements do not include all disclosures required by generally
accepted accounting principles and should be read in conjunction with the
audited financial statements and other information included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998, and with the
Company's current report on Form 8-K filed with the SEC on August 6, 1999.
Financial results for this interim period are not necessarily indicative of
results to be expected for the full year 1999.
3. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
4. Supplemental Financial Statement Data
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- -------------
<S> <C> <C>
Inventories:
Raw materials . . $ 479,122 $ 260,222
Work in process . 218,705 86,375
Finished goods. . 657,059 196,013
-------------- -------------
Total inventories $ 1,354,886 $ 542,610
============== =============
</TABLE>
5. Net Loss Per Share
The Company has adopted SFAS No. 128, "Earnings Per Share." Under SFAS 128,
basic EPS is calculated by dividing net earnings (loss) by the weighted-average
common shares outstanding during the period. Diluted EPS reflects the potential
dilution to basic EPS that could occur upon conversion or exercise of
securities, options, convertible debentures, or other such items, to common
shares using the treasury stock method based upon the weighted-average fair
value of the Company's common shares during the period. In accordance with SFAS
128, the loss (numerator), shares (denominator) and per-share amounts for the
three months ended September 30, 1998 and September 30, 1999 are $(1,191,229),
10,683,000 $(0.11), and $(2,510,629), 10,781,000 and $(0.23), respectively. The
loss (numerator), shares (denominator) and per share amount for the nine months
ended September 30, 1998 and 1999 are $(3,461,262), 9,845,000 and $(0.35) and
$(6,931,342), 10,746,000 and $(.65), respectively. As the Company has been in a
net loss position for the periods presented, common share equivalents of
973,000 and 1,858,000 for the three months ended September 30, 1998 and 1999,
respectively, and 950,000 and 1,675,000 for the nine months ended September 30,
1998 and 1999, respectively, were not used to compute diluted loss per share as
the effect was antidilutive. Consequently, diluted EPS equals basic EPS.
<PAGE>
6. On June 30, 1999, Endocare acquired all the outstanding units of Advanced
Medical Procedures, LLC, a Florida limited liability company ("AMP"). AMP
operates a mobile cryosurgery business which provides cryosurgical equipment for
the treatment of prostate and liver cancer on a procedural basis. The
acquisition was consummated pursuant to a Plan of Merger (the "AMP Merger
Agreement") by and among AMP, Endocare, and Advanced Medical Procedures, Inc.
("AMPI"), a Delaware corporation and wholly-owned subsidiary of Endocare.
Pursuant to the Merger Agreement, AMP was merged with and into AMPI, with AMPI
surviving as a wholly-owned subsidiary of Endocare. The AMP unitholders
received an aggregate of 260,000 shares of Endocare Common Stock in exchange for
all of their AMP units. The acquisition was accounted for as a
pooling-of-interests for financial reporting purposes. The pooling-of-interests
method of accounting is intended to present as a single interest two or more
common stockholders' interests which were previously independent; accordingly,
the historical financial statements for the periods prior to the acquisition
have been restated as though the companies had been combined. Fees and expenses
related to the acquisition were expensed as incurred and amounted to
approximately $50,000.
The results of operations previously reported by the separate companies and the
combined amounts presented in the accompanying condensed consolidated financial
statements are summarized below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net Revenue:
Endocare
Net product sales . . . . . . . . . . $ 639,157 $ 261,282 $ 1,381,060 $ 970,260
Revenue from collaborative agreements -- 290,000 -- 641,672
AMP
Procedures. . . . . . . . . . . . . . 390,063 100,384 963,701 394,130
Adjustments . . . . . . . . . . . . . -- (113,000) (51,910) (113,000)
-------------------- ------------------- ------------ ------------
Combined. . . . . . . . . . . . . . . $ 1,029,220 $ 538,666 $ 2,292,851 $ 1,893,062
==================== =================== ============ ============
Net Loss:
Endocare. . . . . . . . . . . . . . . $ (2,462,982) $ (1,122,024) $(6,868,741) $(3,411,773)
AMP . . . . . . . . . . . . . . . . . (37,289) (31,205) (333) (11,489)
Adjustments (10,358) (38,000) (62,268) (38,000)
-------------------- ------------------- ------------ ------------
Combined $ (2,510,629) $ (1,191,229) $(6,931,342) $(3,461,262)
==================== =================== ============ ============
</TABLE>
Adjustments have been made to eliminate the impact of intercompany sales
from Endocare to AMP. Additionally, a previously existing note payable from
Endocare to AMP of $135,000 at December 31, 1998, has been eliminated in the
accompanying condensed consolidated balance sheet. There were no other
significant transactions between Endocare and AMP prior to the combination.
Procedural revenue is recognized upon completion of procedures.
7. Convertible Debentures
On June 7, 1999, the Company received $5,000,000 from the sale of its 7%
Convertible Debentures due June 7, 2002 (the "Debentures"). Interest is payable
annually in cash, or at the Company's option, in common stock at a price per
share based on recent bid prices prior to the date interest is paid. Under the
financing arrangement, the purchasers have the option to purchase an additional
$5,000,000 in aggregate principal amount of Debentures and, under the
circumstances described below, the Company may require the purchasers to
exercise this purchase option. The $5,000,000 principal amount of the
Debentures must be repaid in full in cash on June 7, 2002, but may be converted
into the Company's Common Stock in whole or in part at the purchasers' option at
any time on or prior to June 7, 2002 at a conversion price of $5.125 per share.
The conversion price is subject to certain anti-dilution adjustments.
In addition to the purchasers' option to convert the Debentures, the Company may
require that the purchasers convert the Debentures into Common Stock at $5.125
per share (as may be adjusted as described above) if the bid price for the
Common
<PAGE>
Stock as listed for quotation is above $8.00 per share for twenty (20)
trading days during a consecutive thirty (30) trading day period, and certain
other conditions are met.
Under a Securities Purchase Agreement, the purchasers have a call option
exercisable at any time prior to June 7, 2002 to require that the Company sell
to the purchasers an additional $5,000,000 principal amount of debentures. The
additional Debentures will mature three years from the date they are issued,
will bear interest at 7% per annum and will be convertible in whole or in part
at a conversion price of $6.75 per share (subject to adjustment as described
above). The fair value of the purchasers' call option, totaling $1,000,000, has
been estimated using the Black-Scholes pricing model and is reflected in
deferred financing costs and other assets in the accompanying condensed
consolidated balance sheet, as of September 30, 1999. This amount is being
amortized to interest expense over the life of the call option. The Company has
a put option to require the purchasers to buy the $5,000,000 principal amount of
additional debentures if the closing bid price for the Common Stock as listed
for quotation is more than $10.00 per share for twenty (20) trading days in a
consecutive thirty (30) trading day period and on the date the Company elects to
exercise the put option, and certain other conditions are met.
On July 30, 1999, Endocare received an additional $3,000,000 from the sale of
its 7% Convertible Debentures due July 29, 2002 (the "Convertible Debentures").
Interest is payable annually in cash, or at the Company's option, in Common
Stock at a price per share based on recent bid prices prior to the date interest
is paid, and certain other conditions are met. Under the financing agreement,
the purchasers have the option to purchase an additional $3,000,000 in aggregate
principal amount of Convertible Debentures and, under the circumstances
described below, the Company may require the purchasers to exercise this
purchase option.
The $3,000,000 principal amount of the Convertible Debentures must be repaid in
full in cash on July 29, 2002, but may be converted into the Company's Common
Stock in whole or in part at the purchasers' option at any time, subject to
certain restrictions, on or prior to July 29, 2002 at a conversion price of
$6.00 per share. The conversion price is subject to certain anti-dilution
adjustments.
In addition to the purchasers' option to convert the Convertible Debentures, the
Company, subject to certain restrictions, may require that the purchasers
convert the Convertible Debentures into Common Stock at $6.00 per share (as may
be adjusted as described above) if the bid price for the common Stock as listed
for the quotation is above $9.00 per share for twenty (20) trading days during a
consecutive thirty (30) trading day period, and certain other conditions are
met.
Under a Securities Purchase Agreement, the purchasers have a call option
exercisable at any time prior to July 29, 2002 to require that the Company sell
to the Convertible Purchasers an additional $3,000,000 principal amount of
debentures. The additional debentures will mature three years from the date
they are issued, will bear interest at 7% per annum and will be convertible in
whole or in part at the option of the purchase at any time prior to maturity
into Common Stock at a conversion price of $6.75 per share. The fair value of
the purchasers' call option, totaling $600,000 has been estimated using the
Black-Scholes pricing model and is reflected in deferred financing costs and
other assets in the accompanying condensed consolidated balance sheet as of
September 30, 1999. This amount is being amortized to interest expense over the
life of the call option. The Company has a put option to require the purchasers
to buy the $3,000,0000 principal amount of additional debentures if the closing
bid price for the Common Stock as listed for quotation is more than $9.00 per
share for twenty (20) trading days in a consecutive thirty (30) trading day
period and on the date the Company elects to exercise the put option, and
certain other conditions are met.
Certain events will trigger an event of default under the Debentures. An event
of default gives the purchasers the right to accelerate all indebtedness under
the Debentures and declare it due immediately. Upon an event of default,
interest thereafter accrues at 20.00% per annum and a default premium is added
to the principal amount of the Debentures. The premium is the greater of 20.00%
of the principal amount, or higher based on recent trading prices of the
Company's Common Stock. The amount due upon an event of default (including the
purchaser's option in an equivalent value of shares of Common Stock of the
Company) is calculated based on the average bid price per share of the Common
Stock for a certain number of days prior to the acceleration of the indebtedness
by the purchasers.
8. Credit Facility
On July 29, 1999, the Company entered into a Loan and Security Agreement
with Transamerica Business Credit Corporation ("TBCC") which provides for a
revolving credit line in the amount of $2,000,000 plus up to an additional
$1,000,000 based on eligible accounts receivable of the Company (the "Loan").
As of September 30, 1999, $2,000,000 of the Loan is outstanding.
The Loan matures and all amounts must be repaid on July 31, 2001. The Loan bears
interest at the highest prime or equivalent rate announced by certain designated
banks, plus 2% or 3.5%. The Loan is secured by a first priority lien on all of
the assets of the Company, except for intellectual property, is fully guaranteed
by the Company's subsidiary, and contains certain restrictive covenants.
The Company is in compliance with the restrictive covenants as of September 30,
1999.
9. Stockholders Rights Plan
In April 1999, the Company adopted a stockholder rights plan in which
preferred stock purchase rights will be distributed as a dividend at the rate of
one right for each share of common stock held as of the close of business on
April 15, 1999. The rights are designed to guard against partial tender offers
and other abusive and coercive tactics that might be used in an attempt to gain
control of the Company or to deprive Endocare stockholders of their interest in
the long-term value of the Company. The rights will be exercisable only if a
person or group acquires 15% or more of the Company's common stock (subject to
certain exceptions stated in the Plan) or announces a tender offer the
consummation of which would result in ownership by a person or group of 15% or
more of the Company's common stock. At any time on or prior to the close of
business on the first date of a public announcement that a person or group has
acquired beneficial ownership of 15% or more of the Company's common stock
(subject to certain exceptions stated in the Plan), the rights are redeemable
for one cent per right at the option of the Board of Directors.
10. Legal Proceedings
The Company, in the normal course of business, is subject to various legal
matters. While the results of litigation and claims cannot be predicted with
certainty, the Company believes that the final outcome of these matters will not
have a material adverse effect on the Company's results of operations or
financial condition.
From time to time, the Company has received correspondence alleging infringement
of proprietary rights of third parties. No assurance can be given that any
relevant claims of third parties would not be upheld as valid and enforceable,
and therefore that the Company could be prevented from practicing the subject
matter claimed or would be required to obtain licenses from the owners of any
such proprietary rights to avoid infringement. Management does not expect any
material adverse effect on financial condition or the results of operations
because of such actions.
11. Subsequent Event
In October 1999, the Company entered into a strategic alliance with Sanarus
Medical Inc. ("Sanarus") to commercialize Endocare's proprietary cryosurgical
technology in the treatment of breast tumors and gynecological diseases. The
terms of the related agreements included an equity investment by Endocare in
Sanarus totaling $300,000 and a warrant to acquire Sanarus common stock received
by Endocare in consideration of entering into a manufacturing supply and license
agreement. In the event Endocare were to exercise the warrant, the Company
would then own a majority equity position in Sanarus.
<PAGE>
ITEM 2.
ENDOCARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the unaudited condensed
financial statements and notes thereto included in Part I--Item 1, the audited
financial statements, and notes thereto, and Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in the
Annual Report on Form 10-K for the fiscal year ended December 31, 1998, and with
the Company's current report on Form 8-K filed with the SEC on August 6, 1999.
General
Endocare designs, manufactures, and markets an array of innovative,
temperature-based surgical devices and technologies to treat prostate diseases,
including prostate cancer and prostate enlargement. Additionally, Endocare is
currently developing additional, innovative therapies for prostate enlargement.
The Company does not expect to be profitable in the near future because of
increased operating expenses associated with product launches and from expanded
research and development efforts and support of clinical trials for products
currently under development.
On June 30, 1999, Endocare merged with a company that operates a mobile
cryosurgical business. The company provides urologists and surgical specialists
the option of utilizing Endocare's targeted cryosurgery for the treatment of
prostate and liver cancer on a procedural basis. Endocare recognizes procedural
revenue upon the completion of procedures. The acquisition was accounted for as
a pooling-of-interests for financial reporting purposes. The
pooling-of-interests method of accounting is intended to present as a single
interest two or more common stockholders' interests which were previously
independent; accordingly, the historical financial statements for the periods
prior to the acquisition have been restated as though the companies had been
combined.
Since its formation in 1990, Endocare operated first as a research and
development department, then later as a division of Medstone International, Inc.
Effective January 1, 1996, Endocare was spun out and began operating as an
independent corporation.
Results of Operations
Product revenue for the three months ended September 30, 1999 increased 331% to
$639,000 compared to $148,000 in 1998. The increase was attributable to the
third quarter 1999 launch of the Company's cryosurgical technology in
conjunction with Medicare's July 1, 1999 implementation of national coverage for
localized prostate cancer.
Product revenue for the nine months ended September 30, 1999 increased 55% to
$1,329,000 compared to $857,000 in 1998. The increase was attributable to the
reasons stated above.
Revenue from procedures for the three months ended September 30, 1999 was
$390,000 compared to $100,000 in 1998. The increase corresponds to a greater
number of procedures performed in 1999 as a result of increased sales and
marketing efforts.
Revenue from procedures for the nine months ended September 30, 1999 was
$964,000 compared to $394,000 in 1998. The increase is due to the reason
described above.
Revenue from collaborative agreements for the three months ended September 30,
1999 was zero, compared to $290,000 in 1998. The 1998 amount represented a
licensing fee and the respective quarters' amortization of a lump-sum payment
from Boston Scientific Corporation ("BSC") based upon a previous distribution
agreement entered into in November 1996. The distribution agreement with BSC
was terminated by Endocare in March 1999.
Revenue from collaborative agreements for the nine months ended September 30,
1999 was zero compared to $642,000 in 1998. The decrease was due to the reasons
described above.
Gross margin on product sales was 49% for the three months ended September 30,
1999 compared to 26% in 1998. The increase is due to a mix of higher margin
cryosurgical probe and system sales in 1999 coupled with a reduction in product
costs due to increased manufacturing efficiencies.
<PAGE>
Gross margin on product sales for the nine months ended September 30, 1999 was
41% compared to 28% for the same period in 1998. The increase is due to the
reasons described above.
Gross margin on procedures was 59% for the three months ended September 30, 1999
which is comparable to 59% in 1998.
Gross margin on procedures was 62% for the nine months ended September 30, 1999,
compared to 58% in 1998. The change in margins is attributable to procedure mix
and higher surgery rental costs in 1998.
Research and development expense increased 25% to $570,000 for the three months
ended September 30, 1999, compared to $455,000 in 1998. The increase reflects
the investment the Company has made in the form of additional personnel and
related infrastructure to support general product improvement, new product
development efforts and clinical costs associated with the Horizon Prostatic
Stent and womens' healthcare cryosurgical product.
Research and development expense for the nine months ended September 30, 1999
increased 47% to $1,892,000, compared to $1,288,000 for the same period in 1998.
The increase is attributable to the reasons described above.
Selling, general and administrative expense increased 80% to $2,234,000 for the
three months ended September 30, 1999, compared to $1,235,000 in 1998. The
increase reflects increased sales and marketing costs associated with the launch
of Endocare's cryosurgical product for prostate cancer and an almost doubling of
Endocare's direct sales and marketing personnel between periods.
Selling, general and administrative expense for the nine months ended September
30, 1999 increased 70% to $5,989,000 compared to $3,518,000 for the same period
in 1998. The increase is attributable to the reasons described above.
Other income (expense), net was $(248,000) for the three months ended September
30, 1999, compared to $109,000 in 1998. The change in 1999 was due to interest
expense associated with the recent issuance of convertible debentures and note
payable, including amortization of deferred financing costs, offset by interest
income.
Other income (expense), net for the nine months ended September 30, 1999 was
$(190,000) compared to $228,000 in 1998. The change is due to the reasons
described above.
Endocare's net loss for the three months ended September 30, 1999 was
$2,511,000, or 23 cents per share on 10,781,000 weighted average shares
outstanding, compared to a net loss of $1,191,000 or 11 cents per share on
10,683,000 weighted average shares outstanding for the same period in 1998. The
increase in net loss resulted from higher research and development costs, higher
selling, general and administrative expenses and increased interest expense
partially offset by increased revenues and lower cost of sales.
Endocare's net loss for the nine months ended September 30, 1999 was $6,931,000
or 65 cents per share on 10,746,000 weighted average shares outstanding,
compared to a net loss of $3,461,000 or 35 cents per share on 9,845,000 weighted
average shares outstanding for the same period in 1998. The increase in net
loss is attributable to the reasons described above.
Liquidity and Capital Resources
At September 30, 1999, Endocare's cash and cash equivalent balance was
$9,420,000 compared to $6,286,000 at December 31, 1998.
Working capital has been used as Endocare's operations have increased in 1999.
Net accounts receivable increased to $1,179,000 at September 30, 1999, compared
to $408,000 at December 31, 1998. In conjunction with the launch of Endocare's
cryosurgical technology for prostate cancer, inventory increased to $1,355,000
at September 30, 1999, compared to $543,000 at the beginning of the year.
Additions to property and equipment during the first nine months of 1999 were
approximately $544,000. Working capital was provided as accounts payable and
other current liabilities increased to $3,946,000 from $1,779,000 at December
31, 1998.
At September 30, 1999, Endocare's net working capital was $8,120,000 and the
ratio of current assets to current liabilities was 3.1 to 1.
In June and July 1999, Endocare received a total of $8,000,000 from the sale of
its 7% convertible debentures which are due in three years. In addition, in
July 1999, the Company entered into a Loan and Security Agreement which provides
for a revolving credit line in the amount of $2,000,000 plus up to an additional
$1,000,000 based on eligible accounts receivable of the Company (the "Loan").
As of September 30, 1999, $2,000,000 of the Loan is outstanding. The Loan
matures and all amounts must be repaid on July 31,
<PAGE>
2001. The Loan bears interest at the highest prime or equivalent rate announced
by certain designated banks, plus 2% or 3.5%. The Loan is secured by a first
priority lien on all of the assets of the Company, except for intellectual
property, is fully guaranteed by the Company's subsidiary, and contains
certain restrictive covenants.
The Company believes that its existing cash resources and credit facility will
provide sufficient resources to meet present and reasonably foreseeable working
capital requirements and other cash needs for the next year. If the Company
elects to undertake or accelerate significant research and development projects
for new products or pursue corporate acquisitions, it may require additional
outside financing prior to such time. The Company expects that to meet its
long-term needs it will need to raise substantial additional funds through the
sale of its equity securities, the incurrence of indebtedness or through funds
derived through entering into collaborative agreements with third parties.
Other Matters
Many existing computer systems and applications, and other control devices, use
only two digits to identify a year in the date field, without considering the
impact of the upcoming change in the century. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can process data related to the year 2000 and beyond. The Company relies
on its systems, applications and devices in operating and monitoring all major
aspects of its business, including financial systems (such as general ledger,
accounts receivable, accounts payable and payroll modules), customer services,
infrastructure, networks and telecommunications equipment, and end products.
The Company has initially assessed how it may be impacted by the Year 2000 and
has commenced a plan to address the following aspects of the Year 2000 problem:
Information systems, non-information systems, products, suppliers and customers.
The plan as it related to information systems, involved a combination of
upgrades and replacement. The Company has completed remediation of its
information systems. The Company has also completed the assessment and
remediation plans with respect to substantially all of the Company's
non-information systems. The Company has completed an assessment of its
products and has determined its products do not contain specific calendar year
functions. However, there can be no assurance that unforeseen problems will not
be encountered when the Company's products are used in conjunction with
equipment which is non-Year 2000 compliant. The Company is currently assessing
Year 2000 issues with respect to major suppliers and customers and expects this
process to be completed in the fourth quarter 1999; however, the Company can
provide no assurance that Year 2000 compliance plans will be successfully
completed by suppliers and customers in a timely manner. The Company currently
estimates that the costs associated with the Year 2000 issues will not have a
material effect on the results of operations or financial assessment and
remediation have not been material to the results of operations. If the Company
is not successful in implementing its Year 2000 compliance plan, there may be a
material adverse impact on the Company's results of operations and financial
condition. The Company believes its greatest risks related to the Year 2000
issue involve interrupted product flow from suppliers and a possible redirect or
interruption of purchasing activities from key customers due to their potential
failure to fully address their own Year 2000 issues. Due to the importance of
addressing these risks, and the need for the Company to focus attention to
remediation efforts, the Company expects to develop contingency plans to address
those Year 2000 problems which may not be corrected by implementation of the
Company's Year 2000 compliance plan. Contingency plans are expected to be
complete in the fourth quarter 1999.
This Form 10Q contains forward looking statements. The Company's business and
results of operations are subject to risk and uncertainties including, but not
limited to, those discussed under the caption "Factors That May Effect Future
Results and Trading Price of Common Stock" included in the Company's Annual
Report on Form 10-K, and in risk factors contained in other periodic reports
filed with the Securities and Exchange Commission. Such risk factors include,
but are not limited to, limited operating history of the Company with a history
of losses; fluctuations in the Company's order levels; uncertainty regarding
market acceptance of the Company's new products; uncertainty of product
development and the associated risks related to clinical trials, the rapid pace
of technological change in the Company's industry; the Company's limited sales,
marketing and manufacturing experience; uncertainty regarding the impact Year
2000 system failures may have if experienced by the Company, its suppliers and
customers, and the ability to convince health care professionals and third party
payers of the medical and economic benefits of the Company's Cryocare System.
The actual results that the Company achieves may differ materially from any
forward looking statements due to such risks and uncertainties.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company, in the normal course of business, is subject to various legal
matters. While the results of litigation and claims cannot be predicted with
certainty, the Company believes that the final outcome of these matters will not
have a material adverse effect on the Company's results of operations or
financial condition.
From time to time, the Company has received correspondence alleging infringement
of proprietary rights of third parties. No assurance can be given that any
relevant claims of third parties would not be upheld as valid and enforceable,
and therefore that the Company could be prevented from practicing the subject
matter claimed or would be required to obtain licenses from the owners of any
such proprietary rights to avoid infringement. Management does not expect any
material adverse effect on financial condition or the results of operations
because of such actions.
Item 2. Changes in Securities
Stock Options
During the period from July 1, 1999 through September 30, 1999, the Company
granted stock options to 9 individuals covering an aggregate of 179,500 shares
of its common stock. All such options were granted at exercise prices equaling
fair market value on the date of grant, vest over a four year period, and are
exercisable over a ten year period. No consideration was paid for any of such
options. Such grants were exempt from the registration requirement of the
Securities Act as not involving the sale of a security.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1* Debenture dated July 29, 1999 between the Company and Brown
Simpson Strategic Growth Fund, Ltd. (filed as Exhibit 4.1 to Form 8-K filed on
August 6, 1999).
4.2* Debenture dated July 29, 1999 between the Company and Brown
Simpson Strategic Growth Fund, L.P. (filed as Exhibit 4.2 to Form 8-K filed on
August 6, 1999).
10.1* Securities Purchase Agreement dated July 29, 1999 among the
Company and the Purchasers. (filed as Exhibit 10.1 to Form 8-K filed on August
6, 1999).
10.2* Registration Rights Agreement dated July 29, 1999 among the
Company and the Purchasers. (filed as Exhibit 10.2 to Form 8-K filed on August
6, 1999).
10.3* Loan and Security Agreement dated July 29, 1999 between the Company
and TBCC. (filed as Exhibit 10.3 to Form 8-K filed on August 6, 1999).
10.4* Streamlined Facility Agreement dated July 29, 1999 between the Company
and TBCC. (filed as Exhibit 10.3 to Form 8-K filed on August 6, 1999).
10.5* Continuing Guaranty dated July 29, 1999 by the AMP in favor of TBCC.
(filed as Exhibit 10.3 to Form 8-K filed on August 6, 1999).
10.6* Security Agreement dated July 29, 1999 between AMP and TBCC. (filed
as Exhibit 10.3 to Form 8-K filed on August 6, 1999).
99.1* Press Release dated August 5, 1999. (filed as Exhibit 10.3 to Form
8-K filed on August 6, 1999).
27 Financial Data Schedule
- ---------------
*Incorporated herein by reference.
(b) Reports on Form 8-K
On August 6, 1999, the Company filed a Form 8-K with the Securities and
Exchange Commission dated July 29, 1999 reporting the receipt of funds from the
sale of its 7% Convertible Debentures due July 29, 2002 for an aggregate of $3
million. The Debentures were sold pursuant to a Securities Purchase Agreement
dated July 29, 1999. The full principal amount of the Debentures must be repaid
in full on or prior to July 29, 2002, but may be converted into the Company's
Common Stock in whole or in part at the Purchaser's option at a conversion price
of $6.00 per share. The Form 8-K also reported that the Company entered into a
loan and security agreement which provides for a revolving line of credit of $2
million plus up to an additional $1 million based on eligible accounts
receivable of the Company. The loan matures and all amounts must be repaid on
July 31, 2001.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ENDOCARE, INC.
Date: November 17, 1999 By: /s/ Paul W. Mikus
Paul W. Mikus
Chief Executive Officer and President
(Duly Authorized Officer )
By: /s/ William R. Hughes
William R. Hughes
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
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