##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008
 OR
 o
    
    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)
 DELAWARE
    
    33-0618093(State of Incorporation)
    
    (I.R.S. Employer I.D. No.)
 201 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA 92618  (Address of Principal Executive Office, Including Zip Code)
 (949) 450-5400  (Registrants Telephone Number, Including Area Code)
 þ o þ o
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-Accelerated Filer o
    
    Smaller Reporting Company o(Do not check if a smaller reporting company)
 o þ




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##### 



Endocare, Inc. and Subsidiary
 INDEX
 Part I. Financial InformationItem 1. Condensed Consolidated Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Statements of Operations  Three months ended March 31, 2008 and 2007
    
    
    3Condensed Consolidated Balance Sheets  March 31, 2008 and December 31, 2007
    
    
    4Condensed Consolidated Statements of Cash Flows  Three months ended March 31, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    22Part II. Other InformationItem 1. Legal Proceedings
    
    
    23Item 1A. Risk Factors
    
    
    23Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3. Defaults Upon Senior Securities
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23Item 5. Other Information
    
    
    23Item 6. Exhibits
    
    
    23Signatures
    
    
    24EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 ENDOCARE, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended March 31,2008
    
    
    2007(Unaudited)(In thousands, except
per share data)Total revenues
    
    $
    8,143
    
    
    $
    7,546Costs and expenses:Cost of revenues
    
    
    2,505
    
    
    
    2,622Research and development
    
    
    569
    
    
    
    616Selling and marketing
    
    
    3,828
    
    
    
    3,763General and administrative
    
    
    3,040
    
    
    
    3,829Total costs and expenses
    
    
    9,942
    
    
    
    10,830Loss from operations
    
    
    (1,799
    )
    
    
    (3,284
    )Interest income, net
    
    
    109
    
    
    
    25Net loss
    
    $
    (1,690
    )
    
    $
    (3,259
    )Net loss per share  basic and diluted
    
    $
    (0.14
    )
    
    $
    (0.32
    )Weighted average shares of common stock outstanding
    
    
    11,785
    
    
    
    10,313
  3




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ENDOCARE, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2008
    
    
    2007(Unaudited)(In thousands, exceptper share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,515
    
    
    $
    7,712Accounts receivable, net
    
    
    4,507
    
    
    
    3,530Inventories, net
    
    
    3,144
    
    
    
    3,022Prepaid expenses and other current assets
    
    
    448
    
    
    
    2,081Total current assets
    
    
    14,614
    
    
    
    16,345Property and equipment, net
    
    
    792
    
    
    
    850Intangibles, net
    
    
    2,952
    
    
    
    3,077Investments and other assets
    
    
    989
    
    
    
    989Total assets
    
    $
    19,347
    
    
    $
    21,261LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,374
    
    
    $
    2,194Accrued compensation
    
    
    2,846
    
    
    
    3,895Other accrued liabilities
    
    
    3,056
    
    
    
    3,034Loan payable
    
    
    880
    
    
    
    880Obligations under capital lease  current portion
    
    
    25
    
    
    
    28Total current liabilities
    
    
    9,181
    
    
    
    10,031Deferred compensation
    
    
    266
    
    
    
    227Obligations under capital lease  less current portion
    
    
    82
    
    
    
    84Stockholders equity:Preferred stock, $0.001 par value; 1,000 shares
authorized; none issued and outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value; 50,000 shares
authorized; 11,801 and 11,762 issued and
outstanding as of March 31, 2008 and December 31,
2007, respectively
    
    
    12
    
    
    
    12Additional paid-in capital
    
    
    201,253
    
    
    
    200,663Accumulated deficit
    
    
    (191,447
    )
    
    
    (189,756
    )Total stockholders equity
    
    
    9,818
    
    
    
    10,919Total liabilities and stockholders equity
    
    $
    19,347
    
    
    $
    21,261
  4




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ENDOCARE, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months Ended March 31,2008
    
    
    2007(Unaudited)(In thousands)Cash flows from operating activities:Net loss
    
    $
    (1,690
    )
    
    $
    (3,259
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    251
    
    
    
    309Loss on sale of placement units and other fixed assets
    
    
    
    
    
    
    52Stock-based compensation
    
    
    728
    
    
    
    783Changes in operating assets and liabilities:Accounts receivable
    
    
    (976
    )
    
    
    (281
    )Inventories
    
    
    (183
    )
    
    
    (422
    )Prepaid expenses and other assets
    
    
    73
    
    
    
    297Accounts payable
    
    
    179
    
    
    
    378Accrued compensation
    
    
    (1,010
    )
    
    
    (456
    )Other liabilities
    
    
    8
    
    
    
    34Net cash used in operating activities
    
    
    (2,620
    )
    
    
    (2,565
    )Cash flows from investing activities:Collection of note receivable
    
    
    1,560
    
    
    
    Purchases of property and equipment
    
    
    (7
    )
    
    
    (22
    )Net cash provided by (used in) investing activities
    
    
    1,553
    
    
    
    (22
    )Cash flows from financing activities:Payments under capital lease obligation
    
    
    (6
    )
    
    
    Net borrowings on line of credit
    
    
    
    
    
    
    1,498Payroll tax on issuance of restricted stock
    
    
    (124
    )
    
    
    Proceeds from sale of common stock
    
    
    
    
    
    
    1,000Net cash provided by (used in) financing activities
    
    
    (130
    )
    
    
    2,498Net decrease in cash and cash equivalents
    
    
    (1,197
    )
    
    
    (89
    )Cash and cash equivalents, beginning of period
    
    
    7,712
    
    
    
    1,811Cash and cash equivalents, end of period
    
    $
    6,515
    
    
    $
    1,722Non-cash activities:Transfer of inventory to property and equipment for placement at customer sites
    
    $
    115
    
    
    $
    113Transfer of Cryocare Surgical Systems from property and equipment to inventory
for sale
    
    $
    54
    
    
    $
    Adoption of
FSP 00-19-2:Reduction of retained earnings
    
    $
    
    
    
    $
    4,373Increase in additional paid-in capital
    
    
    
    
    
    
    5,680Reduction of common stock warrant liability
    
    
    
    
    
    
    1,307
  5




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Tabular numbers in thousands, except per share data)
 (Unaudited)
 1. Organization and Operations
  2. Basis of Presentation
    3. Recent Operating Results and Liquidity
  Commitments and Contingencies
  6




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Tabular numbers in thousands, except per share data)
 (Unaudited)
   Private Placement of Common Stock and Warrants,
    Bank Line of Credit,
  7




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Tabular numbers in thousands, except per share data)
 (Unaudited)
  4. Private Placement of Common Stock and Warrants
 May 2007 Private Placement
    Fusion Capital Equity Purchase Agreement
 Recent Operating Results and Liquidity
   8




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Tabular numbers in thousands, except per share data)
 (Unaudited)
  March 2005 Private Placement
        Accounting for Derivative
 9




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Tabular numbers in thousands, except per share data)
 (Unaudited)
 Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock Accounting for Registration Payment
Arrangements Accounting for Contingencies.
 5. Bank Line of Credit
 Recent Operating Results and Liquidity
    10




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Tabular numbers in thousands, except per share data)
 (Unaudited)
  6. Capital Stock and Net Loss Per Share
  7. Stock-Based Compensation
 Share-Based
Payment
   11




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Tabular numbers in thousands, except per share data)
 (Unaudited)
  8. Inventories
   March 31,
    
    
    December 31,2008
    
    
    2007Raw materials
    
    $
    1,957
    
    
    $
    2,331Work in process
    
    
    579
    
    
    
    227Finished goods
    
    
    891
    
    
    
    958Total inventories
    
    
    3,427
    
    
    
    3,516Less: inventory reserve
    
    
    (283
    )
    
    
    (494
    )Inventories, net
    
    $
    3,144
    
    
    $
    3,022
 9. Commitments and Contingencies
 Legal Proceedings
 Governmental Investigations and Legal Proceedings
    12




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Tabular numbers in thousands, except per share data)
 (Unaudited)
 Other Litigation
  10. Income Taxes
  Accounting for Uncertainty in Income Taxes an interpretation of SFAS No. 109 Accounting for
Income Taxes
  11. Results of Operations
  Three Months EndedMarch 31,2008
    
    
    2007Revenues:Cryoablation disposable products
    
    $
    5,916
    
    
    $
    5,220Cryocare Surgical Systems
    
    
    433
    
    
    
    4766,349
    
    
    
    5,696Cryoablation procedure fees
    
    
    1,690
    
    
    
    1,776Cardiac royalties
    
    
    113
    
    
    
    90Other
    
    
    (9
    )
    
    
    (16
    )$
    8,143
    
    
    $
    7,546Costs of Revenues:Cryoablation disposable products and procedure fees
    
    $
    2,359
    
    
    $
    2,393Cryocare Surgical Systems
    
    
    146
    
    
    
    229$
    2,505
    
    
    $
    2,622
  12. Recent Accounting Pronouncements
 Fair
Value Measurements
 13




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Tabular numbers in thousands, except per share data)
 (Unaudited)
   The
Fair Value Option for Financial Assets and Financial Liabilities
 Accounting for
Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development
Activities
 Accounting for Collaborative Arrangements
Related to the Development and Commercialization of Intellectual Property.
  14




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Item 2. Managements 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 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, 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 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
   Strategy and Key Metrics
      15




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Three months endedYear ended December 31,
    
    March 31,2005
    
    2006
    
    2007
    
    2007
    
    2008Estimated domestic
cryoablation procedures
    
    
    6,407
    
    
    
    7,802
    
    
    
    9,373
    
    
    
    2,315
    
    
    
    2,568Number of cryoprobes sold:Straight probes
    
    
    29,943
    
    
    
    33,598
    
    
    
    38,909
    
    
    
    9,764
    
    
    
    10,283Right-angle probes
    
    
    2,803
    
    
    
    4,590
    
    
    
    6,308
    
    
    
    1,447
    
    
    
    1,920Total
    
    
    32,746
    
    
    
    38,188
    
    
    
    45,217
    
    
    
    11,211
    
    
    
    12,203
  Results of Operations
  Three Months EndedMarch 31,2008
    
    
    2007Revenues:Cryoablation disposable products
    
    $
    5,916
    
    
    $
    5,220Cryocare Surgical Systems
    
    
    433
    
    
    
    4766,349
    
    
    
    5,696Cryoablation procedure fees
    
    
    1,690
    
    
    
    1,776Cardiac royalties
    
    
    113
    
    
    
    90Other
    
    
    (9
    )
    
    
    (16
    )$
    8,143
    
    
    $
    7,546Costs of Revenues:Cryoablation disposable products and procedure fees
    
    $
    2,359
    
    
    $
    2,393Cryocare Surgical Systems
    
    
    146
    
    
    
    229$
    2,505
    
    
    $
    2,622
  16




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Share Based Payment Accounting for Stock Based Compensation
 Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
 Revenues
 Three Months EndedMarch 31,2008
    
    
    2007
    
    
    $ Change
    
    
    % Change(dollars in thousands)Cryoablation disposable products
    
    $
    5,916
    
    
    $
    5,220
    
    
    $
    696
    
    
    
    13.3
    %Cryocare Surgical Systems
    
    
    433
    
    
    
    476
    
    
    
    (43
    )
    
    
    (9.0
    )%6,349
    
    
    
    5,696
    
    
    
    653
    
    
    
    11.5
    %Cryoablation procedure fees
    
    
    1,690
    
    
    
    1,776
    
    
    
    (86
    )
    
    
    (4.8
    )%Cardiac royalties
    
    
    113
    
    
    
    90
    
    
    
    23
    
    
    
    25.6
    %Other
    
    
    (9
    )
    
    
    (16
    )
    
    
    7
    
    
    
    43.8
    %$
    8,143
    
    
    $
    7,546
    
    
    $
    597
    
    
    
    7.9
    %
 17




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Cost of Revenues
 Three Months EndedMarch 31,2008
    
    2007
    
    $ Change(dollars in thousands)Cost of revenues
    
    $
    2,505
    
    
    $
    2,622
    
    
    $
    (117
    )Percent of revenues
    
    
    30.8
    %
    
    
    34.7
    %
  Gross Profit and Gross Margin
 Three Months EndedMarch 31,2008
    
    
    2007
    
    
    $ Change(dollars in thousands)Cryoablation disposable products and procedure fees
    
    $
    5,247
    
    
    $
    4,603
    
    
    $
    644Cryocare surgical systems
    
    
    287
    
    
    
    247
    
    
    
    40Cardiac royalties and other
    
    
    104
    
    
    
    74
    
    
    
    30$
    5,638
    
    
    $
    4,924
    
    
    $
    714
 Three Months Ended
    
    PercentageMarch 31,
    
    Point2008
    
    2007
    
    Change(percent of revenues)Cryoablation disposable products and procedure fees
    
    
    64.4
    %
    
    
    61.0
    %
    
    
    3.4
    %Cryocare Surgical Systems
    
    
    3.5
    %
    
    
    3.3
    %
    
    
    0.2
    %Cardiac royalties
    
    
    1.3
    %
    
    
    1.0
    %
    
    
    0.3
    %69.2
    %
    
    
    65.3
    %
    
    
    3.9
    %
  18




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Research and Development Expenses
 Three Months EndedMarch 31,2008
    
    2007
    
    $ Change
    
    % Change(dollars in thousands)Research and development expenses
    
    $
    569
    
    
    $
    616
    
    
    $
    (47
    )
    
    
    (7.6
    )%Percent of total revenues
    
    
    7.0
    %
    
    
    8.2
    %
  Selling and Marketing Expenses
 Three Months EndedMarch 31,2008
    
    2007
    
    $ Change
    
    % Change(dollars in thousands)Selling and marketing expenses
    
    $
    3,828
    
    
    $
    3,763
    
    
    $
    65
    
    
    
    1.7
    %Percent of total revenues
    
    
    47.0
    %
    
    
    49.9
    %
  General and Administrative Expenses
 Three Months EndedMarch 31,2008
    
    2007
    
    $ Change
    
    % Change(dollars in thousands)General and administrative expenses
    
    $
    3,040
    
    
    $
    3,829
    
    
    $
    (789
    )
    
    
    (20.6
    )%Percent of total revenues
    
    
    37.3
    %
    
    
    50.7
    %
  Interest Income, Net
 Three Months EndedMarch 31,2008
    
    2007
    
    $ Change
    
    % Change(dollars in thousands)Interest income, net
    
    $
    109
    
    
    $
    25
    
    
    $
    84
    
    
    
    336.0
    %Percent of total revenues
    
    
    1.3
    %
    
    
    0.3
    %
 19




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Net Loss
 Three Months EndedMarch 31,2008
    
    2007
    
    $ Change
    
    % Change(dollars in thousands)Net loss
    
    $
    (1,690
    )
    
    $
    (3,259
    )
    
    $
    (1,569
    )
    
    
    (48.1
    )%Percent of total revenues
    
    
    (20.8
    )%
    
    
    (43.2
    )%
  Liquidity and Capital Resources
  Commitments and Contingencies
  Private Placement of Common Stock and Warrants
  20




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
   21




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Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
  Changes in Internal Controls.
 22




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  23




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##### Table of Contents



SIGNATURES
  ENDOCARE, INC.By:
    /s/ CRAIG T. DAVENPORTCraig T. DavenportChief Executive Officer, President and
Chairman of the Board
(Duly Authorized Officer)By:
    /s/ MICHAEL R. RODRIGUEZMichael R. RodriguezSenior Vice President, Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)  24




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EXHIBIT INDEX
 ExhibitNo.
    
    Description2.1
    (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.10.1
    (11)
    
    Amendment to Loan Documents, dated as of February 8, 2008, by and between Endocare, Inc.
and Silicon Valley Bank.10.2
    (12)
    
    Third Amendment to Employment Agreement, dated February 28, 2008, between Craig T.
Davenport and Endocare, Inc.10.3
    (12)
    
    Summary Description of 2008 MICP.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.(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.(11)
    
    Previously filed as an exhibit to our Form 8-K filed on February 11, 2008.(12)
    
    Previously filed as an exhibit to our Form 8-K filed on March 5, 2008. 25